Tag: tax competition

America’s Corporate Tax System Ranks a Miserable 94 out of 100 Nations in “Tax Attractiveness”

I’ve relentlessly complained that the United States has the highest corporate tax rate among all developed nations.

And if you look at all the world’s countries, our status is still very dismal. According to the Economist, we have the second highest corporate tax rate, exceeded only by the United Arab Emirates.

But some people argue that the statutory tax rate can be very misleading because of all the other policies that impact the actual tax burden on companies.

That’s a very fair point, so I was very interested to see that a couple of economists at a German think tank put together a “tax attractiveness” ranking based on 16 different variables. The statutory tax rate is one of the measures, of course, but they also look at policies such as “the taxation of dividends and capital gains, withholding taxes, the existence of a group taxation regime, loss offset provision, the double tax treaty network, thin capitalization rules, and controlled foreign company (CFC) rules.”

It turns out that these additional variables can make a big difference in the overall attractiveness of a nation’s corporate tax regime. As you can see from this list of top-10 and bottom-10 nations, the United Arab Emirates has one of the world’s most attractive corporate tax systems, notwithstanding having the highest corporate tax rate.

Unfortunately, the United States remains mired near the bottom.

Tax Havens Are Good for High-Tax Nations

Regular readers know that one of my main goals is to preserve and promote tax competition as a means of restraining the greed of the political class. Heck, I almost wound up in a Mexican jail because of my work defending low-tax jurisdictions.

As you can imagine, it’s difficult to persuade politicians. After all, why would they support policies such as fiscal sovereignty and financial privacy that hinder their ability to extract more revenue? So I try to educate them about the link between taxes and growth in hopes that they will understand that a vibrant economy also means a large tax base. And I specifically tell them that so-called tax havens play a very valuable role since they are an alternative source of investment capital for nations that have undermined domestic investment with bad tax policy.

I also explain to them that low-tax jurisdictions give companies some much-needed flexibility to maintain operations in an otherwise hostile fiscal environment. Let’s look at that specific issue by reviewing some of the findings from a study by two Canadian economists about tax havens and business activity. In the introduction to their study, they describe the general concern (among politicians) that competition between governments will lead to lower tax rates:

Increased mobility of goods and services is apt to give rise to an erosion of corporate tax bases in high-tax industrialized countries, a decline in tax revenues and a rise in competition among governments. Countries seeking to attract and retain mobile investment and the associated tax revenues may be induced to reduce tax rates below the levels that would obtain in the absence of mobility. In the view of some commentators, indeed, increased mobility can lead to a “race to the bottom” driving business tax rates to minimal levels, due to the fiscal externalities that mobility creates.

It certainly is true that tax competition has pressured politicians to lower tax rates, and the academic research shows that this is a good thing, notwithstanding complaints by leftists economists such as Jeffrey Sachs.

OECD Study Admits Income Taxes Penalize Growth, Acknowledges that Tax Competition Restrains Excessive Government

I have to start this post with a big caveat.

I’m not a fan of the Paris-based Organization for Economic Cooperation and Development. The international bureaucracy is infamous for using American tax dollars to promote a statist economic agenda. Most recently, it launched a new scheme to raise the tax burden on multinational companies, which is really just a backdoor way of saying that the OECD (and the high-tax nations that it represents) wants higher taxes on workers, consumers, and shareholders. But the OECD’s anti-market agenda goes much deeper.

Now that there’s no ambiguity about my overall position, I can admit that the OECD isn’t always on the wrong side. Much of the bad policy comes from its committee system, which brings together bureaucrats from member nations.

The OECD also has an economics department, and they sometimes produce good work. Most recently, they produced a report on the Swiss tax system that contains some very sound analysis, including a rejection of Obama-style class warfare and a call to lower income tax burdens.

Shifting the taxation of income to the taxation of consumption may be beneficial for boosting economic activity (Johansson et al., 2008 provide evidence across OECD economies). These benefits may be bigger if personal income taxes are lowered rather than social security contributions, because personal income tax also discourages entrepreneurial activity and investment more broadly.

I somewhat disagree with the assertion that payroll taxes do more damage than VAT taxes. They both drive a wedge between pre-tax income and post-tax consumption. But the point about income taxes is right on the mark.

New European Data: When Tax Competition Is Weakened, Politicians Respond by Increasing Tax Rates

I often argue that we need to preserve tax competition and tax havens in order to limit the greed of the political class.

Without some sort of external constraint, they will over-tax and over-spend, creating the kind of downward economic spiral already happening in some European nations.

Speaking of which, new evidence from Europe bolsters my case.

Back in 2009, facing pressure from the big G-20 nations, all of the world’s major low-tax jurisdictions - even Switzerland - acquiesced to the notion that human rights laws protecting financial privacy no longer would apply to foreign investors.

In other words, high-tax governments now have much greater ability to track - and tax - flight capital.

So how have they responded since that time? Well, look at this chart from the European Union’s new report on taxation trends. Tax rates have begun to increase, reversing a very positive trend (which began with the Reagan and Thatcher tax cuts, though this chart only shows data since 1995).

Top EU Tax Rates

A Tax Haven Primer for the New York Times

I could only use 428 words, but I highlighted the main arguments for tax havens and tax competition in a “Room for Debate” piece for the New York Times.

I hope that my contribution is a good addition to the powerful analysis of experts such as Allister Heath and Pierre Bessard.

I started with the economic argument.

[T]ax havens are very valuable because they discourage anti-growth tax policy. Simply stated, it is very difficult for governments to impose and enforce confiscatory tax rates when investors and entrepreneurs can shift their economic activity to jurisdictions with better tax policy. Particularly if those nations have strong policies on financial privacy, thus making it difficult for uncompetitive high-tax nations to track and tax flight capital. Thanks to this process of tax competition, with havens playing a key role, top personal income tax rates have dropped from an average of more than 67 percent in 1980 to about 42 percent today. Corporate tax rates also have plummeted, falling from an average of 48 percent to 24 percent.

…Lawmakers also were pressured to lower or eliminate death taxes and wealth taxes, as well as to reduce the double taxation of interest, dividends and capital gains. Once again, tax havens deserve much of the credit because politicians presumably would not have implemented these pro-growth reforms if they didn’t have to worry that the geese with the golden eggs might fly away to a confidential account in a well-run nation like Luxembourg or Singapore.

Since I didn’t have much space, I couldn’t go into much greater detail. Below the jump is a video that elaborates on the economic benefits of tax havens, including an explanation of why fiscal sovereignty is a big part of the debate.

According to Washington Post Exposé, People Who Utilize Tax Havens Are Far More Honest than Politicians

Using data stolen from service providers in the Cook Islands and the British Virgin Islands, the Washington Post published a supposed exposé of Americans who do business in so-called tax havens.

Since I’m the self-appointed defender of low-tax jurisdictions in Washington, this caught my attention. Thomas Jefferson wasn’t joking when he warned that “eternal vigilance is the price of liberty.” I’m constantly fighting against anti-tax haven schemes that would undermine tax competition, financial privacy, and fiscal sovereignty.

Even if it means a bunch of international bureaucrats threaten to toss me in a Mexican jail or a Treasury Department official says I’m being disloyal to America. Or, in this case, if it simply means I’m debunking demagoguery.

The supposedly earth-shattering highlight of the article is that some Americans linked to offshore companies and trusts have run afoul of the legal system.

Among the 4,000 U.S. individuals listed in the records, at least 30 are American citizens accused in lawsuits or criminal cases of fraud, money laundering or other serious financial misconduct.

But the real revelation is that people in the offshore world must be unusually honest. Fewer than 1 percent of them have been named in a lawsuit, much less been involved with a criminal case.

This is just a wild guess, but I’m quite confident that you would find far more evidence of misbehavior if you took a random sample of 4,000 Americans from just about any cross-section of the population.

Targeting Multinationals, the OECD Launches New Scheme to Boost the Tax Burden on Business

I’ve been very critical of the Organization for Economic Cooperation and Development. Most recently, I criticized the Paris-based bureaucracy for making the rather remarkable assertion that a value-added tax would boost growth and employment.

But that’s just the tip of the iceberg.

Now the bureaucrats have concocted another scheme to increase the size and scape of government. The OECD just published a study on “Addressing Base Erosion and Profit Shifting” that seemingly is designed to lay the groundwork for a radical rewrite of business taxation.

In a new Tax & Budget Bulletin for Cato, I outline some of my concerns with this new “BEPS” initiative.

…the BEPS report…calls for dramatic changes in corporate tax policy based on the presumption that governments are not seizing enough revenue from multinational companies. The OECD essentially argues that it is illegitimate for businesses to shift economic activity to jurisdictions that have more favorable tax laws. …The core accusation in the OECD report is that firms systematically—but legally—reduce their tax burdens by taking advantage of differences in national tax policies.

Ironically, the OECD admits in the report that revenues have been trending upwards.

…the report acknowledges that “… revenues from corporate income taxes as a share of gross domestic product have increased over time. …Other than offering anecdotes, the OECD provides no evidence that a revenue problem exists. In this sense, the BEPS report is very similar to the OECD’s 1998 “Harmful Tax Competition” report, which asserted that so-called tax havens were causing damage but did not offer any hard evidence of any actual damage.

To elaborate, the BEPS scheme should be considered Part II of the OECD’s anti-tax competition project. Part I was the attack on so-called tax havens, which began back in the mid- to late-1990s.