Three Fiscal Crises Heading our Way

Three federal crises are heading our way — the “sequester” battle on March 1, the end of the “continuing resolution” of the budget on April 1, and the next “debt-ceiling” debate around May 1. It could be a rocky spring on Wall Street.

Everybody, including Wall Street, seems to be upset that another fight is erupting on Capitol Hill over spending cuts mandated by the budget agreement last year known as the “sequester.”

And at the end of next week, on March 1, the “sequester” will kick in. It triggers about $85 million in annual spending cuts across most government agencies, including the military, the Department of Education and the Department of Justice. Yes, the cuts are only $85 million. That’s a drop in the bucket, compared to the $3.8 trillion dollar federal budget. Big government supporters complain, “These cuts will result in furloughs, loss of overtime, and probably some layoffs, especially if they are permanent.”

Give me a break. The entire $70-billion budget of the Department of Education is a waste of money, and could be abolished. In fact, it would probably help education and the economy in this country.

The Congressional Budget Office, all Keynesian economists, estimates that the sequester cuts, combined with the tax increases earlier this year, will reduce 2013 gross domestic product (GDP) growth by 1.5 percentage points. I have my doubts. Monetary policy is extremely easy and will keep the economy well stimulated.

The second crisis involves the “continuing resolution” to fund the federal government through March. The federal government will have to shut down unless or until another continuing resolution (or budget) is passed by Congress. I hope the government does shut down. That means fewer regulations from the Environmental Protection Agency, the Federal Communications Commission or the Securities and Exchange Commission.

Finally, Congress faces another “debt-ceiling” debate in May. The U.S. government might default on its $16 trillion debt. That might be a good thing — to teach investors not to depend on Treasuries as a “safe haven” anymore. Treasuries are the true junk bonds of the marketplace.

But it’s a hopeless libertarian dream. Congress and President Obama will agree and extend the debt ceiling, extend the “continuing resolution,” and avoid any real spending cuts — until we have genuine political leadership in this country that recognizes what Ben Franklin knew more than 200 years ago: “A virtuous and industrious people may be cheaply governed.”

You Blew It! The Economist Magazine Attacks Tax Havens

“There are no tax havens without tax hells.”

— Old Swiss banker saying

First, the Economist magazine endorses Barack Obama rather than the pro-market and pro-business Mitt Romney. The magazine now publishes a cover story attacking tax havens. Walter Bagehot must be turning over in his grave! (Although I hear the Financial Times is worse!)

The Economist attacks tax-haven countries (more than 50 of them, from the Cayman Islands to Liechtenstein) as “sunny places for shady people” — for allegedly financing terrorism, laundering money, hiding illegal activities and scams, and evading taxes. The magazine addresses but downplays their legitimate functions, such as protecting assets from corrupt regimes, self-insuring liability, registering companies and ships inexpensively and efficiently, and diversifying one’s investment assets.

Unfortunately, the Economist seems to endorse this new “war on harmful tax competition” and the new draconian rules imposed by the Obama administration going after tax havens specifically and foreign investing in general. Starting next month, all foreign banks doing business in the United States (to trade stocks, transfer money, etc.) will be forced to identify all account holders. A new IRS rule forces U.S. banks to report interest payments to non-residents. That requirement will damage the United States severely as a tax haven for Latin Americans who have sent billions to Miami banks.

What the Economist and critics of tax havens seem to forget is that the popularity of tax havens is in direct correlation with draconian tax policies in the major industrial countries. As the Economist reports, “Some offshore champions [like the Cato Institute] consider tax competition [and tax havens] a good thing because it discourages countries from trying to tax their way out of trouble.”

Just as the answer to black markets is to deregulate markets, the answer to tax havens is to simplify tax policies and lower tax rates. Fight the cause, not the symptoms.

So, this July 10-13 at FreedomFest in Las Vegas, we are going to have a big debate on “Tax Havens, Good or Bad?” with Richard Rahn and Dan Mitchell from the Cato Institute defending the tax havens and James S. Henry, Esq., a former director of McKinsey & Co., criticizing tax havens. The sparks will fly. To register, go to www.freedomfest.com.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.