Adam Gopnik has a spot on commentary in The New Yorker on the GOP’s making hay of Obama’s Roanoke speech the other day. The GOP and right-wing commentators understand well the context of Obama’s remarks—and that they are deliberately taking them out of context—but in a tough campaign and with Romney on the defensive on account of Baingate and his tax returns, c’est de bonne guerre I suppose (then again, maybe it’s just pure demagoguery). Gopnik, referring to an article of his on Adam Smith, says that
Smith, as I wrote, does not think that “government is the problem”; he thinks problems arise when the rich are able to make the government take their side. A healthy sovereign state is what serves the public against the producers… It isn’t just that a free market can survive regulation; it’s that the free market is the product of regulation, regulation designed to protect the public from the kind of arrangement that, let’s say, allows people with undue influence on the government to have a lower tax rate than people who don’t. This makes Smith, as I wrote, a firm believer in public goods: his state has an obligation to build roads and schools, establish an army, build bridges and highways, and do all the other things necessary for a sane polity in which the market can function naturally. Everyone should pay for them, and the rich should always pay more than others.
Couldn’t have said it better myself. Gopnik concludes his fine piece with this
So the view that the President was articulating the other day in the “that” speech wasn’t even a mild and “acceptable” form of social democratic reproach; it was the root foundational view of the free market as its greatest apostle imagined it. So don’t apologize, Mr. President, and don’t explain. Say it again! What you were articulating were the principles on which the free market, and with it this republic, is built. And that … is … that.
Yes, no need for Obama to explain himself. All he needs to do is keep hammering away at the S.O.B.s.
In this vein, the great Paul Krugman has a home run column today on the “Pathos of the Plutocrat.” C’mon Mitt, release those tax returns. Show us the goods. Just do it.
Wow, Gopnik has me convinced (not!) Meanwhile, here is someone else who was convinced by Obama’s speech:
http://rwcg.wordpress.com/2012/07/18/president-obama-is-right-and-heres-what-that-implies/
More thoughts on Gopnik and Smith, from Yuval Levin:
Over at the New Yorker, Adam Gopnik assures us that Adam Smith would have had no trouble with Barack Obama’s recent remarks about how the existence of public roads nullifies the significance of individual accomplishment and justifies the administrative state.
Count me a skeptic. Gopnik is certainly right to say that Smith believed that markets were created and sustained by public policy, and that building infrastructure is an important public purpose which government should pursue. Everyone else believes that too. Obama’s assertion that his opponents disagree with that is preposterous. But as Gopnik also notes, Smith was an ardent critic of what we today would call crony capitalism. His case for the approach he lays out in The Wealth of Nations begins from a critique of the then-reigning economic approach known as mercantilism, under which each of the European powers set market rules that served the interests of a few large domestic manufacturers and trading companies that worked closely with the government—putting economic policy in the service of what they took to be the national interest, in order to advance the nation’s trading position. Smith argued that legislators should instead govern the market in the interest of the common consumer, and that the interest of that consumer would be best served by intense, open competition among producers that did not privilege large and well-connected businesses over smaller and newer rivals.
Crony capitalism—and a preference for a few large companies in each part of the economy that will function as agents of the government and be rewarded and protected accordingly—is the core of the Obama administration’s approach to the economy. It’s the essence of Obamacare and Dodd-Frank, for instance. And it is decidedly not about open competition in the service of the common consumer’s interest. You can name your new agencies consumer protection bureaus all you like, what they’re doing is making the economy more consolidated and easily manageable from the center, rejecting competitive enterprises in favor of public utilities. That’s basically the opposite of Smith’s vision.
And that is what Obama’s critics are criticizing—not his view that roads and bridges are necessary for commerce, but his ludicrous assertion that the very existence of public infrastructure (funded by the wealth produced through commerce, by the way) somehow diminishes the value of private enterprise or should silence critics of bureaucratic micromanagement and crony capitalism. Adam Smith would be no friend of that view, to put it mildly.
Reflecting on the technocratic hubris of Obamacare in particular, I’m often thrown back to this observation of Smith’s about the overconfident legislator:
It is no stretch to say that this does not appear to be Barack Obama’s view of the world.
I do not agree with your claim that the Obama administration has engaged in crony capitalism. I challenge you to explain and document it.
So you’ve never heard of Solyndra, Beacon Power, and Abound Solar? Or the auto bailouts? You need to get out more…
Yuval is talking about how large-scale government-run programs created by the Obama administration (the ACA and the Dodd-Frank legislation) are designed to favor equally large-scale players in the health-insurance and banking industry. That’s why the major insurance/banking companies were willing to get behind this legislation — they were going to get new customers and/or government funds and were big enough to afford the regs that come along with the funds. Smaller, upstart firms that want to grow are suddenly burdened with new regulations and can’t compete with the big boys.
I’ve heard of all these, just cabbages—and kings—and lots of things. What’s your point? If the names you rattle off support some kind of argument, then please just make the argument and explain how these things fix into it. Just listing off a bunch of names of things doesn’t establish anything about anything.
O.K., so let’s start with the basics. Crony capitalism refers to the idea that the government gets to pick which businesses will succeed and/or get special breaks (sometimes the breaks don’t lead to success — witness the failures of the Department of Energy loan program). In other words, rather than market forces determining winners and losers, the government steps in a helps pick winners and losers. The “cronies” are the ones picked to “win” by the government, usually because they have connection and money to influence politicians.
So with that definition and the examples I gave you, hopefully you now understand why Obama is accused of crony capitalism. Incidentally, this sort of thing happens with Republicans as well — for example the U.S. Farm Bill is many things but essentially it is one big subsidy to agribusiness interests, many of whom are connected to Republican members of Congress. For an excellent treatment of the problem and what to do about it I would suggest the relatively new book by Luigi Zingales called A Capitalism for the People: Recapturing the Lost Genius of American Prosperity. Here’s a recent article of his detailing some of his themes:
http://www.city-journal.org/2012/eon0708lz.html
@Fake Herzog
We seem to be talking at cross purposes. I actually do understand the idea of “crony capitalism” and I also understand that you are saying that the list of names you rattled off are supposedly examples of it. Nevertheless, you have not done what I asked, which is to explain and document in what way they represent examples of crony capitalism. You say that these are examplesof “crony capitalism: and I still say: ‘prove it.’
It was not that comment by Obama but another that raised my ire recently. Romney is apparently a supporter of “territorial taxation” and Obama responded in favor of strengthening the current U.S. system of “worldwide taxation” on U.S. based companies operating abroad and U.S. citizens and Green Card holders living abroad. Of all the countries in this world, only the U.S. and Eritrea have a system of worldwide taxation (also referred to as citizenship-based taxation) and there are good reasons for this. Daniel Mitchell has a good article here about this:
http://www.forbes.com/sites/danielmitchell/2012/07/20/what-obama-and-the-new-york-times-dont-understand-about-worldwide-taxation/
Double-taxing (being obliged to pay taxes in both the U.S. AND the country of residence) companies that operate abroad or U.S. citizens who live abroad makes no sense – the enforcement costs are high (the word is that the IRS will add hundreds of agents to its international division) and there is no proof whatsoever that one American job will be saved or that enough revenue will be generated to offset that cost. I will vote against any candidate for president or Congress in the U.S. that backs the current system.
Victoria, all the links here have to do with corporate taxation overseas, not on individuals. Do you have a reference to Obama saying that “worldwide taxation” explicitly includes overseas Americans and Green Card holders?
American citizens (as opposed to corporations) do not pay taxes twice but they must pay tax on their income regardless of where it is earned. The US simply requires its citizens to file tax returns reporting all of their income worldwide, which it may or may not tax depending on the individual’s situation.
Practically speaking, Americans resident abroad don’t pay double taxes since earned income is largely exempt (i.e., salary or personal service income as distinguished from return on capital or investments such as real estate) and there is generally a tax credit on your US return for taxes paid to a foreign country. Also, I believe that most European countries have tax treaties with the US so that their nationals and US citizens pay taxes only once.
I think that you are complaining about having to pay taxes to the US on money earned someplace where it wouldn’t otherwise be taxed. Since I personally consider non-doms to be free-riders, I think the answer for you is to simply renounce your American citizenship. Also, I think you’ll find that England and France will soon be shifting to universal taxation because people there are getting fed-up with non-doms tax exiles like Lord Ashcroft who are basically free-riding parasites.
@Mitch Guthman, “I think the answer for you is to simply renounce your American citizenship.”
Yes, I think many of us are becoming resigned to the fact that this may be our only option. I’m not sure what you mean by “non-dom tax exiles” but the folks I know and talk to on a daily basis on this topic are just regular folks: the lady in the city next to me who is married to a French national and has lived here for 30 years or the retired Canadian/American couple who is being threatened with the loss of a substantial portion of their retirement savings (not because they owe any tax, mind you, but because they didn’t understand U.S. tax law and how it applied to them) or the Accidental Americans (those who didn’t know they were American citizens) being told that they can only renounce their U.S. citizenship if they pay tribute to the U.S. government first to the tune of 5% of their assets or the legal immigrants in the U.S. who never knew they had to file FBAR’s and are living in fear of fines if around 50,000 USD. These are the casualties of U.S. universal taxation and they are legion. Their anger is all the greater because so many of them did vote for or support Obama in 2008.
Just for fun I did my own cost-benefit analysis to try to get some clarity as to whether I should renounce or not. Here is what I came up with. Let me know if I do indeed fit your definition of a “tax exile”:
http://thefranco-americanflophouse.blogspot.fr/2012/05/american-citizenship-cost-benefit.html
Arun
First of all, Victoria is correct in what she says. The US asserts the right to tax “U.S. Persons’ (Greencard holders and American Citizens abroad) world wide no matter where they live.
Secondly
Mitch,
I don’t know where you come up with the idea that a “Non-dom” is a free rider. With all due respect where did that view come from? Is it an informed one based upon experience, or just a generalized bias? Maybe there something about your definition of a “Non-dom” that I don’t understand.
For both of you…
Yes, a lot of countries do tax world wide income, but ONLY Americans tax the income of its citizens and U.S. persons residing in other countries and already paying taxes to the county in which they reside, live and receive services. They are hardly free riders that get to pay taxes and submit forms to two different countries. Lucky them.
BTW, if you want to know how other countries tax offshore income,and Citizenship vs territorial, here is a reference for you based upon some research another blogger did which might be helpful for you. http://bit.ly/QcmA6j
If you read that, then by now, I am sure you must know that NO OTHER OECD country does this to their citizens. Why not? Because everyone else engages in something that is understandable, logical and it is fair. It is called a territorial system.
My wife is an Aussie and now living with me back in the States. She pays taxes to the U.S. Government where she resides. Australia has let go of her, because of her domicile in America. She has no reporting requirements back to Australia. However, when I was living with her in New Zealand I had to continue paying taxes back to the U.S. as does she, because the U.S. now designates her a U.S. Person and asserts an extra territorial right to tax her and me both no matter where we reside. Australia does none of that nonsense.
You do also understand don’t you, that the 50 individual states also practice Territorial taxation too. Just because you were born in California, they do not tax you if you move to and now live in Iowa Although Mitch you might consider that ex-Californian as “non-dom” “free rider” if I follow your logic correctly.
You also quickly claim that you ‘think’ the tax treaties wipe out the double taxation, but that it not so. I can tell you from experience that what you ‘think’ is wrong. Anyone who has lived outside the U.S. Borders knows this. Yes, there are some offsetting credits or exemptions for certain forms of income, but not for other forms, so you do get double taxed.
For instance you get no credits for the GST, VAT paid where you reside, or do you get credits for income generated in another countries retirement plans like the Australian mandated Super. You have to pay taxes on it back to America even though it is tax sheltered in Australia. Additionally you have the expensive professional fees to stay current and compliant with two taxation systems. That is a tax too, although you might not have considered that before. Even if you attempt to complete your own taxes, not an advised activity, you spend a lot of LCUs, life credit units, staying compliant. That is the BIGGEST tax of all. Eating up the minutes you have left to live to serve the needs and pay tribute to a distant land with a BIG deficit! But maybe you are too young yet to understand that.
But…. There is more. That is not the half of it. It is the Tax Complexity, Stupid! … that makes this U.S. system especially egregious.
There is the incredible complexity and severe penalties applied to Expats living abroad with the Fwhat? froms, FBAR and FATCA now being the worst. If you don’t know about these complexities and duplicity and risks associated with filing them or not filing them, then I would recommend you spend some time reading Hale Sheppard’s excellent analysis of all of this. http://bit.ly/LXAZ00 I would guess you have no idea. As a resident in another country you have no choice but to add this complexity to your tax filing, while in the states, if you keep your money safely at home in Kansas, none of this effects you.
If you read this (I kinda doubt that you will) it might sober you up a bit about the extreme nature of the complexity that America requires out of its Citizens abroad, that NO OTHER COUNTRY in the whole wide world requires! NONE, ZERO, NADA!! Also, you SHOULD read the National Tax Advocates report to Congress on these very issues. http://bit.ly/xIqDb7 Again, that might require more time than you wish to devote to a subject you don’t know much about. Even they understand what you don’t seem to comprehend. But in fairness, maybe you have never lived overseas or experienced the US tax system from abroad.
As for your suggestion that one should renounce their citizenship, that is certainly a solution to some of these problems. I will give you that. Many average middle class folks living abroad are coming to the conclusion that is their only option if they are to live a normal life abroad on an equal playing field with their fellow residents. Of course, being an American means nothing about the renouncing process is cheap or easy. The U.S. makes it a very hard and bureaucratic process to do. Then there is the exit tax which can be significant hit on ‘Mark to Market’ unrealized inflation or FX gains just for the privilege of being allowed to leave. Then there is the ‘name and shame’ list for ‘cover expats’ the IRS puts out to be sure the media have a chance to write their stupid little stories claiming all that renounce are trying to escape taxes. Of course if move from New York to Florida that is exactly what you are doing, but never mind.
Personally, I am not sure how creating such complexity and tax burden on U.S. citizens so severe that it makes them want to renounce is good for America. It loses representatives, and goodwill ambassadors abroad right at the time of increasing trade deficits and decreasing job prospects in the homeland. Meantime the Chinese, the Germans, the Indians, etc can fan out around the world selling their products unhindered by all the obstacles of homeland Citizenship taxation being extended into the countries they now reside, like America. They never have to experience the taxation burdens that an American abroad does.
Finally if you think the world is coming around to the US way of doing things, I certainly hope not. Maybe you think FATCA is the Catalyst for this. Then again, maybe you don’t even know what FATCA is. FATCA is creating a lot of resentment abroad of the US unilateral approach to everything. Many financial institutions are just refusing to have American customers anymore. Some fanatics in Congress that that this would be a the pre-emptive strike against homeland tax evasion that is the equivalent of the Iraqi “shock and awe”. It will probably turn out with just as good of a result as the Iraqi war did! Huge cost, extensive collateral damage on Americans abroad, loss of U.S standing in the world and too many other unintended consequences to count.
Your idea of universal taxation is the copy cat practice I worry about, almost more than stupidity of FATCA. What would be the international tribunal for the adjudication on which country has the right to tax which citizen where?! Under your universal taxation scheme, we would have an incredible mess on our hands if other countries copied the American citizenship taxation model. Here is a little thought experiment on what that might look like for you to ponder before you make this suggestion again! http://bit.ly/NJlfPw You might have some accidental dual nationality in you that another country wants to tax, and WOULD DO SO if your universal taxation fantasy became a reality.
Let’s hope your wishes die in the dust bin of loony ideas.
Cheers mate.
@ Just Me,
There is a great deal of offshore funny money and the games being played by some very rich American citizens and corporations are costing my country plenty. People here are starting to get tired of it (just as they are starting to look on nondom games differently in England, France and Germany). I’m sorry if there are people who were not trying to hide income or game the system are being inconvenienced or even harmed.
My understanding is that contrary to what you suggest, the IRS is relatively sympathetic to people who didn’t file returns or disclose bank account where it’s clear that the failure was inadvertent and (1) the bank accounts are in the country where you live and (2) were disclosed in the tax returns you filed there. The fact that you or the people whose stories you relate are apparently fighting to disclose as little as possible to the IRS makes me think that there might be more to this than just not understand that you have to file a return even if you are resident abroad. Especially inasmuch as the first $100K of earned income is exempt and the tax treaties mean that you get full offsets for taxes paid where you live.
I have had bank accounts in England and Europe since 1998 without experiencing any of the problems you describe. I filed my tax return and disclosed my bank accounts when I lived in England and now that I’m back in California, I file a simple form with my Form 1040 and that’s it. Not that big a deal. Every other American is expected to find out what forms they need to file and file the required returns. There are American expat groups all over Europe that will tell you what to do and if you moved from the US to Europe, your American tax preparer should have told you as well. This is very common knowledge—common enough that Americans moving to France or England are often told by the local authorities that it’s still required to file a US tax return. The fact that you are domiciled in Europe changes nothing. If I and every other American in this country didn’t take steps to find out what I needed to do to comply with IRS regulations, I would be in a lot of trouble, too.
I’m actually quite sympathetic to your position in certain ways because unless your income is coming from activities in the US, you aren’t getting much benefit from your American citizenship since we mostly spend federal taxes on the military, corporate subsidies and federal spending in free-riding “Red states” like Alaska, Wyoming and nearly all of the Deep South (except Texas). Our health care system is vastly more expensive and not nearly as good as the ones available to most American abroad and our social security benefits are comparatively meager. All of which may point towards renunciation, if you have a nice place to land in the EU. I appreciate that you don’t want to file US tax returns and so forth. I don’t want to file tax returns or pay taxes either. But that’s life.
@Mitch Guthman, I think we have many points of agreement here. Those who park their money offshore in defiance of local law and to evade taxes (whether they are French or American or any other nationality) will find no friend in me. What I’m saying is that the application of older laws and the creation of new draconian ones to deal with this issue is doing a great deal of harm to people who are not rich, had no intention of evading anything, and desperately want to make it right but can’t find a way to do so (as was allowed in the past) that doesn’t destroy them and their families.
The situation you describe in 1998 was indeed (from my experience) the case. Those who came forward in the past seem to have been treated with understanding and a “go forth and sin no more.” All this has changed and I suspect it has a lot to do with the dire straits that the U.S. is in right now.
What I would like to see is something that makes a distinction between homelanders who hide their money offshore and those who actually live abroad and have legitimate reasons for having “foreign” (local to us) accounts. I just seems so darn silly that every year I have to report my daughter’s 700 Euro savings account (along with the checking and the savings accounts) to the U.S. gov because it is presumed that these are being used for nefarious purposes until I prove otherwise.
I’m also not against the idea of paying taxes to the U.S. government (others disagree with me and this is just my .02). But the process should be easier and an effort needs to be made through the embassies and expat groups to reach people who even today are not aware of the U.S. government tax and reporting requirements. I see where you are coming from – London is indeed filled with expat groups and has a big embassy. But there are many Americans abroad who have never belonged to such organizations and who live in places far from any U.S government presence.
And then if there are to be taxes levied on those international migrants who happen to be U.S. citizens then let’s have them be transparent and call them what they are: a Diaspora Tax (to support the homeland), a Tax on Emigration (a price to leave the country), and Exit Taxes (the price to give up citizenship).
I understand that you are unhappy about having to file an American tax return even though you live in France. The regular folks you speak of seem not to be very well informed and I don’t understand why since there are American groups all over Europe that can help them. My assumption is that they had enough common sense or respect for the French government to find out what France expected of them so I don’t understand why they seem to have made no similar effort with respect to the US.
I don’t understand why the retired Canadian/American couple is in danger of losing their retirement savings since the IRS regularly waives non-filing penalties for American abroad. The accidental americans who must pay tribute are necessarily worth in excess of $2 million and can look out for themselves. The people who are legal immigrants in the US with foreign bank accounts presumably filed income tax returns in this country so if their tax preparer didn’t tell them about the requirement to disclose their foreign bank account then they should sue their tax preparer.
As to your own cost-benefit, it’s entirely up to you.
Mitch Guthman
When you say, …
“IRS regularly waives non-filing penalties for American abroad.”
and what about FBAR Penalties? You expect that those will just be “regularly be waived”… too. NOT!
I assume you are not much aware of the past 3 year offshore jihad that the IRS has been on applying alike on rich homelanders and American’s living offshore. They use the FBAR filing failures as the vehicle of choice to assess some pretty excessive penalties.
Also, do you realize how much personal time, (LCUs) expense and apprehension go into reaching what you describe so simply in 9 words? !!!
In many cases benign failures of American’s abroad, and egregious failures of homeland tax evaders are treated exactly the same, in a one size fits all penalty regime. Here are your choices for reaching your nine word reassurance is:
1. Quiet Disclosure and then play the audit lottery and wait out the SOLs and hope you aren’t caught! If you are, then it is a very long and tedious audit process and penalty result unknown. You will have to live with a lot of uncertainty to become compliant with these unique requirements.
2. Noisy Disclosure, which usually requires expensive lawyer help, and then openly challenge the IRS to get you to your 9 word reassurance about waiving of penalties. It has been rarely tried and results unknown.
3. Enter the IRS voluntary Disclosure process (which the IRS insists that you must do). That is a 2 year bureaucratic nightmare of huge expense in either Practitioner frees or LCUs, and then to get some reasonable agent discretion, you must Opt Out at the end of it to try to get a penalty down to a reasonable level for a benign failure. Not for the faint of heart.
So which of those 3 choices do you recommend to get your result of….”IRS regularly waives non-filing penalties for American abroad”?
As you challenge others, I challenge you to show what you say is true.
I think you may not understand that the U.S. does not make it easy for Americans abroad who want to try to become compliant, even as complex and cumbersome it is to file and meet all the U.S. reporting requirements. At every turn there are catch 22s, and punitive penalties that are not as easily waived as your simple 9 words indicate.
You might want to do some more research.