• Tag Archives taxes
  • Life Before the Income Tax

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    If someone from the 17th century came back to life, he or she would be surprised, most of all, by the means of transport and communication tools we use now.

    Probably, the most familiar things would be hospitals and schools.

    Personally, I think that there is something that would very surprise a person from those times even more: the fact that Governments take away individuals’ earnings compulsively.

    In fact, contrary to what many people think, income tax is a rather recent “invention,” created—in most cases—as an emergency tax to deal with extraordinary expenses, which later survived as a way to finance the growing fiscal deficits of Governments increasingly mismanaged, corrupt, and in debt.

    We will review two significant examples.

    After centuries imposing specific, eccentric taxes (e.g. chimney tax, window tax, malt tax, among others), Income Tax was first introduced by William Pitt in the United Kingdom in 1798, and it started to be charged in 1799. The aim was not to finance original expenses of the State but the Napoleonic Wars.

    At the time, no other country levied a tax over the earnings produced by its citizens. The United States, for example, would only start charging it, intermittently, some 60 years later, and definitively in 1913.

    The non-taxable minimum in the United Kingdom of the late 1700s would be equivalent to £6,000, and the maximum rate was ten percent. Only local income was susceptible to taxing, which was quite logical.

    At the time, the malt tax covered approximately ten percent of the Government’s budget.

    This first version of the Income Tax was in force only for three years, as it was annulled (logically) upon the signing of the Treaty of Amiens.

    Henry Addington, who had succeeded Pitt in 1801 and had eliminated the tax when the peace with France was signed, reestablished it in 1803 when new difficulties appeared with that country. It was kept in force until the Battle of Waterloo. When the tax was annulled again, every document that referred to it was burnt, due to the sense of shame associated with having established and charged this tax.

    From 1817 to 1842 there was no Income Tax in the United Kingdom or any other country.

    Although he criticized the tax during the 1841 campaign, Prime Minister Robert Peel reestablished it in 1841, not to finance a war but to cover the Government’s deficit.

    This time, the non-taxable minimum was over twice the previous one and the rate was around three percent.

    The First World War was the perfect excuse to increase the rates. So, they were increased to 17.5 percent in 1915, 25 percent in 1916 and 30 percent in 1918.

    For context, the only other country with an income tax at the time was the United States, which, as said above, had reestablished it in 1913, with a rate of 1 percent for incomes above $20,000.

    The system was modernized as years went by, but the rising trend did not slow down, with a notorious record of 99.25 percent (yes, that is correct) during the Second World War.

    Contrary to what one might believe, in the following two decades there was a minor reduction, but the tax remained over 95 percent.

    During the 1970s and 1980s there were further decreases, but not very significant.

    Only upon the election of Margaret Thatcher and the growth and increased sophistication of the offshore jurisdictions did the rates start to decrease substantially.

    In 1988, for example, after three consecutive reductions, the basic rate was 25 percent.

    Nowadays, that rate (the basic rate) is even lower: 20 percent and the maximum rate is 40 percent.

    Let’s have a look at what happened on the other side of the Atlantic Ocean.

    Although the United States became independent from the United Kingdom in 1776, after a conflict arising precisely from a taxing issue, it was not until 1861 that the country imposed the first income tax. And, just like in the United Kingdom, this was not done to finance the ordinary expenses of the State but the Civil War.

    In other words, for over a century and 15 presidential terms, the State was financed without needing to take away from taxpayers a part of their income. Moreover, when it was finally done, those funds were not used to finance original expenses, but a civil war.

    And even in that emergency situation (1862), the rate was between three percent and five percent, depending on the income level. That is to say, there were just two tax brackets, as is the case today, for example, in Paraguay.

    In 1872, the income tax was annulled, basically due to the pressure of taxpayers, who deemed it expropriatory, like the majority of Congress.

    In 1894, the income tax was incorporated again, but the next year, when ruling in the case 158 U.S. 601 (Pollock v. Farmers Loan & Trust Company), the Supreme Court declared it unconstitutional. The exact date of the ruling was May 20, 1895, and the main argument put forward by the majority of the justices was that a direct tax was not constitutional if there was not a proportional way to distribute it among the states forming the Union, based on a census carried out to this end. The decision was made with five votes in favor and four against.

    In 1909, the creation of this tax was proposed again, and in the presidential election of 1912, the three principal candidates—the president at the time, William H. Taft; the former president, Theodore Roosevelt; and the candidate who eventually won, Woodrow Wilson—supported the legalization of the income tax.

    The 16th Amendment was introduced precisely to achieve this goal. Paradoxically, Wyoming—now one of the states where non-residents frequently establish their foreign trusts—was the 36th state to pass the Amendment, which led to the tax being in force.

    In particular, this Amendment established that Congress shall have the right to create and collect taxes over income, whichever source they may be from, without apportionment between the different states and without the need for a census.

    As said above, the tax bracket for most of the population was 1 percent.

    So, when did everything become more complicated for taxpayers? With the establishment of the Revenue Act of 1918 (WWI), which raised this tax to 77 percent, a rate over twice as much as that of the United Kingdom.

    From looking at the way in which the public sector has been financed in the United States, the following can be seen:

    • between 1890 and 1920, all internal revenue came from foreign trade, in the form of custom duties;
    • between 1920 and 1940, the greatest part of the revenue came from corporate income tax, followed by personal income tax and custom duties; and
    • between 1940 and the year 2000, custom duties tended to disappear, and the personal income tax overtook the corporate income tax.

    As mentioned above, in time, more and more countries started adopting this new type of tax, especially countries with growing deficits.

    As an example, Switzerland imposed it in 1840, France in 1872, Spain in 1900, Norway in 1911, Russia in 1916, Canada in 1918, Brazil in 1924 and Argentina in 1932.

    As a result, inhabitants of these countries began to look for ways to legally elude these unfair taxes, often using structures in jurisdictions that continued to consider these taxes as expropriatory.

    In that context, countries that expected (and expect) to charge this tax (which they deemed unethical not so long ago) turned against the rest and accused them of being “unfair fiscal competition.”

    In other words, they unilaterally changed the rules and then attacked those who simply maintained the status quo.

    Later, they gathered in small cartels (e.g. OECD, G20, and others) to lend more legitimacy to these claims. That is how the first “black lists” of “tax havens” appeared, and how the pressure against them increased.

    When they realized that these organizations were not achieving their goals, they started to use other arguments, more amenable to the general public (money laundering, terrorism financing).

    Offshore jurisdictions were not created to capture the investments of fiscal residents of other countries, but it was these other countries which drove away their own fiscal residents by creating taxes on their income (first) and their assets (later), taking the tax burden to untenable limits.

    Reality indicates that the very concept of “tax haven” was created by high-tax countries which, not being able to compete, tried (unfairly) to get the most efficient countries out of the competition.

    As usual, he who does not want to compete is the least competitive one. No wonder.

    What learnings can we derive from the British and American experience?

    Several:

    • Firstly, there is a possibility that States finance themselves without receiving funds from the income or revenue of their inhabitants (or taxing these).
    • Secondly, until not long ago, all governments agreed that imposing taxes over income or revenue was expropriatory, and therefore could only be done under extraordinary circumstances. To impose this kind of tax was frowned upon, and those who were forced to do so were embarrassed.
    • Finally, were it not for the “fiscal wilderness” there would be no “tax havens”. If high-tax countries really wanted to “vanquish” tax havens, they should strive to provide legal security and reduce taxes, instead of lobbying through discredited, decadent multilateral organizations, which they have been doing for decades without any results.

    This article is reprinted with permission from the Panam Post.

     

     


    Martin Litwak

    Martin Litwak is the founder and CEO of @UntitledLegal, a boutique law firm specialized in investment funds and international estate planning, and the first Legal Family Office in the Americas. Martin Litwak is the author of the book “How the wealthiest people protect their assets and why we should do the same”.

    This article was originally published on FEE.org. Read the original article.


  • Trump’s Trade Plan: Raise Taxes on Americans to Punish Mexico Over Immigration


    President Trump, frustrated that Congress has not approved the funding for his border wall, proposed escalating tariffs on Mexico until Mexico ends illegal immigration. According to the president, the tariffs—akin to a tax on US consumers—would start at 5 percent on all Mexican imports in June but could escalate as high as 25 percent by the fall.

    This comes on the heels of a threat (later withdrawn) to close the US-Mexico border for a “long time” unless Mexico prevents all illegal immigration into the United States. Reasonable minds can disagree on immigration policy and border enforcement strategies. However, disrupting North American trade would harm American consumers and businesses across the country.

    And President Trump knows it.

    While discussing closing the border, Trump cavalierly admitted that doing so would hurt the US economy. Mexico has traditionally been the United States’s number three trade partner (behind China and Canada). But earlier this year, Mexico became our number one trade partner. For 2018, the United States’s total trade with Mexico was about $671 billion. Total US exports to Mexico last year were about $299.1 billion. It should be pointed out that about one-half of the total imports into the US are actually inputs into final products produced by the United States.

    While all states would be affected, Texas, the nation’s top exporter, would be disproportionately harmed if cross-border trade were disrupted. Texas alone exports over $97 billion annually in goods that include computers and electronics, transportation equipment, energy, and agriculture to Mexico, our top trade partner. It is estimated that approximately 36.9 percent of Texas’s exports are sent to Mexico. Texas has an $8.5 billion annual trade surplus with Mexico. Sales into Mexico constitute about 5.7 percent of the Texas Gross State Product.

    Jeffry Bartash, writing in Marketwatch, estimated that “if all the costs were passed on to US customers, they would pay an extra $17 billion over a full year under a 5% tariff. The price tag could jump to $87 billion if duties were set at 25%.”

    Disrupting the integrated North American supply chain could have a lasting negative impact. If international customers can’t rely on the supply of goods from US-based manufacturers, those customers might turn to manufacturers elsewhere (such as Europe and Asia). Once market share is lost, there is no guarantee that American manufacturers will win back foreign customers after America’s supply lines are restored.

    After NAFTA came into place in 1994, US agricultural exports to Canada and Mexico increased 288 percent. But a trade war that cuts off American farmers and ranchers from the Mexican market would jeopardize revenue and jobs, as well as strain their way of life.

    Trump has made the threat to close the Mexican border for commerce before, walked it back, and renewed it, but he now seems intent on unilaterally imposing tariffs—presumably under the guise of national security. This move jeopardizes the ratification of the USMCA (United States-Mexico-Canada Agreement), or the renegotiated NAFTA 2.0. Business decision-makers are getting whiplash. One moment Trump is removing his steel and aluminum tariffs on Canada and Mexico. The next moment he is threatening tariffs on all Mexican imports. This basket case trade policy is making it exceedingly difficult for businesses to plan their operations, decide on capital expenditures, and manage their supply chains.

    Senate Finance Committee Chairman Chuck Grassley (R-Iowa) responded to the president’s latest tariffs threat against Mexico by saying, “This is a misuse of presidential tariff authority and counter to congressional intent.” But it is not clear at this time what legal authority the president has to impose a tariff across the board on Mexican imports. It is risible to claim, for instance, that imports of avocados are a threat to national security (thus justifying tariffs under Section 232 of the Trade Expansion Act).

    Immigration, border security, and trade are complex issues that require thoughtful deliberation. However, Congress (which through 2018 was controlled by the president’s party) has failed to reach a consensus on border security. Unless Congress acts to rein in the president’s authority to impose “national security” tariffs, one man will make a decision that could unilaterally cause tremendous damage to our economy. If that happens, there could be electoral consequences.

    Again, Texas is the nation’s top exporter, and it relies on trade with its neighbor to the south. With Texas looking more and more like a 2020 swing state, the president’s indifference to the economic well-being of Texans, as well as the failure of elected officials to reach reasonable solutions, may bring political risk for the president and his allies if Texas consumers and businesses feel the pain of his misguided trade policies before election day.

    Doug McCullough

    Doug McCullough is Director of Lone Star Policy Institute.

    This article was originally published on FEE.org. Read the original article.


  • Why the UK Suddenly Is Suffering from a Physician Shortage


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    A UK tax policy intended to soak the rich has caused highly specialized physicians and surgeons to retire early, depriving more than a million citizens of their services. A new report details the extent to which progressive taxation has harmed British patients.

    The NHS is in a state of perpetual crisis characterized by doctor shortages, long wait times, and rationing. The UK lost 441 general practitioners last year and had 11,576 unfilled vacancies for doctors as of last June.

    But in the last six years, 585 surgical practices have closed down, affecting 1.9 million patients. Last year alone, 138 surgery facilities closed their doors, up from 18 in 2013.

    What changed during that time? The Daily Mail explains:

    The [British Medical Association] has warned that growing numbers of GPs and consultants are taking early retirement or cutting back on work to avoid hefty pensions taxes which make it uneconomic to continue practising. Retiring GPs often create a domino effect by leaving remaining colleagues with more work, who in turn become demoralised and quit.

    The problem has been compounded by the fact that more doctors are now working part-time.

    Some members of UK society dismiss anything published in the Daily Mail. However, more socially prestigious outlets confirmed that analysis:

    An investigation [in March] by the Financial Times found widespread evidence of consultants refusing to take on extra work to clear patient backlogs fearing extra pay would bust tax allowances on their pensions contributions, triggering five-figure tax bills. …

    [T]he Department of Health conceded that around 3,500 consultants and GPs had retired early over the past three years due to pension tax charges.

    The NHS pension system is a Byzantine labyrinth of rules and regulations impossible for most people to navigate. These two videos (see below) explain the problem.

    In brief: NHS doctors have no choice about whether, or how much, to contribute to their public pension. Physicians must contribute up to 14.5 percent of procedures deemed “pensionable pay.”

    Citizens may also have a private pension plan. But since deposits are tax-deferred, the government slashed the annual limit on contributions from £255,000 in 2010-2011 to £40,000 in 2014-2015. There is also a lifetime pension limit of £1,055,000.

    To further complicate matters, a penalty kicks in on anyone earning an “adjusted income” of £150,000 annually—but that amount includes earnings and any growth in the pension plan (which is impossible to foresee).

    That can cause doctors to exceed government-mandated caps and see their income taxed at 40 to 45 percent. In some cases, they end up paying the NHS to work.

    Doctors respond to these perverse incentives the same way many rational actors would: by closing up shop. All parties agree the UK’s progressive tax policy triggered this cascading medical shortage. Matt Hancock, secretary of state for Health and Social Care, admitted, “This is an unintended consequence of a different tax change made a couple of years ago.” The policy “produced unforeseen consequences, resulting in punitive tax bills for senior doctors who carry out much-needed work,” said NHS Providers. And a spokesman for the BMA blamed “the unintended consequences of changes to the pension taxation rules.”

    If only someone had warned them.

    Politicians are aware of the problem, but they cannot offer any solutions because of envy. A government insider told The Guardian, “There’s no way any government, not just this one, is going to change the tax system to benefit people who are in the top one percent of earners.” Not even if members of that 1 percent keep the other 99 percent alive.

    The government sees only half of the equation: temporary tax revenue and short-term political advantage. A spokesperson for the Treasury confirmed this to the FT, saying that “we do have to get the balance right between encouraging saving and managing government finances, which is why we restrict the tax relief available for the highest earners.”

    For the government, it is a simple trade-off of maximizing tax revenue vs. providing “tax relief” to the wealthy.

    For half-a-million British patients, the cost is too high and too personal.

    Increasing taxes on the wealthiest Brits has harmed them in at least five ways:

    1. It reduces the supply of medical providers. This has been especially hard on specialists and the most qualified. Their high salaries reflect market demand plus the scarcity of their service.

    2. It temporarily leaves patients without a physician, delaying surgeries even longer.

    3. It closes down small shops and benefits big businesses. One-fifth of all 2018 surgical closures saw small providers absorbed by larger providers, better able to juggle the workload. Economic policies that “favor the little guy” always benefit the big guy.

    4. The consolidation favors wealthy patients, and regions, over poor ones. Practices consolidate in high-population areas with a client base sufficient to support them. This moves them farther away from rural areas and increases the travel times (and costs) of the poorest people, who rely on public transportation.

    5. It prevents doctors from taking part in the healing vocation. As World War II drew to a close, Pope Pius XII described the sublime value of medicine to the Army Medical Corps. “How exalted, how worthy