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In Defense of Tax Avoidance

Frequent guest on The Morning Zone, Economist with Wyoming Libery Group and columnist Sven Larson

~~By Sven Larson~~

To begin with, for all you socialists and liberals reading this blog: there is a difference between tax avoidance and tax evasion. Tax evasion is when you do not pay taxes that you are legally mandated to pay. Tax evasion is a crime and should be duly punished (though it is worth pointing out that tax evasion should never be punished on par with any crime against a person).

Tax avoidance is when you take measures within the law to reduce your tax burden. The difference is monumental: it is illegal to drive faster than the speed limit but it is not illegal to take a detour around the city to avoid low downtown speed limits.

In the international debate over low-tax jurisdictions, castigated as “tax havens” by high-tax advocates, tax avoidance and tax evasion are often lumped together. The so called “investigative journalism” project that I mentioned the other day is a case in point. In a global effort to make private bank records public, the “International Center for Investigative Journalism” has shown great disdain for the privacy of their fellow citizens. Here is how one person involved in the project puts it:

“I don’t think we should be worried about the sensitivities of the poor banker and poor criminals whose criminal activities are being exposed,” he said. “If there are people who are doing nothing wrong and their information is being exposed, then it’s collateral. It’s a price to be paid.”

I wonder if this person has the same attitude toward the National Security Agency listening in on all our e-mails and phone calls. After all, if you have nothing to hide, what do you have to worry about…?

The revelation of financial data for law-abiding citizens and the suggestion that such publication is merely “collateral”, is very serious indeed. The people who pry into their fellow citizens’ private affairs with this attitude are dangerous individuals. It is disturbing, to say the least, that they seem to have such deep disrespect for the integrity of other people that they are willing to expose law-abiding citizens – tax avoiders – in the same context as criminals – tax evaders. Again the comparison to government eavesdropping comes to  mind, but there is an even broader issue at work here.

High-tax advocates who criticize tax avoidance as being no different than tax evasion – the aforementioned “investigative journalism” project is a case in point – generally go after so called “tax havens”, more appropriately referred to as low-tax jurisdictions. The purpose is to prevent citizens of country A from choosing to move their money to country B and pay lower taxes.

The premise behind the defense of tax avoidance is that I as an individual citizen have earned that money through my own work or the investment of my own rightfully earned money. High-tax advocates do not see it that way. They do not share the premise that my earnings and my wealth are in fact mine.

This is a fundamental, philosophical difference that extends beyond being mere premises for tax policy. By suggesting that my income is not necessarily mine, and by focusing on the transfers of money around the world for the purposes of tax avoidance (and tax evasion) they imply that there is a legitimate distinction between what is truly mine of my property and what is not mine. The premise is that whatever assets I can move from one country to another for the purposes of lower taxes are assets that I really do not need – with “need” of course defined by the high-tax advocates.

Which brings us to the core of the controversy. High-tax advocates build their reasoning on the false idea that there is a debatable, externally definable and imposable maximum to what a person needs. The roots of this belief is in 19th century Marxism, which claims that a person’s needs are defined by his ability to reproduce his labor. In plain English, your needs are what you need to be able to go back to work tomorrow and do the same job all over again.

To the best of my recollection, Marx never explicitly listed those needs. He came close to defining them by suggesting what part of a work day a person needs to work in order to earn enough to pay for his needs. The rest of the time, Marx said, the person works for the white, evil, heterosexual, baby-eating, Christian Capitalist. (OK, he didn’t say “white”…) This definition of needs is a core principle of Marx’s application of the labor theory of value, and its original purpose was to identify the so called Capitalist surplus. The point was to “return” that surplus to the worker so that the worker could enjoy a higher standard of living.

Even if Marx’s theory was fundamentally flawed already from the outset, his biggest problem was that government got in the way. Fast forward to the mainstream European welfare state, the Marxist concept of “need” has now become public policy in two directions: spending on entitlements to give people their “needs” and taxation in order to take away the excess of “needs” from those who have earned a bit more.

This is where the high-tax pundits go to work on stopping international financial planning. They consider the very existence of money for that purpose a sign that the owners have an excess of what they need. Therefore, if I invest money in a low-tax jurisdiction (Puerto Rico is one, conveniently accessible to Americans) then they see that investment as illegitimate property on my end and a legitimate target of taxation – preferably of the confiscatory kind.

This is the theoretical foundation of the attacks on low-tax jurisdictions. There is obviously one big fault in this foundation: its theory of need, work and the individual. The very idea that someone else can define your needs is an open disrespect for you as a sovereign individual. You and I are free to define what we need without anyone else intervening. As independent persons we are free to pursue the resources for our needs within the framework of respecting other people’s life, liberty and property. I am free to define a brand new Mercedes E-class as part of my needs (though as an automotive purist I might do with my Honda Accord…) while my neighbor can take the completely ascetic route through his life.

My neighbor and I are then free to work as much or as little as we want, entirely in accordance with our own definition of what we need.

As for the concept of “work”, we once again clash with the high-pitched proponents of high taxes. When I work for my employer, I put in all of my time into that work. It is my effort, my skills and my talents that produce the product that my employer has contracted me to deliver. That contract, in turn, is a deal between me and my employer and absolutely nobody else. Therefore, the proceeds – the salary – are mine and mine alone.

This may seem trivial to us with common sense, and it is. However, high-tax pundits do not share our view of this contract between an employer and an employee. Their view of work is based on the same Marxist theory from which they derive their ideas regarding needs. In their view, the work day is split up between the work that I need to put in to reproduce myself for tomorrow, and the work that – in statist theory – is my boss’s profit. (Since I work for a non-profit, that concept is rather ironic…)

Since my boss will not give up that “profit” voluntarily, high-tax activists turn to government for help. They use taxation as a means to confiscate as much as they dare to confiscate of the alleged profit. The confiscation takes place on several levels: in a regular, for-profit business both the employer and the employee pay a slew of taxes that are all aimed at raking in the “Capitalist surplus” to government.

The problem for the statist comes when the individual entrepreneur decides that he wants a cut of the money that his business is generating. Tired of paying high taxes he moves his business or just his own money to a low-tax jurisdiction, out of reach for the tax-greedy statist. This angers the tax-to-the-max crowd because by their playbook, for reasons just outlined, the Capitalist has no moral right to that money.

In other words, the witch hunt against low-tax jurisdictions and people who use them is founded in a radical, Marxist philosophy that is not just detached from reality but directly dangerous as a means for public policy. The danger lies primarily, but far from solely, in that this Marxism-in-disguise constitutes a platform for a political assault on individual and economic freedom. By splitting the work day of the individual employee into two parts – one where he works for himself according to what other people define and one where he works for others – the statist effectively splits the individual’s life into two parts. The first part is private and recognized as such, namely the time he works for his own needs as the statist has defined them, and where he gets to satisfy those needs (eating, sleeping, doing maintenance work on his dwelling, washing his clothes and teaching his children the virtues of Marxism). The second part is public and subjects the individual to the state. This is the part where he works to pay taxes so government, not his employer, can enjoy the surplus of his work.

By dividing the individual’s existence into these two parts, the Marxist/statist reduces him to a subject under the authority of government. This subjection – or subjugation – characterizes everything the government does at the hands of the statist. Furthermore, depending on the needs of government, the statist can move the dividing line between “needs” and “evil profits” as he pleases. In a situation such as the one currently holding Europe’s welfare states in a tight grip the line tends to move rather sternly in the direction that favors government.

This means tax hikes.

It also means an increased aggressiveness against those who plan their finances based on a desire to pay less taxes. It is with this in mind that we should resist the urges of the statists to eradicate low-tax jurisdictions and the freedom of individual citizens (as well as corporations) to choose where to invest their money, for what purpose and why.

If the high-tax advocates succeed in eliminating low-tax jurisdictions – either explicitly or implicitly by preventing people from investing abroad – then they have won a big moral victory on behalf of big government over the individual. Their underlying philosophical agenda, a revived Marxist notion of the individual as being a subject of government, will set deeper roots in our public policy arena. It will open for more restrictions and confinements on individual freedom.

How do we know this? When was the last time you heard a coherent answer from a statist to the question: when is government big enough for you?

We also know it because both European and American history  over the past 75 years show us that once government starts growing, it will continue to grow uninterruptedly – until its sheer size and burden on the private sector destroy government’s host organism.

For all these reasons together it is very important that we, friends of freedom, do not let the statists get away with their assault on tax avoidance and low-tax jurisdictions.

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