Big conferences can be enervating, especially when large panels are populated with establishment political figures spouting the conventional wisdom. However, the Doha Forum, which I have been attending in Doha (surprise!), Qatar, sported a burst of spontaneity at a workshop on the role of Islamists in the Middle East.

While competing discussions of economics and technology were sparsely attended, the Islamist workshop overflowed. Islamists from Bahrain, Egypt, and Tunisia made the case that Muslim fundamentalists in those countries were dedicated to democracy and intended to be inclusive of all within their societies.

Most in attendance—at least those who asked questions (or made comments in the guise of asking questions)—were skeptical. The audience included many Westerners, but fellow Arabs led the attack. Attendees from Jordan and Kuwait, which have been at the periphery of the Arab Spring, were particularly critical. A Gulf journalist complained about Islamists who said one thing for his broadcasts but behaved differently in power (no American politicians have ever behaved that way!). A young female professional complained about the treatment of women, who helped overthrow authoritarian regimes but then faced increased discrimination.

The panelists stood their ground, but they didn’t seem to win many converts. So many people wanted to comment that the session went overtime a half hour. Both sides wanted to keep going, but the translators insisted that they needed a break before the next session.

While the tension between Islamic fundamentalism and revolutionary democracy has challenged U.S. policy, it even more directly affects those who live in the Middle East. It’s one thing to toss overboard archaic monarchies if the result will be liberal societies with democratic political systems. Revolution is quite another matter if the consequence will be fundamentalist societies ruled by authoritarian democracies.

The session reached no conclusion. But it highlighted a debate that will only intensify as the Arab Spring continues to reverberate throughout the region.

The Balkans Wars ended years ago, but ethnic divisions remain strong, promoted, unfortunately, by the European Union. The latest example of geopolitical malpractice is the EU-brokered agreement for Serbia’s de facto recognition of Kosovo’s independence.

Two decades of America’s and Europe’s toxic mix of diplomacy and war-making followed one consistent policy: the Serbs always lose. Everyone else in the disintegrating Yugoslavia got their own country. Minority ethnic Serbs were expected to live under the sometimes heavy boot of others.

Independence for Slovenia, Croatia, Bosnia, Macedonia, Montenegro, and Kosovo were perfectly reasonable responses to Serb brutality, but no side was innocent of atrocities. That is evident in Kosovo where, as I point out in my new article in the American Spectator Online: after the war NATO “stood by as ethnic Albanians kicked out more than 200,000 Serbs, Roma, Jews, and others. In 2004 another round of Albanian-led violence ensued, as mobs destroyed the homes and churches of ethnic Serbs, creating additional refugees.” Even the Council of Europe acknowledged that allied policy had “led to numerous human rights violations and [had] not produced lasting solutions for the underlying problems.”

Some 120,000 ethnic Serbs remain in Kosovo, with roughly half concentrated in four counties around the city of Mitrovica north of the Irba River. They should be allowed to stay with Serbia, but the EU was horrified by such a suggestion. Instead, Brussels threatened to slow if not kill Belgrade’s membership aspirations if the latter did not come to terms. Serbia agreed to a nominal compromise which promises Serbian Kosovars limited autonomy in return for what looks to be eventual full recognition of Kosovo.

Of course, the decision is up to Belgrade, which is under heavy pressure to concede. However, the Kosovo Serbs may not go quietly. Far better, I argue, would be to offer ethnic Serbs the same right of self-determination granted others. As I conclude:

It’s too late to remedy the geopolitical and humanitarian messes that have resulted. But if the Europeans desire a stable solution, they should encourage genuine negotiations among the new Balkans nations, Serbia, and remaining disaffected minorities. Reasonable border changes are the only means to ensure peace. Continuing to suppress the aspirations of ethnic Serbs throughout the Balkans risks renewed conflict.

As the IRS scandal thickens, targeted groups are coming out to describe their ordeals in dealing with that most-reviled of government agencies. The Ohio Liberty Coalition was one of the groups targeted by the IRS, and Tom Zawistowski of the OLC recently sat down with Cato’s Caleb Brown to discuss the experience.

Among the many lessons we can take from this scandal is to realize how bureaucrats enforcing vague government regulations can chill free speech. Campaign finance laws are filled with vague regulations–such as whether an ad is the “functional equivalent of direct advocacy”–and they are anything but harmless to political speech.

In assessing applications for (c)(4) status, the IRS looked for whether political campaigning was an applicant’s “primary activity.” Due to the vagueness of this term, “rogue” IRS agents were free to harass applicants for the “content of their prayers” and other uncouth requests.

Advocates for campaign finance restrictions often do not understand how political speech can be killed by a thousand cuts as much as it can by one fatal blow. Some FEC regulations clearly prohibit certain types of spending. Others tell would-be speakers to judge whether their ads “in context, can only be interpreted by a reasonable person as advocating a candidate’s election or defeat.” Complying with these regulations ultimately comes down to a silly “magic words” test–that is, a search for words such as “vote for,” “elect,” “support,” etc.

Some campaign finance advocates who understand what Citizens United was actually about–that is, a non-profit corporation prohibited from showing a movie critical of Hillary Clinton on Pay-Per-View–concede that Citizens United should have narrowly won the case. Rather than allowing all corporations to spend independently in elections, as the case turned out, they argue the Court should have carved out an exception for “genuine ideological organizations,” “voluntary media choices” (Pay-Per-View), or some other vague criterion that would ultimately have been enforced by bureaucrats at the FEC. We can now can see how such vague standards are applied and abused. 

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Earlier this year, Senator Carl Levin (D‑MI) announced that he will be retiring after many, many, many decades of lawmaking when his term expires in January 2015. But he doesn’t intend to make for the exits without sealing his legacy of disdain for America’s wealth creators. After holding hearings last September to shed light on the “loopholes and gimmicks” employed by U.S. multinational companies to avoid paying their “fair share” of taxes, Levin resumed his inquisition today by holding a hearing intended to publically shame one of America’s most successful and most bountiful companies:

Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere. We intend to highlight that gimmick and other Apple offshore tax avoidance tactics so that American working families who pay their share of taxes understand how offshore tax loopholes raise their tax burden, add to the federal deficit and ought to be closed.

Man, the spite in those words is palpable.

At the outset, it is important to note that no illegalities have been alleged, nor have any likely been committed. Like most other U.S.-based multinational corporations, who face tax rates of 35 percent on profits repatriated from abroad, Apple has tax avoidance specialists on its payroll to figure out the most effective ways to minimize their tax burden. They’d be sued for corporate malfeasance by their shareholders if they didn’t.

Unlike foreign-based multinationals whose governments don’t tax their profits earned abroad (or do so very lightly), U.S multinationals are subject to double taxation—first in the foreign countries where they operate at local tax rates and then by the IRS, at up to 35 percent, when profits are brought home. Well guess what? That system discourages profit repatriation, depriving the economy of working capital, and it encourages elaborate, legal tax avoidance schemes.

Oddly, Senator Levin’s problem is not with these perverse incentives, but with the act of following them. Thank you, sir, may I have another! But even worse, Senator John McCain (R‑AZ) acknowledges the faults and disincentives of the system, but still casts the blame on those following Congress’s incentive structure:

I have long advocated for modernizing our broken and uncompetitive tax code, but that cannot and must not be an excuse for turning a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America. The proper place for the bulk of Apple’s creative energy ought to go into its innovative products and services, not in its tax department.

A company that found remarkable success by harnessing American ingenuity and the opportunities afforded by the U.S. economy should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue. It is important to understand Apple’s byzantine tax structure so that we can effectively close the loopholes utilized by many U.S. multinational companies, particularly in this era of sequestration.

Apple’s byzantine tax structure?

Should Apple be blamed for optimizing according to the legal incentives created by the likes of Senators Levin and McCain? Rather, the public would be better served if Senators Levin and McCain were hauled before a public panel to explain why the tax system they helped create and have failed to reform penalizes U.S. companies, and discourages domestic reinvestment.

These were my related, but more comprehensive, thoughts back in September:

Like too many other long-reigning fixtures on Capitol Hill, Senator Carl Levin (D‑MI) doesn’t appreciate the magnitude of the challenge to the authority he presumes to hold over America’s job and wealth creators. Or maybe he does, and frustration over that fact explains why he besmirches companies like Apple, Google, Microsoft, and Hewlett-Packard.

Levin presided over a Senate hearing last week devoted to examining the “loopholes and gimmicks” used by these multinational companies to avoid paying taxes – and to branding them dirty tax scofflaws. Well here’s a news flash for the senator: incentives matter.

The byzantine U.S. tax code, which Senator Levin – over his 33-year tenure in the U.S. Senate (one-third of a century!) – no doubt had a hand or two in shaping, includes the highest corporate income tax rate among all of the world’s industrialized countries and the unusual requirement that profits earned abroad by U.S. multinationals are subject to U.S. taxation upon repatriation. No other major economy does that. Who in their right minds would not expect those incentives to encourage moving production off shore and keeping profits there?

Minimizing exposure to taxes – like avoiding an oncoming truck – is a natural reaction to tax policy. Entire software and accounting industries exist to serve that specific objective. Unless they are illegal (and that is not what Levin asserts directly), the tax minimization programs employed at Apple, Google, Microsoft, and Hewlett-Packard are legitimate responses to the tax policies implemented and foreshadowed by this and previous congresses. If Levin is concerned about diminishing federal tax collections from corporations (which, of course, reduces his power), the solution is to change the incentives – to change the convoluted artifice of backroom politics that is our present tax code.

Combine the current tax incentive structure with stifling, redundant environmental, financial, and health and safety regulations, an out-of-control tort system that often starts with a presumption of corporate malfeasance, exploding health care costs, and costly worker’s compensation rules, and it becomes apparent why more and more businesses would consider moving operations abroad – permanently. Thanks to the progressive trends of globalization, liberalization, transportation, and communication, societies’ producers are no longer quite as captive to confiscatory or otherwise suffocating domestic policies. They have choices.

Of course many choose to stay, and for good reason. We are fortunate to have the institutions, the rule of law, deep and diversified capital markets, excellent research universities, a highly-skilled workforce, cultural diversity, and a society that not only tolerates but encourages dissent, and the world’s largest consumer market – still. Success is more likely to be achieved in an environment with those advantages. They are the ingredients of our ingenuity, our innovativeness, our willingness to take risks as entrepreneurs, and our economic success. This is why companies like Microsoft, Apple, Google, and Hewlett-Packard are born in the United States.

But those advantages are eroding.

While U.S. policymakers browbeat U.S. companies and threaten them with sanctions for “shipping jobs overseas” or “hiding profits abroad” or some other manifestation of what politicians like to call corporate greed, characterizing them as a scourge to be contained and controlled, other governments are hungry for the benefits those companies can provide their people. Some of those governments seem to recognize that the world’s wealth and jobs creators have choices about where they produce, sell, and conduct research and development. And some are acting to attract U.S. businesses with incentives that become less necessary every time a politician vents his spleen about evil corporations. Not only should our wealth creators be treated with greater respect from Washington, but we are kidding ourselves if we think our policies don’t need to keep up.

Last Friday, the Organization of American States released a groundbreaking report on the future of drug policy in the Americas. The OAS received the mandate to produce this document at the Summit of the Americas last year in Cartagena, Colombia, where some presidents aired their frustration with the war on drugs and even suggested legalization as an alternative to fight the cartels. 

The document is based on solid premises:

1. Drug violence is one of the greatest challenges facing the Americas
2. The current approach is a failure isn’t working
3. New policy alternatives need to be discussed and implemented
4. Drug use will remain significant by 2025

These premises might seem pretty obvious, but when it comes to drug policy, stating the obvious hasn’t been the norm for those who believe in the status quo: for example, in 1988 the UN held an event titled “A drug-free world: we can do it” (consumption of marijuana and cocaine has increased by 50 percent since then). Or the latest National Drug Control Strategy, which claims that the greatest accomplishment of the Mérida Initiative with Mexico has been “the mutual fostering of security, protection and prosperity” (never mind the 60,000 people killed in drug violence in six years in Mexico).

The OAS report avoids recounting this fairy tale. It also avoids making recommendations, given the lack of consensus among its authors about where drug policy should be headed in the next 12 years. Instead, the document lays out four different interpretations of the “drug problem” and presents the scenarios of what the response should be. The report also presents the challenges facing each scenario (name in bold):

Together: Under this scenario, the problem is not drug laws but weak institutions. It foresees greater security and intelligence cooperation among nations, more expenditure in the security and judiciary apparatuses and tougher laws dealing with corruption, gun trafficking and money laundering.

Latin American countries indeed suffer from weak institutions. The shortcoming of this scenario is that prohibition actually exacerbates the problem since it inflates the profit margins of the cartels to stratospheric levels, thus increasing their corrupting and violent power. In 2010 all seven Central American countries combined spent nearly $4 billion in their security and judiciary apparatuses (a 60 percent increase in five years). And yet that fell terribly short of the estimated revenues of the Mexican and Colombian cartels which, according to a report from the Justice Department, could reach up to $39 billion a year.

The report foresees another challenge with this approach: a disparity among countries in their institution-building efforts, which would lead to the balloon effect of criminal activities. This is perhaps the main feature of the drug business in the Americas: its high capacity to adapt to changing circumstances. For example, in the early 1990s, as pressure grew on coca growers in Peru they moved to Colombia. Now, after a decade of eradication programs in that nation, they are moving back to Peru. Overall the Andean region continues to produce the same amount of cocaine as it did 20 years ago.

Over the years the common denominator of the war on drugs in Latin America has been the attempt to export the problem to your neighbor. Greater cooperation, harmonization of efforts, and same-pace institution building seems unrealistic.

Pathways: Under this scenario, the problem isn’t drugs but drug prohibition. It portends a growing number of presidents in the region calling for the adoption of a legal market for certain drugs, starting with cannabis.

Indeed, the future is here. Guatemala’s president, Otto Pérez Molina, has already called for the legalization of drugs. Uruguay is considering a bill that would legalize marijuana. And even in the United States, Colorado and Washington have legalized the recreational use of cannabis.

Two challenges come to mind under this scenario. First, the discussion on legalization (or regulation, as some prefer), has focused almost exclusively on marijuana. Indeed, the momentum towards a legal market of cannabis seems unstoppable: a recent poll showed that 52 percent of Americans favor legalizing the drug. Moreover, in a recent interview in Colombia’s El Tiempo, William Brownfield, assistant secretary of state for International Narcotics and Law Enforcement, said that legalizing cocaine, heroine, methamphetamine, and synthetic drugs would constitute crossing a “red line” for Washington. Tellingly he didn’t mention marijuana. As Mark Kleinman from UCLA points out, it seems as if the drug warriors in the Obama administration might have decided that “the Battle of Cannabis is lost, and are attempting to fall back to a more defensible position”. However, the problem in the Andean region, Central America, and largely Mexico isn’t marijuana, but cocaine prohibition. And the report, realistically so, foresees tough resistance from public opinion on most countries towards a legalized market for cocaine.

This leads us to the second challenge: some countries will be more enthusiastic in adopting legal frameworks for certain drugs while other will stick to prohibition. Given that narco-traficking is a transnational problem, this would create problems and tensions between governments.

It’s not a secret that the pathway toward legalization will prove a difficult one, especially because of the resistance it faces from public opinion in many Latin American counties. However, only legalization deals with the root of the problem: the black market of drugs that creates enormous profit opportunities for organized crime.

Resilience: Under this scenario, the drug problem is a consequence of a larger social problem related to poor socio-economic conditions at the local level and the lack of jobs and opportunities, especially for the youth. It also focuses on addiction as a health problem and not a criminal one.

The scenario portends countries investing in communities, establishing clinics to treat drug addicts, building sport facilities to dissuade youngsters from joining gangs and implementing “harm reduction” policies. It even envisions some sort of Marshall Plan where countries such as the United States contribute substantial financial resources in community building efforts in Latin America.

This is the most unrealistic scenario. The drug problem in most of Latin America is not abuse but trafficking. Building libraries or basketball courts in poor areas won’t stop youths from joining gangs and engaging in drug running when the incomes they derive from it far exceed those they can earn from legal activities. And good legal jobs are rarely created in areas suffering from violent crime. It’s a vicious circle that is difficult to overcome short of legalization.

This scenario tackles drug abuse from a health perspective, which is positive. But this can also be the case under the legalization scenario.

Disruption: This is perhaps the most politically realistic scenario for the moment. Fed up by the constant failure of prohibition and the little advances in implementing alternatives to the war on drugs, one or a group of countries abandon the fight against international drug trafficking. They adopt a non-interventionist approach to drug smuggling, while focusing their police resources on violent crimes.

Many people speculated that this could be the case of Mexico under its new president Enrique Peña Nieto, although there is little evidence so far that his government is trying to reach accommodation with the cartels. Nor is this necessarily possible nowadays. Back in the 1970s and 80s the PRI governments—to which Peña Nieto belongs—adopted a complicit approach to drug trafficking, basically having the federal government look the other way while drugs were shipped to the North. However, back then drug trafficking was basically a family business conducted by an ex-policeman, Miguel Ángel Felix Gallardo. Today Mexico has up to seven powerful and violent cartels that fight against each other for control of trafficking routes. Even if the Mexican government were to adopt a non-interventionist approach to drug smuggling, that wouldn’t prevent the cartels from engaging in bloody turf wars. Drug violence might decline, since government intervention added volatility to a changing cartel landscape, but it is likely that Mexico would remain a violent country.

Moreover, the report rightly points out that, if a country decides to abandon the fight against drug trafficking, it could become a safe haven for kingpins. Drug money would likely flow into that country’s economy, potentially corrupting institutions and even civil society.

Unfortunately, given Washington’s obstinacy with prohibition, several governments in the region might be tempted to follow this scenario in the near future. They are willing to risk the growing presence of criminal organizations in order to reduce the staggering levels of violence afflicting their countries.

The OAS should be commended for this candid report. It serves the cause of having an open and honest debate on drug policy. It is now up to the leaders of the 34 nations of the Western Hemisphere to discuss which of these scenarios serve their countries better.

The 13th Doha Forum has convened, with your loyal correspondent in attendance. It is an impressive gathering, filling the luxurious Ritz-Carlton. Cars are checked for bombs before approaching the hotel. Guests have to go through a metal detector both entering the hotel and inside heading to the conference. The meeting room was full, with just about every citizen of Qatar (who only make up something like 15 percent of the population) seeming to line the hallway before the Emir arrived.

There are few more tragic figures than onetime national leaders who have fallen away from the centers of power. For instance, after the Qatar royals, who still do matter, opened the gathering, to the stage strode a frustrated former British prime minister trying to remain relevant. The Right Honorable Gordon Brown, who finally grabbed the premiership from his frenemy Tony Blair only to lose it in the 2010 election, twice quoted John F. Kennedy while chattering on about the importance of interdependence.

Brown also urged the creation of a North African-Middle Eastern development bank to promote economic growth in such nations as Egypt—which, he failed to note, has been buried in foreign aid for years without generating economic growth. The former PM was introduced as preventing a new Great Depression (who knew!) and later lauded for his “profound” ideas (apparently defined as previously advanced by his hosts in Qatar).

Francois Fillon, a former prime minister of France, followed, telling us that we needed to solve the Syrian conflict, create a Middle Eastern financial institution, and “defend European civilization,” whatever that means. The moderator declared his ideas to be “fascinating” and his mention of Europe to be an example of “self-reflection.”

Amadou Bondou, the vice president of Argentina—which has made a practice of looting the productive and stealing people’s retirement savings—denounced austerity. These policies are having “negative repercussions” on poor people, he complained. No doubt, they are. However, if you have a wild party, you can’t very well expect everyone else to pay the clean-up costs. Next time countries, especially his own, should think before blowing their budgets to enrich favored interests and win votes.

Wolfgang Ischinger, chairman of the Munich Security Conference, concluded the first session with a discussion about the importance of solving the Syrian conflict. He suggested a comprehensive conference to end the fighting and conduct of proxy wars in the region. Alas, what evidence is there that the parties are prepared to settle or that their backers are prepared to stay out? He also urged more humanitarian assistance for Syrians. He worried that if the Europeans fail to give more aid they may be left with no friends at all in Syria. Given the way that conflict is going, why would that be such a bad thing? Trying to make friends is about the dumbest reason one can imagine for getting involved in such a war.

Well, that’s the start here in Doha. I just can’t wait for additional “fascinating” observations from more “profound” thinkers like Messrs. Brown, Fillon, Bondou, and Ischinger!

A Senate Subcommittee chaired by Senator Carl Levin heard from three panels of witnesses today on Apple Inc.’s corporate tax payments.

Democratic senators and some news stories are making it sound like some vast tax cheating has been going on, but that’s not what the hearing actually revealed. My sense in listening for four hours is that Apple pretty well does what many or most U.S. multinationals do to legally minimize their tax payments on foreign income. No one at the hearing said the company is doing anything illegal.

The basic story seems to be that Apple uses a holding company to gather all the after-tax profits from its sales outside of the Americas. Those sales may or may not be subject to tax in the countries where they occur, but that first layer of tax is up to those particular countries. The holding company is apparently not taxed as an entity in any country, but Apple says that its investment earnings are taxed in the U.S. to the Apple parent company.

The purpose of Apple’s corporate structure that the senators focused on seems to be to avoid double-taxation of its foreign earnings. That goal makes sense because the U.S. is one of few major countries left that does not have a territorial corporate tax system. Essentially, Apple and many other companies are trying to create a home-made territorial tax system so that they can remain competitive in foreign markets. Thus, they are doing the job that Congress should have done in reforming the U.S. international tax system.

Note that Apple holds such a big pile of cash abroad in a holding company mainly because the U.S. applies such a high corporate tax rate to profit repatriation. A major goal of tax reform is to slash America’s absurdly high corporate tax rate so that companies can bring home their piles of foreign cash and invest it here. With such a reform, the issue of whether or not investment earnings of foreign holding companies were taxed would become far less important.

Part of the hearing regarded transfer pricing and whether Apple is unjustifiably shifting U.S. profits abroad. Transfer pricing is a gigantic complex mess that is getting worse over time because of the high-tech nature of most modern corporations, and with the rise in the importance of intellectual property. It’s hard to know where much of the income of high-tech corporations is actually “earned.” Transfer pricing has become especially a problem for tax administration in countries—such as the United States—that try to swim against the current and retain high statutory corporate tax rates.

Senator Ron Johnson had the best questions and comments at the hearing. Johnson focused on the fact that much of Apple’s employment, research, supplier network, and shareholders are in the United States, and they benefit if Apple’s affiliates reduce their tax payments to foreign governments. He also noted that the share of Apple’s global income taxed in the United States is just a bit less than the U.S. share of Apple’s global product sales, but that is because Apple’s foreign sales are somewhat more profitable that its U.S. sales. Put another way, the U.S. government seems to getting a roughly “fair share” of Apple’s global profits.

An Apple official noted that 50,000 of Apple’s 75,000 global employees are in the U.S. At the same time, about 60 percent of the company’s sales are abroad. So obviously—as Senator Rob Portman noted—Apple’s foreign sales are great for the United States because it means that U.S. employment, research, and other activities get boosted.

Democratic senators and the liberal witnesses at the hearing seemed to believe that piling more tax regulations on multinationals would be a good idea. But as I discuss in Global Tax Revolution, we’ve been adding more and more tax rules on multinationals since the early 1960s to reduce avoidance, and we’ve ended up with perhaps the most vastly complex corporate tax system in the world. And that approach hasn’t even solved the supposed avoidance problem that liberals worry about, as illustrated by this hearing.

A much better solution would be to sharply reduce our federal statutory corporate tax rate from 35 percent to, say, 15 percent, which is the current rate in Canada. I’ve noted that Canada’s huge tax rate cut does not seem to have lost the country much, if any, tax revenue.

The U.S. rate is the highest general corporate tax rate in the world, as shown in the chart below based on KPMG data. (KPMG lists UAE at 55 percent, but that rate is only applied to foreign oil companies, and even then those companies often cut special deals to reduce the rate). The KPMG global average rate for 130 countries is just 24 percent. Thus, the U.S. federal-state rate of 40 percent is two-thirds higher than the global average.

Given the U.S. tax disadvantage, it’s not surprising that Apple and every other U.S. multinational have strong incentives to move their real investments and paper profits abroad. That Apple may or may not be doing so is the non-story of these hearings.