There’s no better way to understanding the destructive distortions governments around the world cause in their economies than through Austrian economics.

In case you don't know, Austrian economics is based on the analysis of the purposeful actions of individuals and advocates, property rights, the free market, and sound money while opposing taxes, price controls, capital controls, and other destructive government interventions in the economy.

Ludwig von Mises - the leader of the Austrian School of economics - claimed that the first job of an economist is to tell governments what they cannot do.

Austrian economics contrasts sharply with mainstream Keynesian economics, the type of economics taught in public schools.

Being essentially a state-sponsored school of thought, it is no wonder that Keynesian economics seeks to justify destructive government meddling in the economy.

It is also no surprise that Ron Paul chose Austrian economics.

Austrian economics is very relevant to international diversification because it gives us the intellectual tools to better understand the distortions that actions of a desperate government can cause… and how to better position our investments and ourselves as a result.

This is why I am very glad to bring to you this conversation between Jeff Deist and Dan Mitchell.

Jeff is the president of the Mises Institute and Dan Mitchell is a renowned defender of tax havens.

I think you’ll enjoy their conversation below.

Jeff: Dan Mitchell is a PhD economist and the Cato Institute’s resident tax expert. He’s also a great defender on moral grounds of so called tax havens, which are nothing more that sovereign foreign countries that dare to have lower tax rates than Uncle Sam prefers.

Taxes sound like a boring subject, but Dan brings great energy and passion. I must say from my own perspective, he really demystifies some of these tax issues in a way that is very readable for a layperson.

Dan will tell us why the US worldwide tax regime violates the basic human right not to be hounded by a country in which you neither live nor have income, why Burger King was right to move its corporate headquarters out of the US, why greedy politicians hate tax competition, and why invasive laws like FATCA should scare anyone who cares about privacy.

Welcome, Dan. How are you?

Dan: I’m doing just fine considering I’m living in the epicenter of Washington DC, which is always uncomfortable.

Jeff: I have to say, you must be one of the most important antitax intellectuals in the world. I well remember working in Ron Paul’s office in the mid 2000s. We very frequently cited your material. So you’ve really spent an entire career in demystifying and exposing the whole rotten tax schemes. Kudos to you for that.

Dan: Thanks… maybe it’s just a sign that there are far too few people in Washington trying to limit government than expand it.

Jeff: Tax havens seem to be a particular point of contention for our progressive friends. But we’ve heard the left’s view on tax havens ad nauseam. I would love to get your thoughts on how we, as liberty minded folks, should defend lower tax jurisdictions.

Dan: Well, I like tax havens because they restrain the greed of politicians. Politicians always want to finance bigger government. If they have to worry that the geese that lay the golden eggs might fly away or at least that their money may fly away, that’s going to restrain their appetite for higher taxes.

Globalization dramatically increased the ability of taxpayers to seek out low tax jurisdictions that have strong human rights laws regarding financial privacy. I think that’s one of the reasons why so many countries lowered income tax rates beginning in the 1980’s. The average top personal tax rate in Organization for Economic Co-operation and Development (OECD) countries - basically developed countries of the world - the average top tax rate fell from nearly 68% down to the low 40s%. The average corporate tax rate has fallen from 48% down to 24%. There have been big decreases in the double taxation of dividends, interest, and capital gains.

I wish I could claim that all these things were happening because politicians were reading the tax studies I write. No, I think it’s because of tax competition, and tax havens are a very big part of tax competition. Politicians are worried about the geese with the golden eggs having the ability to fly away. That led to better tax policy. It also led to all the high tax countries starting to work with international bureaucracies like the OECD to try to stamp out tax havens. They realize that tax havens are a threat to big government.

Jeff:  What is the current status of the OECD’s ongoing goal of having all western countries up their tax rates to match each other?

Dan: Well, the OECD began what they call their “harmful tax competition campaign” years ago. That led to the publication of a blacklist of so called tax havens.

When Obama got into office, you basically had this huge push to attack financial privacy. As a result, even places such as Switzerland no longer apply their human rights laws on financial privacy to nonresident investors.

So the bad news is, the high tax governments - the global totalitarians that want to destroy financial privacy to enable bigger government - have won some victories. It’s now much harder for individuals to protect their privacy around the world and in low tax jurisdictions.

Jeff: Well, when you talk about the OECD, I’m still not sure that most Americans really understand this distinction between worldwide versus territorial tax systems. Of course the United States is one of only seven OECD countries that taxes its citizens and residents on their worldwide income regardless of where they reside or work. I would like to know from your perspective, does the average American really understand this conceptually? And if so, do they understand how terrible the impact is not only on American business but also on Americans working abroad?

Dan: Not only does the average American not understand this, the average tax policy person doesn’t understand it.

What’s worldwide taxation? Worldwide taxation is the notion that a government is going to tax not on the basis of income earned inside national borders, but on the basis of income earned anywhere in the world, even if it’s already taxed someplace else in the world. Territorial taxation by contrast is the common sense notion of only taxing inside national borders.

Then, you also have to break it down by types of income. There’s corporate income, there’s labor income, and then there’s individual savings and investment income. Very few countries in the world have worldwide taxation for labor income or for corporate income for nonresidents like the US does. So the US definitely stands out in a very bad way in that regard.

So if you’re an American citizen, let’s say you are married to someone from Brazil and you are living and working in Brazil. If you’re from almost any other country in the world, Brazil would tax you… but that would be the end of it. But if you’re American, the US wants to tax you as well. Likewise, if you are an American domiciled company, you will also be hit by the IRS taxes on Brazilian income in addition, of course, to the taxes that are imposed by Brazil.

If you follow tax reform issues, you know that the least destructive way of collecting tax is to have a low rate system with no double taxation on a territorial basis. Well, what is it that the US government is trying to do?  What is it that the OECD is trying to do? They are basically trying to make it possible for countries to maintain very bad tax policies.

Jeff: The issue of double taxation is closely related to the left’s hysteria over so-called corporate inversions. You will recall last year Burger King received a lot of bad press when it announced it would buy the Canadian coffee chain Tim Hortons and redomicile as a Canadian corporation.

Corporate inversions go directly to the problem with a worldwide tax system and double taxation on corporate income earned abroad. Can you give us your take on this hysteria and the lack of understanding over why would a company be so “unpatriotic” as to leave the US?

Dan: Because we have this worldwide taxation for corporate income - and this is critical - combined with the world’s highest corporate tax rate, this creates a hugecompetitive burden for American companies competing for market share around the world.

Simply stated, if you’re an American company trying to compete against, say, Dutch companies and British companies and Japanese companies for business in Ireland, all of the companies will pay the 12.5% Irish corporate tax rate on any Irish profits. But the US company will also have the IRS insist that if you ever try to bring that money back to your shareholders, then you have to pay tax on it at a 35% rate. This is about three times as much as any of your competitors are going to have to pay just because you are a US company.

So if you are a multinational company trying to compete around the world against companies domiciled in countries with territorial tax systems, the US corporate tax system is a huge millstone around your neck.

So it makes sense for American companies to redomicile in a jurisdiction that has a territorial tax system. That doesn’t, by the way, get you out of paying tax to the IRS on your US source income.

Whether you are Honda or whether you’re General Motors, whether you’re Siemens or whether you’re General Electric, companies that do business in the US will pay tax to the IRS under US sourced profits. The question is whether or not the US government should be trying to tax foreign source income.

Other countries don’t make this mistake. But we do.

As a result, if American companies want to follow the fiduciary responsibility to their shareholders - and also care about their workers and consumers - they redomicile in a friendlier jurisdiction… often through a corporate inversion.

Jeff: Unfortunately, bad US tax policy is not only about corporations. Now, I am sure most people have heard about the new FATCA law.

Dan, as you know, this law can make it incredibly hard for people just trying to get a bank account who work for a US company in another country.

Do you think laws like FATCA represent a step towards capital controls and maybe even outright confiscation of assets down the road?

(Editor’s note:  If you are new to the FATCA law, see this article.)

Dan: Globalization is the enemy of big government. Tax competition is part of globalization. Labor and capital, moving across borders to find better policy, is a form of that tax competition and globalization. Governments are fighting against this.

FATCA is an example of the US unilaterally engaging in fiscal and financial imperialism. The US government is telling other countries we’re going to impose protectionist taxes on you unless you agree to become deputy tax collectors for the IRS.

Of course, this runs contrary to human rights laws and privacy laws in other countries. It’s creating nightmares for overseas Americans. We have millions of American citizens who live and work overseas. That’s good for our country, good for our country’s image, and yet these people now are almost treated like lepers. This is because foreign financial institutions don’t want to have anything to do with American clients because of the burdens of dealing with the IRS.

Jeff: There are people whose lives have very much been ruined. People who have faced huge confiscations on a foreign bank account… not for failing to pay a tax, but for merely failing to file a form.

This is the sort of thing that should give all libertarians pause.

Dan: I blame the politicians. It’s the politicians who enact these crazy laws without any consideration of the ordinary people who are being hurt.

Let’s say you happen to be born in Buffalo, New York, to Canadian parents. You actually have an American passport buried somewhere in you personal belongings but you lived and worked in Canada your whole life so you never filed tax returns to the US. You have also never filed forms about your bank accounts and things like that.

Well, technically, under US Law, you are subject to incredibly onerous fines and penalties because you have that American passport somewhere just by accident of birth. It doesn’t matter if you have never lived or worked in the US. The US government asserts the right to tax you on a worldwide basis. A worldwide tax system is fundamentally inconsistent with a humane international order.

(Editor’s Note:  Here's a firsthand story about a dual American-Canadian citizen who found herself in a serious bind due to FATCA.)

Jeff: As libertarians we tend to view taxes purely in political terms or maybe even in philosophical terms. We oppose them, we want to see them eliminated or reduced. We think of them as an evil that funds the state and makes the state more powerful.

But should we be thinking about taxes more like economists? In terms of their impact on production and entrepreneurship?

Dan: Well, I think of taxes in both ways. I’m a libertarian and so I don’t like big government. I don’t like giving more money to government because as P.J. O’Rourke says, that’s like “giving whiskey and car keys to teenage boys.”

The most destructive way for the state to collect revenue is to double and triple and quadruple tax capital. Heck, every economic theory - even Marxism - all agree you have to have saving and investing to finance future economic growth. Yet our tax system penalizes capital formation. So when I look at issues such as the OECD and high tax governments going after tax havens, they are really facilitating the very worst ways of collecting tax revenue.

For heaven’ sake, yes, I want very small government. But whatever size government we are going to have, doesn’t it make sense to finance it with taxes that don’t do as much damage to job creation and living standards, that don’t interfere with privacy and human rights?

I love tax havens. Not only because I am a libertarian who wants smaller government, but also because I am an economist who doesn’t want needlessly destructive and senseless taxation.

Jeff: Dan Mitchell, thanks so much for your time. Dan is absolutely one of the best experts in the entire US on this topic. You can find his work at his blog.