Topic: Tax and Budget Policy

Articles in the Financial Times and the Economist Defend Tax Competition

The Economist has an entire section on the “offshore” world in the latest issue. Among the key findings are that so-called offshore financial centers promote growth and discourage wasteful government:

…the most vexing problem that highly mobile financial flows pose for governments is that when they cross borders they may take tax revenues with them. …As companies become ever more multinational, they find it easier to shift their activities and profits across borders and into OFCs. …Financial liberalisation—the elimination of capital controls and the like—has made all of this easier. So has the internet, which allows money to be shifted around the world quickly, cheaply and anonymously. …tax, regulatory and other competition is healthy because it keeps bigger countries’ governments from getting bloated. Others argue that OFCs may be an inevitable concomitant of globalisation. “Even if today’s OFCs were somehow stamped out, something like them would pop up to take their place,” says Mihir Desai of Harvard Business School. Some academics have found signs that OFCs have unplanned positive effects, spurring growth and competitiveness in nearby onshore economies. …International organisations have launched various initiatives to try to get OFCs to tighten supervision, co-operate more with foreign governments to catch tax cheats and, at least in Europe, eliminate “harmful” tax practices. OFCs think such initiatives are designed to force them out of business. The countries that set these standards “are an oligopoly trying to keep out smaller competitors. They are both players and referees in the game. How can they be objective?”, asks Richard Hay, a lawyer in Britain who represents OFCs. …the broader concern over OFCs is overblown. Well-run jurisdictions of all sorts, whether nominally on- or offshore, are good for the global financial system.

A column in the Financial Times takes an even stronger position. It notes that tax competition encourages more responsible behavior by lawmakers. It also explains that low taxes are not akin to subsidies, and points out that anti-tax-competition advocates will not be satisfied until all pro-growth tax policies are exterminated:

The European Commission seems to recognise no limits in its drive to impose tax harmonisation across Europe. Having issued a sanction against Luxembourg last July for its preferential tax regime on holding companies, Brussels is now trying to put pressure on a country outside the European Union by targeting Swiss cantons’ tax breaks and low business tax rates. Such a move, if it succeeds, will hurt not only the Swiss but all taxpayers in Europe. Tax competition gives you - the entrepreneur or citizen - the opportunity to escape fiscal pressure from your own government by moving to jurisdictions with more favourable tax regimes. It gives strong incentives for all governments to lower taxes, allowing taxpayers to keep more of their money and making markets less distorted. Such tax competition has existed for some time in Europe and is being intensified by globalisation. Luxembourg and Switzerland, for example, can be considered in a sense to be tax havens at Europe’s heart, benefiting not just European but world taxpayers. Those benefits are being undermined by Brussels’ campaign to condemn places with favourable tax regimes. …The Commission has a strange concept of free trade. It is easy to grasp how public subsidies to business - which involve confiscating resources from some parties and giving them to others - should be regarded as “state aid”. But how can the fact that certain taxes are not levied be placed on the same footing? …This harmonisation logic will inevitably lead EU bureaucrats to attack other regimes that benefit taxpayers, be they in the EU or outside. In Ireland, for example, the corporate tax rate is lower than in Swiss cantons and in Estonia undistributed corporate profits are simply not taxed. When can we expect pressure on Ireland to raise its rates or on Estonia to repeal a system that has contributed to its economic dynamism?

Europeans Want More Tax Harmonization — Which Means Higher Taxes

There already is a minimum fuel levy in the European Union, but governments are allowed to impose higher taxes (but never lower taxes, of course). This tax difference is causing some truckers to drive longer distances to buy fuel where diesel taxes are lower. The proposed response to this alleged problem is to reduce the difference in the tax among jurisdictions. Needless to say, the Euro-crats have decided that the solution is higher tax rates for all nations.

The EU Observer reports on the latest evidence that tax harmonization is always a scheme to increase government power:

EU tax commissioner László Kovács is set to table a proposal to harmonize the minimum level of excise duties at €359 per 1000 litres of diesel in 2012 and subsequently at €380 in 2014, a move which would see most EU states increasing their current rates.

According to Mr Kovács’ paper — seen by EUobserver — such a rise would stamp out so-called fuel tourism, as big trucks now make detours from their routes to tank in a state where it is the cheapest, generating more greenhouse gas emissions as well as losses to some EU states’ coffers. Germans, for example, are willing to drive two to four additional kilometres for each euro cent price differential compared to a neighbouring country in the case of gas oil. Fuel tourism cost Germany €1.9 billion in 2004.

…[O]ne Lithuanian diplomat [is now] saying the Brussels proposal should be scrapped as it would translate into an overall increase in prices and inflation. “It could freeze Lithuania’s euro hopes”, a diplomat told EUobserver, adding “taxes remain one’s competitive edge and countries with high rates have taken a voluntary risk”.

Fairly Ridiculous

A Maryland legislator has introduced an absurd bill that would allow the state to seize unused funds on gift cards. 

From WJLA-TV’s website:

Democratic Delegate Joseline Pena-Melnyk testified Thursday before a House committee that after four years, the state should take money on old gift cards as abandoned property. She argued that companies are unfairly keeping money paid for gift cards and gift certificates.

To Delegate Pena-Melynyk, “fairness” apparently means confiscating money from individuals and businesses and spending it on her priorities, in this case public education.

If I learned one thing during my 13 years in Maryland’s public education system, it’s that taking people’s stuff isn’t fair.

Religious Think Tank Defends Tax Competition

A scholar from the Acton Institute looks at the tax battle between Swtizerland and EU leaders in Brussels, and exposes the misguided morality of the politicians who denounce tax competition:

The war of words was ignited by the French rock star Johnny Hallyday’s decision in late 2006 to move to Gstaad, Switzerland, because he was tired of France’s exorbitant tax-rates. Mr. Hallyday joins an exodus of individuals and companies from France, Germany, Italy, and Austria taking advantage of Switzerland’s 21 percent overall tax-rate and considerably lower corporate tax-rates. Liechtenstein, Switzerland’s tiny neighbor, maintains even lower tax-rates and has benefited from a similar flight.

For corporate tax-exiles in Switzerland, the situation is especially advantageous. Each canton sets its own corporate tax-rates. This has triggered intense competition between cantons anxious to attract new businesses. In January 2006, for example, the central Swiss canton of Obwalden reduced its corporate tax-rate to 6.6 percent. Over 11 months, it attracted 376 new companies. No wonder large corporations such as Google and IBM have located their European headquarters in Zurich.

Outside Switzerland, the response has been extraordinary. Some French socialists have accused Switzerland of “looting” its neighbors. This is somewhat strange, given that no-one is forcing these individuals and companies to move to Switzerland. Some would suggest that the real “looters” are French governments of left and right who have raised taxes over the past 40 years to such levels that even many relatively modestly well-off French citizens have left or invested their capital in off-shore tax-havens.

…“Tax-harmonization” in the EU, incidentally, never means lowering tax-rates. It invariably involves raising taxes to the same high level. It was on this basis that, when faced with companies leaving Germany to base their headquarters in 19 percent flat-tax Slovakia, Germany’s ex-chancellor Gerhard Schroeder once accused Slovakia of “un-European” behavior. To be truly European — apparently — means giving about half your income to the government.

Tax Cuts North of the Border

America traditionally has enjoyed a competitive advantage over Canada, but the Conservative government in Ottawa has announced addtional tax cuts, including reductions in the corporate rate. The rest of the world is responding to tax competition, and the high corporate tax rate in the US is becoming an ever-larger problem for American companies in the global marketplace. Unfortunately, there is no groundswell – or even idle gossip – for a reduction in America’s punitive corporate tax. Tax-news.com reports on the new tax cuts in Canada: 

Jim Flaherty, Canadian Minister of Finance, has announced that he will table the second budget of Canada’s Conservative administration under Prime Minister Stephen Harper on March 19, 2007. …Key tax measures contained in the 2006 budget included the long-promised 1% cut in Goods and Services Tax to 6%, a 2% cut in the general corporate tax rate by 2010, eliminating the corporate surtax on all corporations by 2008, axing the federal capital tax, and increasing the amount of income eligible for the lowest rate of corporate tax for small businesses. In addition, this bottom rate will be reduced by 1% to 11% by 2009.

European Nations Fail to Ease Regulatory Burdens

The European Commission is notorious for cranking out new red tape, so it is somewhat ironic that the bureaucrats have been lecturing member nations to reduce their regulatory burdens. Presumably, the Commission thinks that supra-national regulations are good, whereas national regulations are bad. This does not make much sense, but it is a bit of a moot issue since national governments are refusing to make binding commitments for deregulation. As the EU Observer reports, the economic costs of excessive regulation are substantial:

EU industry ministers have dealt a blow to the European Commission’s “better regulation” agenda by refusing binding targets to cut national bureaucracy which accounts for half of the bloc’s administrative costs. … The commission believes red tape reduction would boost the EU economy with the equivalent of 3.5 percent of GDP and free up an estimated €150 billion for investment. But although there has been a lot of rhetoric in favour of the initiative, it is proving difficult to implement both at EU and national level. … While the UK, the Netherlands, Sweden and Denmark argued in favour of the national red tape cuts, most other delegations were against any fixed goals. Mr Verheugen admitted the commission has no power to force the governments into anything more than they have agreed - given that national legislation and competences are at stake.