Last week I pointed out that the U.S. had fared pretty well from the leak of the Panama Papers. There are Americans named who hold offshore accounts, to be sure, but so far, they seem to be random people with a bit of money, not a Who's Who of our richest and most powerful citizens. There are other countries that wish they could say the same right now.
The response to this observation has been, ahem, mixed. Some people shared my sunny optimism. Others demanded to know how I could claim that America was doing OK, when not all the names have been released yet. (Answer: I don't. But though prediction is folly, I'm guessing that if a prominent politician or Silicon Valley multizillionaire had been among the names, reporters would have probably led with that one, rather than the son of the former president of Egypt.)
Still others simply argued that Americans were taking different approaches to hiding their money. I have now been referred to the same New York Times article on Delaware corporations multiple times. Why bother moving your money abroad when you can illegally shelter it right here?
This argument is deeply, deeply confused. And since it's confused in a way that often muddles our conversations about tax policy, it seems worth talking about.
Start with a simple observation: Delaware corporations are not really a good place to hide your money from U.S. tax authorities. They may be a good place to hide other sorts of activities, particularly from foreign governments. But if you're a wealthy U.S. citizen trying to evade your taxes, you would have to be spectacularly stupid to stash the money in the state of Delaware and hope that no one notices.
There are possibly legitimate complaints that Delaware helps citizens of other countries avoid taxes, and that therefore, the U.S. is a big fat hypocrite about tax avoidance. But it's not a great place to cheat on your taxes if you're American, given that the U.S. Treasury still has access to information about your U.S. bank accounts. Increasingly nowhere is a good place to cheat on your taxes if you're an American, because we're inching closer to realizing the dream of making it impossible for Americans to have bank accounts abroad.
Delaware is, on the other hand, a pretty good place to avoid some U.S. taxes. Specifically, it is a good place to avoid paying corporate income tax to other states.
This makes state lawmakers mad. Why should a company that does most of its business in another state be allowed to incorporate in Delaware and route things like royalty payments through the corporate headquarters, rather than someplace more accessible to the hard-pressed tax authorities of Pennsylvania or New York? This injustice inspires fervid passions in the legislators of those other states.
But another way to phrase the question is: "Why shouldn't you?" Legislators have a regrettable tendency to view their citizens, and particularly their corporate citizens, as a species of tax cattle, in whom they have some sort of perpetual property rights. Just ask someone who has spent time trying to persuade the state of New York that no, really, I don't live there any more. States do not have a right to keep corporations headquartered in their states, any more than they have a right to keep their citizens from leaving.
We have an intuitive sense that avoiding taxes — which is to say, arranging your affairs so as to pay as little tax as possible — is morally wrong, in the same way that evading taxes (failing to pay what you owe) is morally wrong. This intuition is off.
In June 2010, many people were rushing to buy homes, because the first-time-homebuyer tax credit was about to expire. In my own home city, they even engaged in bidding wars, driving up the price of available properties by far more than the value of the tax credit.
This may have been stupid behavior, but was it immoral? Of course not. Well, that's tax avoidance, my friend, and it's morally no different from rich people bidding up the price of tax-exempt municipal bonds. Nor is your 401(k), the nation's favorite method of tax avoidance.
