catallaxy files

catallaxy in technical exile

No honour amongst thieves

with 6 comments

The US government’s pursuit of tax havens has been disgraceful. The problem arises when government attempts to exert its authority beyond its own national borders. We then arrive at the strange situation where government can exercise authority unconstrained by domestic courts. Consider for example the so-called Pacific Solution. The Australian government is able to detain individuals without those individuals having access to the Australian legal system to challenge decisions made by Australian government officials. The US facility at Guantanamo Bay has similar features. The logic that government can act extraterritorially also gives rise to the argument that it can tax assets and income extraterritorially.

But we know there should be strong and clear limits to government to avoid oppression. Tax havens play an important role in creating those limits. For people uncomfortable by this type of argument, there is the utilitarian argument that tax havens also facilitate greater investment and economic efficiency. The American government overstepped a very imporant limitation when it forced UBS to give up the names of suspected US tax cheats. Bear in mind these people have not been found guilty of an offence, merely suspected of an offence due to having a foreign bank account.

Why does this matter? After all the US is generally a force for good and can’t really be described as being an oppressive regime. The problem is that a system of partial disclosure requires Swiss authorities to make a judgement call on the activities of their banking clients and the oppressiveness of foreign governments. A secrecy or non-disclosure policy requires no such judgement call on the part of the Swiss.

But there is some good news out of this sordid affair. The original ‘whistleblower’ is going to jail.

A FORMER banker with UBS who triggered a huge tax-evasion inquiry by the American authorities into his employer’s business will go to jail this week after failing to secure a deal over a sentence imposed on him last August.

Bradley Birkenfeld had pleaded guilty in 2008 to helping a UBS client — Igor Olenicoff, a property developer in California — to evade taxes, but in a plea bargain with prosecutors he agreed to reveal more information about tax evasion in the Swiss banking group in return for a lighter sentence.

Overnight, however, a federal judge, William Zloch, refused to postpone prison or consider a lighter sentence than the one of 40 months handed down in August and ordered Birkenfeld to report to jail on Friday.

Birkenfeld, an American citizen who lived in Switzerland for 15 years, appeared on a television show on Sunday and in his first public interview said: “I gave them the biggest tax-fraud case in the world. I exposed 19,000 international criminals. And I’m going to jail for that?”

To say that he exposed 19,000 criminals is a very long bow. He exposed the inappropriateness of bad tax policy and has exposed the citizens of oppressive regimes to government confiscation of their property.

Written by Sinclair Davidson

January 5, 2010 at 11:02 am

Posted in Uncategorized

6 Responses

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  1. The US government succeeded in a way that the Nazi regime didn’t to pry open Swiss secrecy. Great effort.

    The worst offenders in this whole affair were the UK government. They happily offer tax free status to non-citizens for up to 5 years living in the UK with any income earned offshore and not repatriated in the UK gaining tax free status. The UK’s actions were so hypocritically dishonest that you’d want to puke.


    January 5, 2010 at 11:17 am

  2. Funnily enough, I got one of the Australian Tax Office’s hate mails about declaring foreign income and having foreign bank accounts a few weeks ago (good luck to them if they want to get through the French bureaucracy to find out I don’t have any money there!).
    One of the really weird things about the US system that I could never understand is why you have to pay tax to the US government just for being a citizen, even if you don’t live or earn money in the US. I can see why they are displeased about not paying tax on money earned in the US, but on money not earned in the US is just crazy.


    January 5, 2010 at 12:41 pm

  3. Conrad:

    Why would it be a surprise to you when the second largest party in the US is the Dem(olition) party whose prime interest is ripping away at people’s wealth and earnings and always playing the racist card? That’s no shock.


    January 5, 2010 at 12:45 pm

  4. A US citizen who is resident of Oz doesn’t pay US tax on his Oz income due to the Double Tax Treaty.I assume the same is the case in relation to opther countries as well. Where the US is different is that it taxes non-resident citizens on income from non-treaty countries.

    Rococo Liberal

    January 5, 2010 at 2:17 pm

  5. Rocco:

    I’m not entirely sure if that’s the case. As far as I know US citizens living here have to lodge a US return and if there a timing difference are required to pay US taxes which will be returned once the Australian return is lodged. So the US government is skulking aroiund for tax free loans.

    You would also pay any differential if one arose which in Australia’s case is pretty mute as our tax rates are higher.


    January 5, 2010 at 2:30 pm

  6. “I assume the same is the case in relation to opther countries as well. ”
    I’m not sure about that. I had friends in various places (mainly Asia) who had to think of ways to hide their income — whilst there is certainly a better rate if you didn’t make any of it in the US (or live there for that matter), you still have to pay. Perhaps there is a whole set of rules for different places. It’s all pretty odd in my books.
    I was really interested in what the philosophical justification was — is it something like “you benefited growing up in the US, you therefore must pay back that benefit”.


    January 5, 2010 at 3:03 pm

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