This past April, amidst congressional hysteria over handsome oil-company profits, Sen. Carl Levin (D., Mich.) said, “We need a windfall profits tax, because these profits have been absolutely obscene.” Levin failed to note that at $2.15 trillion, 2005 federal revenues reached yet another record, having risen nearly 300 percent since 1980.
That revenues have continued to rise is particularly relevant considering Levin’s views on the legal means used by Americans to shield money and income from federal taxation. In a recent USA Today article on the proliferation of offshore tax shelters, Levin said these havens are “getting to be a huge problem.” His solution is to introduce legislation that would make it harder for companies and individuals to move money offshore.
Levin’s reasoning suggests that while it’s not okay for individuals and corporations to maximize income and profits, it’s perfectly reasonable for Congress to plug all legal loopholes as a way to maximize its own revenue stream. Record receipts in mind, it’s safe to say that no one will investigate Congress for its own “obscene” profits. Worse, for Levin, assuming he succeeds in getting anti-offshore legislation passed, federal receipts arguably won’t rise as much as he thinks.
Levin forgets that while U.S. corporations are based domestically, they compete for investment capital around the world. If their ability to retain earnings is crimped by aggressive federal legislation, they’ll be less attractive to investors, and become less vibrant as a result. They could also choose to leave the U.S. altogether, with either alternative leaving the U.S. with a smaller tax base.
As for the federal taxes that individuals and corporations do pay, the money collected goes toward immediate consumption since the government funds the various necessary and unnecessary programs created for us by Congress. Conversely, dollars shielded from federal taxation through offshore accounts by definition return here in the form of investment in our debt, land, and the companies of today and tomorrow. Levin’s legislation would distort this process, and investment and revenues would lag.
The Founding Fathers sought to greatly limit what the federal government could do. The idea was to have a limited federal government and limited revenues, with the majority of governmental activity left to the states. Individuals could choose how much government and taxation they wanted, and states could compete for citizens based on how much or how little government they offered.
Today, the opposite is at work, and taxpayers are to some degree captive to a federal government that seeks to maximize revenues. Just as states continue to compete based on levels of taxation, offshore tax havens are a check on the greedy hand of the federal government; they force our legislators to think twice before raising taxes. Legislation meant to curb access to offshore tax shelters is legislation that strengthens the hand of the federal government to take more of what we earn. Should Sen. Levin’s tax plan come to a vote and pass, President Bush should veto it.
– John Tamny is a writer in Washington, D.C. He can be reached at firstname.lastname@example.org.