The IRS Run Amok
I’m not a big fan of the Internal Revenue Service, but I try not to demonize the bureaucrats because politicians actually deserve most of the blame for America’s complex, unfair, and corrupt tax system. The IRS generally is in the unenviable position of simply trying to enforce very bad laws.
But sometimes the IRS runs amok and the agency deserves to be held in contempt by the American people
Let’s look at a grotesque example of IRS misbehavior. It deals with a seemingly arcane issue, but it has big implications for the US economy, the rule of law, and human rights.
On January 7, the tax-collection bureaucracy proposed a regulation that, if implemented, would force American financial institutions to put foreign tax law above US tax law. Banks would be required to report to the IRS any interest they pay to foreigners, but not so the US government can collect tax, but in order to let foreign governments tax this US-source income.
This isn’t the first time the IRS has tried to pull this stunt. At the very end of the Clinton years, the agency proposed a rule to do the same thing. But the bureaucrats were thwarted because of overwhelming opposition from Capitol Hill, the financial services industry, and public policy experts. There was near-unanimous agreement that it would be crazy to drive job-creating capital out of the US economy and there was also near-unanimous agreement that the IRS had no authority to impose a regulation that was completely inconsistent with the laws enacted by Congress.
But like a zombie, this IRS regulation has risen from the grave.
I’m not sure what is most upsetting about this proposed rule, but there are five serious flaws in the IRS’s back-door scheme to turn American banks into deputy tax collectors for foreign governments.
1. The IRS is flouting the law, using regulatory dictates to overturn laws enacted through the democratic process.
Ever since 1921, and most recently reconfirmed by legislation in 1976 and 1986, Congress specifically has chosen not to tax interest paid to non-resident foreigners. Lawmakers wanted to attract money to the U.S. economy.
Yet rogue IRS bureaucrats want to impose a regulation to overturn the outcome of the democratic process. Heck, if they really think they have that sort of power, why don’t they do us a favor and unilaterally junk the entire internal revenue code and give us a flat tax?
2. The IRS has failed to perform a cost-benefit analysis, as required by executive order 12866.
Issued by the Clinton Administration, this executive order requires that regulations be accompanied by “An assessment of the potential costs and benefits of the regulatory action” for any regulation that will, “Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.”
Yet the IRS blithely asserts that this interest-reporting proposal is “not a significant regulatory action.” Amazing, we have trillions of dollars of foreign capital invested in our economy, perhaps $1 trillion of which is deposited in banks, and we know some of which definitely will be withdrawn if this regulation is implemented, but the bureaucrats unilaterally decided the regulation doesn’t require a cost-benefit analysis.
During a previous incarnation of this regulation, the IRS’s failure to comply with the rules led the Office of Advocacy at the Small Business Administration to denounce the tax-collection bureaucracy, stating that “…there is ample evidence that the impact of the regulation is significant and that a substantial number of small businesses will be impacted.”
3. The IRS is imposing a regulation that puts America’s economy at risk.
According to the Commerce Department, foreigners have invested more than $10 trillion in the U.S. economy.
And according to the Treasury Department, foreigners have more than $4 trillion in American banks and brokerage accounts.
We don’t know how much money will leave America if this regulation is implemented, but there are many financial centers – such as London, Hong Kong, Cayman, Singapore, Tokyo, Zurch, Luxembourg, Bermuda, and Panama – that would gladly welcome the additional investment if the IRS makes the American financial services sector less attractive.
4. The IRS is destabilizing America’s already shaky financial system.
Five years ago, when the banking industry was strong, the IRS regulation would have been bad news. Now, with many banks still weakened by the financial crisis, the regulation could be a death knell. Not only would it drive capital to banks in other nations, it also would impose a heavy regulatory burden.
How bad would it be? Commenting on an earlier version of the regulation, which only would have applied to deposits from 15 countries, the Chairman of the Federal Deposit Insurance Corporation warned that, “[a] shift of even a modest portion of these [nonresident alien] funds out of the U.S. banking system would certainly be termed a significant economic impact.” He also noted that potentially $1 trillion of deposits might be involved. And a study from the Mercatus Center at George Mason University estimated that $87 billion would leave the American economy. And remember, that estimate was based on a regulation that would have applied to just 15 nations, not the entire world.
So what happens if more banks fail? I guess the bureaucrats at the IRS would probably just shrug their shoulders and suggest another bailout.
5. The IRS is endangering the lives of foreigners who deposit funds in America because of persecution, discrimination, abuse, crime, and instability in their home countries.
If you’re from Mexico you don’t want to put money in local banks or declare it to the tax authorities. Corruption is rampant and that information might be sold to criminal gangs who then kidnap one of your children. If you’re from Venezuela, you have the same desire to have your money in the United States, but perhaps you’re more worried about persecution or expropriation by a brutal dictatorship.
There are people all over the world who have good reasons to protect their private financial information. Yet this regulation would put them and their families at risk. The only silver lining is that these people presumably will move their money to other nations. Good for them, bad for America.
Let’s wrap this up. Under current law, America is a safe haven for international investors. This is good news for foreigners, and good news for the American economy. That’s why it is so outrageous that the IRS, unilaterally and without legal justification, is trying to reverse 90 years of law for no other reason than to help foreign governments.
By the way, you can add your two cents by clicking on this link which will take you to the public comment page for this regulation. Don’t be bashful.
One last point. The Obama Administration says this regulation is part of a global effort to improve tax compliance. But unless Congress changes the law, the IRS is not responsible for helping foreign tax collectors squeeze more money out foreign taxpayers. Moreover, the White House has been grossly misleading about U.S. compliance issues (as this video illustrates), so their assertions lack credibility.
Obama on Human Rights in America
I’ve just sent a short post to ”The Corner” at NRO on the Obama State Department’s new report to the U.N. Human Rights Council on human rights conditions in the U.S. In a word, we’ve got problems, especially concerning women, minorities, etc., but we’re trying to live up to the expectations of other human rights exemplars on the council — Russia, China, Saudi Arabia, Cuba.
Read and weep.
Making a Joke of Human Rights
Earlier this year, Nobel Peace Prize winner Barack Obama signed legislation that threatens U.S. residents with prison if they fail to purchase health insurance.
This week, his administration told the United Nations that this legislation shows the United States is making progress on human rights.
Want a Free Vacation? Move to Europe
I recently returned from a short vacation — had to get it in before the Supreme Court begins announcing decisions in this year’s big cases and the president nominates a replacement for Justice Stevens — but it seems that I’m a chump for paying for it myself. While I was gone, the EU’s commissioner for enterprise and industry, one Antonio Tajani, declared that vacationing is a human right, one that ought to be paid for by the taxpayers:
Tajani, who unveiled his plan last week at a ministerial conference in Madrid, believes the days when holidays were a luxury have gone. “Travelling for tourism today is a right. The way we spend our holidays is a formidable indicator of our quality of life,” he said.
Tajani, who used to be transport commissioner, said he had been able to “affirm the rights of passengers” in his previous office and the next step was to ensure people’s “right to be tourists”.
As Dave Barry would say, I’m not making this up:
Tajani’s programme will be piloted until 2013 and then put into full operation. It will be open to pensioners and anyone over 65, young people between 18 and 25, families facing “difficult social, financial or personal” circumstances and disabled people. The disabled and the elderly can be accompanied by one person.
In the initial phase, northern Europeans will be encouraged to visit southern Europe and vice versa. Details of how participants are chosen have not yet been finalised, but it is expected the EU will subsidise about 30% of the cost.
Officials have envisaged sending south Europeans to Manchester and Liverpool on a tour of “archeological and industrial sites” such as closed factories and power plants.
With apologies to friends who are fans of the Man U and Liverpool soccer teams, I’m not sure those cities would be on my list of top 1000 places to visit. But still this program illustrates the logical culmination — one logical culmination – of a view that government exists to provide all things to all people and that everyone has a “right” to whatever makes life good and pleasant and fulfilling.
Libertarians are often assailed for exaggerating the problems inherent in large, unlimited government, or of making ad abusurdum slippery slope arguments, or of having “outdated” views of political theory. But really, when the “right” to a paid vacation is ensconced in so many countries’ laws, when it gets its own article (24) in the UN Declaration of Human Rights, is it that far-fetched for someone to come up with an actual state-provided vacation? Apparently Spain has already been doing it.
Journalists Condemn Attack on the Free Press in Ecuador
On Monday I wrote about an Ecuadorian court’s sentencing of Emilio Palacio, editor of the opinion section of El Universo, to three years in jail. Since then, the Inter-American Commission on Human Rights (IACHR) has expressed “profound concern” about the prison sentence for Palacio, and the Inter-American Press Association (IAPA) and Reporters Without Borders (RSF) have strongly condemned it.
Op-ed writers from leading national newspapers have signed a statement condemning the court’s decision. This statement was published in El Comercio, El Universo, Diario HOY and La Hora. So far 47 columnists have signed on. See an updated list here of those of us who express our solidarity with the accused journalist.
The Violation of Human Rights in Venezuela and Cuba
A report (PDF) released today by the Inter-American Commission on Human Rights condemns in well documented form the growing violation of human rights under the regime of Hugo Chavez. The 302-page study is yet another confirmation of the multitude of ways in which individuals, NGOs, union leaders, politicians, activists, businessmen, students, judges, the media and others who disagree with Venezuelan government policies are targeted by the government and its supporters through intimidation, arbitrary use of administrative and criminal law, and sometimes violence and homicide.
Among the many cases it documents, the report describes how the government last year shut down a publicity campaign in defense of private property run by our colleagues at the free-market think tank CEDICE. The government claimed that it did so to safeguard public order and the mental health of the population.
Particularly interesting is that the commission issuing this report (produced in December but for some reason only made public today) is part of the Organization of American States, which has proven itself useless at best and counterproductive at worst, in the face of blatant rights violations by the Venezuelan and other populist Latin American governments in the last decade. Will the same OAS that invited Cuba to rejoin the organization last year now debate the new report or will it and its head, Mr. Insulza, remain silent as they have for so many years?
Meanwhile in Cuba, the country Chavez holds as a model, political prisoner Orlando Zapata Tamayo died yesterday after going on a hunger strike, suffering beatings and having been denied water by prison authorities for 18 days. The mistreatment led to kidney failure. According to Cuba Archive, an NGO that documents deaths attributable to the Cuban regime, Zapata “was then held naked over a powerful air conditioner and developed pneumonia.” What will the Permanent Council of the OAS have to say about that?
Switzerland’s Strong Human Rights Laws Should Be Emulated, not Persecuted
In a rational world, Switzerland would be a role model for other nations. It is quite prosperous thanks largely to a modest burden of government. There is remarkable ethnic and religoius diversity, but virtually no tension because power is decentralized (sort of what America’s Founders envisioned for the United States). Yet despite these — and many other — attractive features, Switzerland is being persecuted because of strong human rights laws that protect financial privacy. Money-hungry politicians from other nations resent Swtizerland’s attractive policies, and they would rather trample Swiss sovereignty rather than fix their own oppressive tax laws. An official from the Swiss Bankers Association provides some background in a New York Times column:
In Switzerland, this tradition of treating a client’s financial affairs in confidence became law in 1934 when it was codified in Article 47 of the country’s first-ever federal banking act as a contemporary reaction to the economic crisis, various domestic political considerations and well-publicized cases of espionage involving France and Germany. …Banking secrecy…reflects the very high degree of trust that exists between the Swiss state and its citizens and it has strong democratic foundations. …The Swiss are proud of their system and they reward it with a high level of taxpayer honesty. It works because the Swiss vote their own taxes, they have a high degree of control over the way tax revenues are spent and over all they believe their tax system to be reasonable, comprehensible, transparent and fair. …Doesn’t Switzerland hear the snapping jaws and cracking whips of foreign finance ministers, tax collectors, O.E.C.D. bureaucrats, cash-dispensing government agents and other denizens of the encroaching real world as they circle round Mother Helvetia intent on biting huge chunks out of her banking secrecy, if not swallowing it whole? …In March last year the Swiss announced they would give up the evasion-fraud distinction for foreign bank clients and adopt the O.E.C.D. standards on information exchange in tax matters. …However, requests for assistance must be made with regard to a specific individual, and “fishing expeditions” — any indiscriminate trawling through bank accounts in the hope of finding something interesting — remain ruled out. …Switzerland demonstrates to the world that it is possible for a state to collect taxes with a high degree of taxpayer honesty and without the authorities being corroded with suspicion about the financial activities of their citizens. Citizens in a democracy would never allow their police force to have an automatic right of forced entry into their homes just on the off-chance of finding some stolen goods, so why on earth should the state have an automatic right of forced entry into citizens’ banks accounts just on the off-chance of discovering some tax evasion? There must be a limit to the extent to which respect for an individual’s privacy is sacrificed on the altar of international cooperation in tax matters.
Sadly, the United States is part of the effort to create a global tax cartel. An “OPEC for politicians” would be terrible news for taxpayers, though, much as a cartel of gas stations would be bad for driviers. So-called tax havens play a valuable role in curtailing the greed of the political class. Ask yourself a simple question: Would politicians be more likely or less likely to raise tax rates if they knew taxpayers had no escape options?
A Victory for Fiscal Sovereignty and Human Rights
A Swiss court just threw a wrench in the gears of an IRS effort to impose bad U.S. tax law on an extraterritorial basis, ruling that Switzerland-based UBS does not have to hand over data to the American tax authorities. This ruling nullifies an agreement that the Swiss government was coerced into making with the U.S. government last year.
In typical arrogant fashion, the IRS already has indicated that it still expects acquiescence, notwithstanding Switzerland’s strong human rights policy on personal privacy. The Bloomberg story excerpted below has the details, but it’s worth noting that this entire fight exists solely because the Internal Revenue Code imposes double taxation on income that is saved and invested, and imposes that bad policy on economic activity outside America’s border. But just as other governments should not have the right to impose their laws on things that happen in America, the United States should not have the right to trample the sovereignty of other nations:
The failure by U.S. citizens to complete certain tax forms or declare income doesn’t constitute “tax fraud” that would require Switzerland to disclose account data, the country’s Federal Administrative Court ruled in a judgment released today. …“The prosecutors at the Justice Department are not going to be happy with this opinion,” Namorato said in an interview in Washington. …U.S. Justice Department spokesman Charles Miller declined to comment. …The Internal Revenue Service said in a statement that while the agency hadn’t reviewed the ruling it “had every expectation that the Swiss government will continue to honor the terms of the agreement.” …Switzerland distinguishes between tax fraud, which is a crime, and tax evasion, which is a civil offense.
This battle is part of a broader effort by uncompetitive nations to persecute “tax havens.” Creating a tax cartel for the benefit of greedy politicians in France, Germany, and the United States would be a mistake. An “OPEC for politicians” would pave the way for higher taxes, as explained here, here, and here.
But this also is a human rights issue. Look at what happened recently in the thugocracy known as Venezuela, where Chavez began a new wave of expropriation. The Venezuelans with money in Cayman, Miami, and Switzerland were safe, but the people with assets inside the country have been ripped off by a criminal government. Or what about people subjected to persecution, such as political dissidents in Russia? Or Jews in North Africa? Or ethnic Chinese in Indonesia? Or homosexuals in Iran? And how about people in places such as Mexico where kidnappings are common and successful people are targeted, often on the basis of information leaked from tax departments. This world needs safe havens, jurisdictions such as Switzerland and the Cayman Islands that offer oppressed people the protection of honest courts, financial privacy, and the rule of law. Heck, even the bureaucrat in charge of the OECD’s anti-tax competition campaign admitted to a British paper that “tax havens are essential for individuals who live in unstable regimes.” With politicians making America less stable with each passing day, let’s hope this essential freedom is available in the future.
Market Liberalism at the Washington Post
Three years ago a Washington Post editorial conceded: “Sometimes libertarians deserve to win an argument.”
“Gee, thanks,” I wrote at the time. ”I’m glad libertarian arguments against over-regulation made sense to the editorial writer in this case. But I’m disappointed in the suggestion that this is a rare occasion.” After all, libertarians and Post editorial writers no doubt agree on a lot of basic principles – private property, markets, the rule of law, limited constitutional government, religious toleration, equality under the law, a society based on merit and contract not status, free speech, free trade, individual rights, peace — though of course we disagree a lot over just how closely public policy should adhere to such principles.
And indeed, the three editorials in Sunday’s Post demonstrate some of the market-liberal values that libertarians and Post editorial writers share. A strikingly good lead editorial, “Redefining human rights,” raps Secretary of State Hillary Clinton for saying that the Obama administration would “see human rights in a broad context,” in which “oppression of want — want of food, want of health, want of education, and want of equality in law and in fact” — would be addressed alongside the oppression of tyranny and torture. “That is why,” Ms. Clinton said, “the cornerstones of our 21st-century human rights agenda” would be “supporting democracy” and “fostering development.” The Post sternly warns:
This is indeed an important change in U.S. human rights policy — but the idea behind it is pure 20th century. Ms. Clinton’s lumping of economic and social “rights” with political and personal freedom was a standard doctrine of the Soviet Bloc, which used to argue at every East-West conference that human rights in Czechoslovakia were superior to those in the United States, because one provided government health care that the other lacked. In fact, as U.S. diplomats used to tirelessly respond, rights of liberty — for free expression and religion, for example — are unique in that they are both natural and universal; they will exist so long as governments do not suppress them. Health care, shelter and education are desirable social services, but they depend on resources that governments may or may not possess. These are fundamentally different goods, and one cannot substitute for another.
Precisely (though we probably disagree about whether it is desirable for such services to be provided by government)! A second editorial deplores flaws in the criminal justice system that continue to send innocent people to jail, including two men who were released this month after spending more than 25 years in prison. It’s a topic that Cato media fellow Radley Balko has been covering regularly. And finally, an editorial on the Federal Trade Commission’s antitrust case against chipmaker Intel. The Post is by no means as critical of antitrust law as libertarians often are, but it does warn that “the agency’s actions are aggressive and potentially worrisome.” And it concludes, more cautiously than I would, but still by noting that consumers have been prospering during this alleged anti-consumer behavior:
The chip market is highly concentrated, and Intel has long been the dominant force. Yet year after year, consumers have benefited from more powerful and cheaper computers. The FTC is right to keep a close eye on the industry and on Intel, in particular, but it must use its power wisely and with restraint.
As David Kirby and I wrote in “The Libertarian Vote,” the United States is “a country fundamentally shaped by libertarian values and attitudes.” Despite all the assaults on liberty of the past decade, that’s a point that politicians and pundits should keep in mind. And editorials like these remind us that the ideas of individual rights, the rule of law, and competitive markets are still widely held.
HRW: “New Castro, Same Cuba”
Human Rights Watch has just released a lengthy report detailing the constant and blatant abuses of human rights and basic individual freedoms in Cuba under the rule of Raul Castro.
Some hoped that the timid economic reforms announced by the “younger” Castro brother, when he assumed the official leadership of the geriatric regime, would constitute the opening salvos toward a more open and freer Cuba. However, a few of us spotted cracks in that fairy tale early on.
The recent beatings of Yoani Sánchez and other independent bloggers (described here by my colleague Ian Vásquez) are a clear reminder that, in Cuba, it’s business as usual under the Castro brothers’ rule.
The New Threats to Free Speech
In a new Policy Analysis, Cato Research Fellow Jason Kuznicki examines the ongoing threats to free speech both at home and around the world, from hate-speech laws in the United Kingdom and Canada and university speech codes in the United States, to the Cairo Declaration on Human Rights in Islam:
The result is not more happiness, but a race to the bottom, in which aggrieved groups compete endlessly with one another for a slice of government power. Philosopher Robert Nozick once observed that utilitarianism is hard-pressed to banish what he termed utility monsters—that is, individuals who take inordinate satisfaction from acts that displease others. Arguing about who hurt whose feelings worse, and about who needs more soothing than whom, seems designed to discover—or create—utility monsters. We must not allow this to happen.
Instead, liberal governments have traditionally relied on a particular bargain, in which freedom of expression is maintained for all, and in which emotional satisfaction is a private pursuit, not a public guarantee. This bargain can extend equally to all people, and it forms the basis for an enduring and diverse society, one in which differences may be aired without fear of reprisal. Although world cultures increasingly mix with one another, and although our powers of expression are greater than ever before, these are not sound reasons to abandon the liberal bargain. Restrictions on free expression do not make societies happier or more tolerant, but instead make them more fractious and censorious.
‘Is Obama Punting on Human Rights?’
That’s today’s Arena question over at Politico.
This morning, both Bret Stephens, in the Wall Street Journal, and Mona Charen, at Real Clear Politics, catalogue Obama’s silence on human rights — China, Tibet, Sudan, Iran, Burma, Honduras — and his backpedaling from his campaign rhetoric. Meanwhile, Eric Posner, at the Volokh Conspiracy, rightly credits Obama for, among other things, not backing the Goldstone Report and pressuring Spain to water down its undemocratic “universal jurisdiction” statute, even as he condemns the administration, again rightly, for its decision to join “the comically named U.N. Human Rights Council,” bastion of some of the world’s worst human rights abusers.
What’s missing, it seems, is any coherent and systematic approach to those matters. During the Reagan administration I served for a time at State as director of policy for the Bureau of Human Rights and Humanitarian Affairs — now called, interestingly, the Bureau of Democracy, Human Rights, and Labor. Things were simpler during the Cold War. We focused on totalitarian regimes, somewhat less on authoritarian regimes, since people were allowed to leave those. And, yes, realpolitik played at least a part in our thinking, as inevitably it must. But the basic principles were clear: If human rights were to be respected, not simply behavioral but systematic change would be required. And Reagan kept the pressure on, publicly. With the fall of the Berlin Wall, millions saw that kind of change, in varying degrees. But the contrast between totalitarianism and democratic capitalism is less clear today than it was then, and the Obama administration, in both its foreign and domestic policies, is doing little to clarify it.
The promotion of human rights starts at home, with allowing people to plan and live their own lives, not with vast public programs that compel people to live under government planning. And in foreign affairs it requires both private and public diplomacy, quiet and not-so-quiet attention to the conditions that give rise to human rights abuses. That doesn’t mean military intervention to change those conditions. But neither does it mean remaining silent, as the Obama administration too often has. Countless victims of abuse, from Cuba to China and far beyond, have written about how important it was that they knew that the world knew about them: When America speaks, the world listens. But equally important, history demonstrates that regimes that respect their own people respect other people as well. It’s time for Obama to speak out.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
