The Organization for Economic Cooperation and Development is a Paris-based international bureaucracy. It used to engage in relatively benign activities such as data collection, but now focuses on promoting policies to expand the size and scope of government.
That's troubling, particularly since the biggest share of the OECD's budget comes from American taxpayers. So we're subsidizing a bureaucracy that uses our money to advocate policies that will result in even more of our money being redistributed by governments.
Adding insult to injury, the OECD's shift to left-wing advocacy has been accompanied by a lowering of intellectual standards. Here are some recent examples of the bureaucracy's sloppy and/or dishonest output.
Falsely asserting that there is more poverty in the United States than in poor nations such as Greece, Portugal, Turkey, and Hungary.
Given this list of embarrassing errors, you probably won't be surprised by the OECD's latest foray into ideology-over-accuracy analysis.
Citing the work of David Burton and Richard Rahn, I warned last July about the dangerous consequences of allowing governments to create a global tax cartel based on the collection and sharing of sensitive personal financial information.
I was focused on the danger to individuals, but it's also risky to let governments obtain more data from businesses.
Remarkably, even the World Bank acknowledges the downside of giving more information to governments.
Here are some blurbs from the abstract of a new study looking at what happens when companies divulge more data.
Relying on a data set of more than 70,000 firms in 121 countries, the analysis finds that disclosure can be a double-edged sword. ...The findings reveal the dark side of voluntary information disclosure: exposing firms to government expropriation.
And here are some additional details from the full report.
...disclosure has important costs in allowing exposure to government expropriation... We show that accounting information disclosure can be detrimental to firm development... Such disclosure allows corrupt bureaucrats to gain access to firm-level information and use it for endogenous harassment. ...once firm information is disclosed, the threat of government expropriation is widespread. Information disclosure thus allows rent-seeking bureaucrats to gain access to the disclosed information and use it to extract bribes. ...Our paper offers a vivid illustration that an important hindrance to institutional development—here in the form of adopting information disclosure—is government expropriation. ...The results are thus supportive of Acemoglu and Johnson (2005) on the overwhelming importance of constraining government expropriation in facilitating economic development.
Yet this doesn't seem to bother advocates of bigger government.
Last August, I shared a list of companies that "re-domiciled" in other nations so they could escape America's punitive "worldwide" tax system.
This past April, I augmented that list with some commentary about whether Walgreen's might become a Swiss-based company.
And in May, I pontificated about Pfizer's effort to re-domicile in the United Kingdom.
Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.
Here's the opening few sentences from a report in the Wall Street Journal.
Medtronic Inc.'s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien's U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world's highest. Such so-called "tax inversion" deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.
It's not just Medtronic. Here are some passages from a story by Tax Analysts.
Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.
So how should we interpret these moves?
I’m in favor of free markets. That means I’m sometimes on the same side as big business, but it also means that I’m often very critical of big business. That’s because large companies are largely amoral. Depending on the issue, they may be on the side of the angels, such as when they resist bad government policies such as higher tax rates and increased red tape. But many of those same companies will then turn around and try to manipulate the system for subsidies, protectionism, and corrupt tax loopholes.
Today, I’m going to defend big business. That’s because we have a controversy about whether a company has the legal and moral right to protect itself from bad tax policy. We’re dealing specifically with a drugstore chain that has merged with a similar company based in Switzerland, which raises the question of whether the expanded company should be domiciled in the United States or overseas.
Here’s some of what I wrote on this issue for yesterday’s Chicago Tribune.
Should Walgreen move? …Many shareholders want a “corporate inversion” with the company based in Europe, possibly Switzerland. …if the combined company were based in Switzerland and got out from under America’s misguided tax system, the firm’s tax burden would drop, and UBS analysts predict that earnings per share would jump by 75 percent. That’s a plus for shareholders, of course, but also good for employees and consumers.
Folks on the left, though, are upset about this potential move, implying that this would be an example of corporate tax cheating. But they either don’t know what they’re talking about or they’re prevaricating.
Some think this would allow Walgreen to avoid paying tax on American profits to Uncle Sam. This is not true. All companies, whether domiciled in America or elsewhere, pay tax to the IRS on income earned in the U.S.
The benefit of “inverting” basically revolves around the taxation of income earned in other nations.Read the rest of this post »
The tax code is a complicated nightmare, particularly for businesses.
Some people may think this is because of multiple tax rates, which definitely is an issue for all the non-corporate businesses that file "Schedule C" forms using the personal income tax.
A discriminatory rate structure adds to complexity, to be sure, but the main reason for a convoluted business tax system (for large and small companies) is that politicians don't allow firms to use the simple and logical (and theoretically sound) approach of cash-flow taxation.
Here's how a sensible business tax would work.
Total Revenue - Total Cost = Profit
And it would be wonderful if our tax system was this simple, and that's basically how the business portion of the flat tax operates, but that's not how the current tax code works.
We have about 76,000 pages of tax rules in large part because politicians and bureaucrats have decided that the "cash flow" approach doesn't give them enough money.
So they've created all sorts of rules that in many cases prevent businesses from properly subtracting (or deducting) their costs when calculating their profits.
One of the worst examples is depreciation, which deals with the tax treatment of business investment expenses. You might think lawmakers would like investment since that boosts productivity, wage, and competitiveness, but you would be wrong. The tax code rarely allows companies to fully deduct investment expenses (factories, machines, etc) in the year they occur. Instead, they have to deduct (or depreciate) those costs over many years. In some cases, even decades.
But rather than write about the boring topic of depreciation to make my point about legitimate tax deductions, I'm going to venture into the world of popular culture.
Though since I'm a middle-aged curmudgeon, my example of popular culture is a band that was big about 30 years ago.
The business pages are reporting that Chrysler will be fully owned by Fiat after that Italian company buys up remaining shares.
I don't know what this means about the long-term viability of Chrysler, but we can say with great confidence that the company will be better off now that the parent company is headquartered outside the United States.
This is because Chrysler presumably no longer will be obliged to pay an extra layer of tax to the IRS on any foreign-source income.
Italy, unlike the United States, has a territorial tax system. This means companies are taxed only on income earned in Italy but there's no effort to impose tax on income earned - and already subject to tax - in other nations.
Under America's worldwide tax regime, by contrast, U.S.-domiciled companies must pay all applicable foreign taxes when earning money outside the United States - and then also put that income on their tax returns to the IRS!
And since the United States imposes the highest corporate income tax in the developed world and also ranks a dismal 94 out of 100 on a broader measure of corporate tax competitiveness, this obviously is not good for jobs and growth.
No wonder many American companies are re-domiciling in other countries!
Maybe the time has come to scrap the entire corporate income tax. That's certainly a logical policy to follow based on a new study entitled, "Simulating the Elimination of the U.S. Corporate Income Tax."
Written by Hans Fehr, Sabine Jokisch, Ashwin Kambhampati, Laurence J. Kotlikoff, the paper looks at whether it makes sense to have a burdensome tax that doesn't even generate much revenue.
Read the rest of this post »
The U.S. Corporate Income Tax...produces remarkably little revenue - only 1.8 percent of GDP in 2013, but entails major compliance and collection costs. The IRS regulations detailing corporate tax provisions are tome length and occupy small armies of accountants and lawyers. ...many economists...have suggested that the tax may actually fall on workers, not capitalists.
Instead, we're discussing today how lawmakers in other nations are beginning to recognize that it's absurdly inaccurate to predict the revenue impact of changes in tax rates without also trying to measure what happens to taxable income (if you want a short tutorial on the Laffer Curve, click here).
But I'm a firm believer that policies in other nations (for better or worse) are a very persuasive form of real-world evidence. Simply stated, if you're trying to convince a politician that a certain policy is worth pursuing, you'll have a much greater chance of success if you can point to tangible examples of how it has been successful.
That's why I cite Hong Kong and Singapore as examples of why free markets and small government are the best recipe for prosperity. It's also why I use nations such as New Zealand, Canada, and Estonia when arguing for a lower burden of government spending.
And it's why I'm quite encouraged that even the squishy Tory-Liberal coalition government in the United Kingdom has begun to acknowledge that the Laffer Curve should be part of the analysis when making major changes in taxation.
I don't know whether that's because they learned a lesson from the disastrous failure of Gordon Brown's class-warfare tax hike, or whether they feel they should do something good to compensate for bad tax policies they're pursuing in other areas, but I'm not going to quibble when politicians finally begin to move in the right direction.
The Wall Street Journal opines that this is a very worthwhile development.
Chancellor of the Exchequer George Osborne has cut Britain's corporate tax rate to 22% from 28% since taking office in 2010, with a further cut to 20% due in 2015. On paper, these tax cuts were predicted to "cost" Her Majesty's Treasury some £7.8 billion a year when fully phased in. But Mr. Osborne asked his department to figure out how much additional revenue would be generated by the higher investment, wages and productivity made possible by leaving that money in private hands.
By the way, I can't resist a bit of nit-picking at this point. The increases in investment, wages, and productivity all occur because the marginal corporate tax rate is reduced, not because more money is in private hands.
I'm all in favor of leaving more money in private hands, but you get more growth when you change relative prices to make productive behavior more rewarding. And this happens when you reduce the tax code's penalty on work compared to leisure and when you lower the tax on saving and investment compared to consumption.