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The Tax Policy Charade

Is political discussion about tax policy meant to achieve a rational tax system? Or is it just to garner votes? Is there science that gets lost in the debate?

tax policy, taxes, ideas

Tax policy discussions are meant to do what? Arrive at a rational policy, or garner votes. I think it is the latter. What is lost in all the debate over tax increases versus tax cuts, is science. Contrary to what most people may think, there is some scientific study of taxation.

<b>Applying The Laffer Curve To Tax Policy</b>

Invented by Arthur Laffer, the Laffer curve shows the relationship between tax rates and tax revenue collected. It demonstrates a simple principle that very few people understand, but one that is crucial to proper governance. It is the idea that as you raise taxes, you reach some point where actual revenues collected begin to drop.

This is perfectly logical, and you can understand it at the extremes. If the government took 95% of your income in taxes after the first $10,000, would you work much after that? Do they get any more taxes if you don't work more? No. More money will actually be collected if they take a lower percentage, right?

Now add to this the fact that every dollar the government takes can't be invested into new businesses or the expansion of existing businesses. New business investment means new income, and therefore more taxes. This isn't hypothetical - you can't invest what has been taken away from you. A friend of mine put off hiring employees and expanding his business for a long time because of a state business tax that would dramatically increase his taxes if he hired help.

That was a truly perverse tax policy, but any raising of taxes has to at some point cause a lowering of profits to the point where less is actually collected in taxes. There obviously has to be a point of diminishing returns. Where is it?

The science isn't that exact yet, but the principle is clear. The top of the curve seems to be somewhere around 15% to 25% as a total tax burden (federal, state and local). What this means is that if tax rates go higher than that 15% to 25%, the curve goes down; the government actually collects less money.

This isn't a republican or democratic issue. When Kennedy lowered tax rates and when Reagan did so (from a high of 70%!), tax revenues soared. The fact that under Reagan the government spent even faster than the rising revenues is another issue, but the lesson was clear: the Laffer Curve is an accurate description of tax rates and tax revenue.

In other words even if a political party or a society wants all sorts of social welfare programs, they have to realize that there is an ideal rate of taxation to get the most money to pay for these programs. Tax more heavily, and you get less, not more. This is the reality, whether people like it or not.

<b>The Politics Of Tax Policy</b>

Quite often, people don't like this reality, and politics trumps science. For example, wealthy people are often taxed at rates that have them spending more time looking for loopholes than ways to make more taxable income. This lowers production, and so lowers the potential taxes collected. If your friends don't get it when you explain this, point out that 20% of a million is more than 50% of three hundred thousand, so production matters - not just higher tax rates.

What happens if we recognize this? Will a politician explain that the government can collect more taxes from the wealthy if the rates are lowered? When they try, they lose votes. Long term there is real hope, because the principle is actually easy to understand. Short term it is politically difficult to say you want to lower taxes on the wealthy to a scientifically determined rate of greatest efficiency.

Many people want to believe that the rich can be taxed enough to pay for anything we want. The reality is that if most of the income of the wealthy was taken it would fund government for only a few weeks. There are more middle class than wealthy people, and more total income there, so that is where most taxes have to come from. Voter's don't know this or don't like this, and politicians tell them what they want to hear. Hence the tax policy charade.

 

How Offshore Tax Wealth Havens Came About . A Guide for Your Financial Wealth Planning

It is Is important to keep in mind that offshore financial centers were originally established by onshore banks and corporations.

Know how and why tax havens were legally developed by banks and governments for you to use tax havens can be a usefull vehicle of your financial planning and finanical convenience , safety and your personal financial stabiltly and ultimately wealth .

banking , wealth , interest , offshore , international , taxes , reduce , cash , financial

It is important to keep in mind that offshore financial centers were originally established by onshore banks and corporations. Why? Because felt hemmed-in by archaic laws, regulations and statutes. For example, Citicorp (the largest American-owned bank in the United States) was one of the first to set-up offshore operations. It wasn't too long before 64 percent of its net income was being generated by offshore sources.

Some of the pioneering centers have evolved into world-class financial and economic headquarters. Since the early 1970s, these centers have initiated policies deliberately designed to attract international trade by minimizing tax obligations and reducing (or entirely eliminating) other restrictions on business operations. The result is that economic activity within these centers is specifically geared to the special global needs of outside businesses and investors.

Typically, these centers are small states with tiny populations. To date more than 75 of these tax havens exist throughout the world. Each one of them is a unique offshore haven of sorts deliberately intended to attract very particular investors with very specific needs.

For example, a center like Aruba was set up primarily for economic development. Formerly dependent on oil refineries for its revenue, it has now implemented an investment policy that gives it entree to the global economic system. Becoming an offshore money haven was the answer. By "renting" its laws regarding taxation, incorporation and other related legal matters, Aruba has begun a much needed process of economic development and diversification.

Singapore, on the other hand, was designed to serve the Asian dollar market. Today it's one of the most prosperous money havens in the world on a per capita basis. And Bahrain was developed to process the Middle East's offshore financial needs, especially Saudi Arabia's.

All these offshore havens were made possible by the electronic revolution in fund transfer mechanisms which occurred early on in the 1970s. That single technological development made it suddenly possible and affordable to establish banks, corporations and holding companies in relatively remote locations. It also made inter and intra time-zone business a viable alternative to home-based operations. In turn, this gave rise to the creation of international wholesale banking — where large deposits could be maintained in a variety of currencies, transferred via a worldwide network of corporations, banks, governments and individuals, and lent to interested borrowers. This, in turn, led to new transnational business practices and the development of the international subcontracting of loans and other financial transactions.

Basically, international havens have become an established part of the international intermediate economy. They stand as "brokers" of a sort for global business and finance. It's important to keep in mind that all of this was initiated by large banks, corporations and even government agencies from around the world. Keep in mind that every government from the Soviet Union to Japan, China and the United States needs to obtain money on the international market. They, too, use money havens as convenient transaction points. The Bahamas became one of the biggest offshore havens because it serves the purposes of various government entities from finance ministries to intelligence agencies.

Offshore havens are, today, an accepted financial fact. Even more important, they are seen as legitimate vehicles through which individual investors can take advantage of the offshore option. If is simply a matter of applying the basic financial principles of profit, tax protection and privacy. They were developed over the centuries by Florentine merchants, royal treasurers and brilliant bankers. The mechanisms and strategies change continuously, but the goals always remain the same.

 

Tax Incentives For Foreign Invested Enterprises In China

Chinese foreign investment law and local policies offer many tax breaks and other financial incentives to encourage foreign investment, particularly with respect to Enterprise Income Tax (the equivalent of US corporate tax). Keep in mind that China intends to phase out these favorable policies toward foreign capital over a five-year period in line with its WTO commitments. Nevertheless, it remains unclear whether China will raise FIE tax rates, lower general tax rates, or sim...

China, company, start-up, tax incenives, joint venture, WOFE, investment

Chinese foreign investment law and local policies offer many tax breaks and other financial incentives to encourage foreign investment, particularly with respect to Enterprise Income Tax (the equivalent of US corporate tax). Keep in mind that China intends to phase out these favorable policies toward foreign capital over a five-year period in line with its WTO commitments. Nevertheless, it remains unclear whether China will raise FIE tax rates, lower general tax rates, or simply use nationality-neutral standards that will nevertheless disproportionately benefit FIEs

National incentives vary according to how much you are investing and whether your project is located in special economic zones; local incentives vary according to jurisdiction and relative bargaining power. In recent years China’s central and western provinces, starved of foreign investment relative to the coastal areas, have been offering incentives that are in some cases considerably more generous than their coastal counterparts. The national government is now encouraging foreign investors to invest in China’s relatively undeveloped hinterlands in order to distribute wealth evenly throughout the nation and reduce the flow of economic migrants to the coast.

Other taxes include:

* Withholding Tax - a withholding tax of 10% is imposed on China-sourced
income derived by foreign corporations without permanent establishments in China (FIE
profits distributed to foreign investors are one of several exemptions to this rule).

* Customs Duties are levied on imported goods and materials, and applicable rates vary. “Encouraged” category FIEs may apply for specific exemptions applicable to equipment imported for their own use (see the Foreign Investment Guidance Catalog for a list of Encouraged activities).

* Value Added Tax (VAT) - sales of goods and some services within China are usually subject to VAT at rates of either 13% or 17%. Imported goods may also be subject to VAT. “Encouraged” category FIEs may apply for significant exemptions applicable to imported equipment for their own use (see the Foreign Investment Guidance Catalog for a list of Encouraged FIE activities).

* Consumption Tax - Basically a “sin” tax - certain goods that are defined as luxury items or unhealthy products are subject to consumption tax at rates ranging from 3% to 45%.

* Land Use Tax - local governments may impose land use tax at a rate determined
by the local government within guidelines set by the State Council.

* Land Appreciation Tax - upon disposal of real estate, the seller is usually liable for Land Appreciation Tax at graduated rates of between 30% and 60%.

* Business Tax is levied at rates of 3% - 5% for certain services including insurance, construction, and assignment of various intellectual property rights. Entertainment services are taxed at a rate of between 5% and 20%.

* Motor Vehicle Acquisition Tax - acquisition of various types of motor vehicles
(such as cars, motorcycles and certain trucks) are taxed at a 10% rate.

* Deed Tax - transfers, gifts and exchanges of land use rights and buildings are taxed
at rates of 3% - 5%.

National Tax Preferences for FIEs
Sample Local Tax Preferences for FIEs
Sample Industrial Park Tax Preferences for FIEs
Individual Income Tax

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