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.
Corporate tax revenues have been falling across OECD countries since the global economic crisis, putting greater pressure on individual taxpayers... “Corporate taxpayers continue finding ways to pay less,
while individuals end up footing the bill,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “The great majority of all tax rises seen since the crisis have fallen on individuals through higher social security contributions, value added taxes and income taxes. This underlines the urgency of efforts to ensure that corporations pay their fair share.” These efforts are focused on the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.
And what evidence does the OECD have to justify this assertion?
Here's what the bureaucracy wrote.
Average revenues from corporate incomes and gains fell from 3.6% to 2.8% of gross domestic product (GDP) over the 2007-14 period. Revenues from individual income tax grew from 8.8% to 8.9% and VAT revenues grew from 6.5% to 6.8% over the same period.
Those are relatively small shifts in tax receipts as a share of GDP, so one certainly could say that the OECD bureaucrats are trying to make a mountain out of a molehill.
But that would mean that they're merely guilty of exaggeration.
The much bigger problem is that the OECD is disingenuously cherry-picking data, the kind of methodological mendacity you might expect from an intern in the basement of the White House, but not from supposed professionals.
If you go to the OECD's website and click on the page where the corporate tax data is found, you'll actually discover that corporate tax receipts have been slowly climbing as a share of GDP.
Yes, receipts are slightly lower than they were at the peak of the financial bubble.
However, honest analysts would never claim that those numbers were either sustainable or appropriate to use as a bennchmark.
Sadly, "honest" and "OECD" are words that don't really belong together any more.
The bureaucrats in Paris also are being mendacious in their portrayal of what's happening with individual income tax revenues.
Monsieur Saint-Amans wants us to think that falling corporate tax receipts are being offset by a rising burden on individuals, but check out this table from the OECD's Revenue Statistics. As you can see, he wants us to look at one tree (what's happened in the past few years) and ignore the forest (the fact that the burden of the personal income tax today is lower than it was in 1980, 1990, or 2000).
By the way, the real story is that the OECD wants higher tax burdens, period. Anytime, anywhere, and on everybody.
It's attack on low-tax jurisdictions is designed to enable higher income tax burdens on individuals.
Its "base erosion and profit shifting" project is designed to facilitate higher income tax burdens on companies.
And the bureaucrats reflexively advocate higher value-added tax burdens.
All of what you might expect from an organization filled with overpaid officials who realize their cosseted lifestyle is dependent on producing output that will generate continuing subsidies from statist politicians such as Obama and Hollande.
P.S. If you want an amazing example of the OECD's ideology-over-analysis approach, here's what the bureaucrats recently wrote about achieving more growth in Asia.
Increasing tax revenues and ensuring sustainable domestic resource mobilisation will be critical as emerging Asian economies seek to boost the provision of public goods and services and improve economic growth and living standards. ...Comparable and consistent tax statistics facilitate transparent policy dialogue and provide policy makers with an important tool to assess alternative tax reforms. ...Continued reforms will be necessary to help these tax administrations raise additional tax revenues in the future.
Yup, you read correctly (at least if you understand that "domestic resource mobilisation" is OECD-speak for higher taxes). The bureaucrats think generating more tax revenue to finance bigger government actually is a recipe for more prosperity.
For all intents and purposes, they're advising nations in the region to copy France and Italy instead of seeking to be more like Hong Kong and Singapore.
Though, to be fair, the OECD isn't just trying to impose bad policy on Asia. The bureaucrats in Paris have an equal-opportunity mindset when advocating statism since that's the exact same prescription the OECD gave for Latin America.
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.
Indeed, they're using a Paris-based international bureaucracy to push a "base erosion and profit shifting" initiative designed to produce global rules that would give governments far greater access to business data.
Their goal is to extract more money openly with tax policy rather than surreptitiously with bribes, but the net effect will be just as bad for the global economy.
A new study from the Center for Freedom and Prosperity has the disturbing details.
Under direction of the G20, the Organization for Economic Cooperation and Development (OECD) began two years ago a major initiative on "base erosion and profit shifting" (BEPS). ...Through the BEPS project, the OECD is continuing its war against tax competition.
For all intents and purposes, politicians from high-tax nations are using the G20 and OECD to undermine the liberalizing force of tax competition.
They want to rewrite international tax policy to prop up nations with uncompetitive tax systems.
[BEPS] would...lead to an overall higher tax environment as politicians freed from the pressures of global tax competition inevitably raise rates to levels last seen in the early 1980s, when reforms by Reagan and Thatcher sparked a global reduction in corporate tax rates that has continued to this day. Through tax competition, the average corporate tax rate of OECD nations declined from almost 50% in 1981 to 25% in 2015. ...The [BEPS] Action Plan...considers the benefits of tax competition to be the real problem, explaining that “there is a reduction of the overall tax paid by all parties involved as a whole.” The prospect of there being less money to be spent by politicians is perceived as a problem to be solved.
Even though there's no evidence of a problem, even from the perspective of revenue-hungry politicians.
Particularly since the OECD's own data shows that corporate tax revenue keeps increasing, as noted in the CF&P study.
The OECD's BEPS Report itself undercuts the argument that there is a pressing need for a global response when it acknowledges that “revenues from corporate income taxes as a share of GDP have increased over time.” Likewise, the Action Plan admits when discussing hybrid mismatch that “it may be difficult to determine which country has in fact lost tax revenue.”
So BEPS isn't a response to the nonexistent problem of falling revenue. Instead, the real goal is to make it easier to impose higher tax rates and change other rules to raise additional revenue.
Even if the required policies have very troubling implications. As part of this new campaign against tax competition, here's some of what the OECD is seeking.
Proposed recommendations for transfer-pricing documentation and country-by-country reporting, for instance, feature broad reporting requirements that go far beyond what is required for purposes of tax collection. ...Information contained in the local and master files are particularly vulnerable, since it would take a breach in only a single jurisdiction for it to be exposed. The OECD makes assurances for the confidentiality of these reports, but they are empty promises. Such government assurances of privacy protection are contradicted by experience and the long history of leaks of taxpayer information. In the United States alone tax data has frequently been exposed thanks to inadequate safeguards, or even released by officials to attack political opponents. ...Even without malicious intent, governments are ill equipped to protect sensitive information from outside access. ...As poor as the United States has proven at protecting privacy, there are likely to be nations even more vulnerable. Through the master file and other reporting mechanisms, BEPS will demand of corporations propriety information and other sensitive data that they have every right to keep private.
Requiring more information is just one part of BEPS.
There are many other elements, all of which are designed to facilitate higher tax burdens. Indeed, the Wall Street Journal warned that, "this is an attempt to limit corporate global tax competition and take more cash out of the private economy."
But as bad as BEPS is now, the study from the Center for Freedom and Prosperity explains it will get worse over time.
Of particular relevance for understanding the BEPS initiative is the pattern demonstrated by the OECD during the course of this campaign. After each recommendation was widely adopted – typically under duress in the case of low-tax jurisdictions – the OECD immediately pushed a new requirement that was more radical and invasive than the last. First was a call to adopt a certain number of Tax Information Exchange Agreements and a standard of information exchange upon request, then a peer-review process whereby tax policies are judged according to the standards of high-tax welfare states. Then, after years of meetings and costly compliance efforts, the old standard for information exchange upon request was replaced with a call for global automatic exchange.
The OECD's strategy of moving the goalposts is worth noting because the BEPS project almost certainly will evolve in ways that enable ever-higher tax burdens.
I predicted back in 2013 that the end result will be "global formula apportionment," a system that would enable dramatically higher tax burdens on the business community.
And I'm sticking with that prediction, in part because that's what would be in the interests of politicians from high-tax nations. If national governments were able to tax on the basis of what companies sold inside their borders, regardless of how much income actually was being earned, there would be very little competitive pressure to keep tax rates reasonable.
Politicians could push corporate tax rates back up to 50 percent, or even higher.
The folks on the left certainly would like that kind of system. Here are some excerpts from a CNN story.
It's time for a complete overhaul of the global tax system to ensure each company pays their fair share, says Nobel laureate Joseph Stiglitz. ..."Multinational corporations act and therefore should be taxed as single and unified firms. It is time for our [political] leaders to be bold," Stiglitz said. ...Stiglitz said that creating a new worldwide tax system is realistic, but all nations would have to work together to agree rules and close loopholes. The group of economists said in a statement that it was critical to "curb tax competition to prevent a race to the bottom." Developed nations should take the first step by agreeing on a minimum rate of corporate tax, possibly under the auspices of the Organisation for Economic Cooperation and Development. ...The economists also suggest establishing an intergovernmental tax body within the United Nations that would combat abusive tax practices.
The bottom line is that politicians and statist interest groups both want to extract more money from the productive sector of the economy.
And OECD bureaucrats have been assigned the task of crafting rules to undermine tax competition so that companies can't escape those higher burdens.
Developing new rules is actually the easy part. The hard part is when the bureaucrats try to rationalize how higher tax rates and bigger government are somehow good for the global economy.
Particularly since economists who work at the OECD have written that lower tax rates and tax competition result in better economic performance.
P.S. To add insult to injury, American taxpayers provide the biggest share of the OECD's budget. This means that our tax dollars are being used to generate policies that will result in higher tax burdens. Which is why I've argued, on a per-dollar-spent basis, that subsidies to the OECD are the most destructively wasteful part of the federal budget.
P.P.S. And to add insult upon insult, OECD bureaucrats get tax-free salaries, so they are insulated from the negative effects of policies they're trying to impose on the rest of the world.
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?
From a logical and ethical perspective, we should applaud companies for protecting shareholders, workers and consumers. If a government is imposing destructive tax laws (and the United States arguably has the world's worst corporate tax system), then firms have a moral obligation to minimize the damage.
Writing in the Wall Street Journal, an accounting professor from MIT has some wise words on the issue.
Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system. The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings. To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. ...Some firms have taken the next logical step to stay competitive with foreign-based companies: reincorporating as foreign companies through cross-border mergers.
Unsurprisingly, some politicians are responding with punitive policies. Instead of fixing the flaws in the internal revenue code, they want various forms of financial protectionism in order the stop companies from inversions.
Professor Hanlon is unimpressed.
Threatening corporations with stricter rules and retroactive tax punishments will not attract business and investment to the U.S. The responses by the federal government and U.S. corporations are creating what in managerial accounting we call a death spiral. The government is trying to generate revenue through high corporate taxes, but corporations cannot compete when they have such high tax costs. ...The real solution is a tax system that attracts businesses to our shores, and keeps them here. ...The U.K. may be a good example: In 2010, after realizing that too many companies were leaving for the greener tax pastures of Ireland, the government's economic and finance ministry wrote in a report that it wanted to "send out the signal loud and clear, Britain is open for business." The country made substantive tax-policy changes such as reducing the corporate tax rate and implementing a territorial tax system. Congress and President Obama should make tax reform a priority.
Here's some info, by the way, about the United Kingdom's smart moves on corporate taxation.
For more information on territorial taxation, here's a video I narrated for the Center for Freedom and Prosperity.
And here's my futile effort to educate the New York Times on the issue.
And if you want some info on the importance of lower corporate taxation, here's another CF&P video.
P.S. You may be asking yourself whether it would have been better to say that America's corporate tax is "sadistic" rather than "masochistic."
From the perspective of companies (and their shareholders, workers, and consumers), the answer is yes.
But I chose "masochistic" because politicians presumably want to extract the maximum amount of revenue from companies, yet that's not happening because they've set the rate so high and made the system so unfriendly. In other words, they're hurting themselves. I guess they hate the Laffer Curve even more than they like having more money with which to buy votes.
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.
But there is a big tax advantage if Walgreen becomes a Swiss company. The U.S. imposes "worldwide taxation," which means American-based companies not only pay tax on income earned at home but also are subject to tax on income earned overseas. Most other nations, including Switzerland, use "territorial taxation," which is the common-sense approach of only taxing income earned inside national borders. The bottom line is that Walgreen, if it becomes a Swiss company, no longer would have to pay tax to the IRS on income that is earned in other nations.
It's worth noting, by the way, that all major pro-growth tax reforms (such as the flat tax) would replace worldwide taxation with territorial taxation. So Walgreen wouldn't have any incentive to redomicile in Switzerland if America had the right policy. And this is why I've defended Google and Apple when they've been attacked for not coughing up more money to the IRS on their foreign-source income. But I don't think this fight is really about the details of corporate tax policy.
Some people think that taxpayers in the economy's productive sector should be treated as milk cows that exist solely to feed the Washington spending machine.
...ideologues on the left, even the ones who understand that the company would comply with tax laws, are upset that Walgreen is considering this shift. They think companies have a moral obligation to pay more tax than required. This is a bizarre mentality. It assumes not only that we should voluntarily pay extra tax but also that society will be better off if more money is transferred from the productive sector of the economy to politicians.
Needless to say, I have a solution to this controversy.
...the real lesson is that politicians in Washington should lower the corporate tax rate and reform the code so that America no longer is an unfriendly home for multinational firms.
For more information, here's the video I narrated on "deferral," which is a policy that mitigates America's misguided policy of worldwide taxation.
P.S. Many other companies already have re-domiciled overseas because the internal revenue code is so punitive. The U.S. tax system is so bad that companies even escape to Canada and the United Kingdom!
P.P.S. It also would be a good idea to lower America's anti-competitive corporate tax rate.
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 UK-based Guardian is reporting on the supposed scandal of ABBA's tax deductions. Here are the relevant passages.
The glittering hotpants, sequined jumpsuits and platform heels that Abba wore at the peak of their fame were designed not just for the four band members to stand out – but also for tax efficiency, according to claims over the weekend. ...And the reason for their bold fashion choices lay not just in the pop glamour of the late 70s and early 80s, but also in the Swedish tax code. According to Abba: The Official Photo Book, published to mark 40 years since they won Eurovision with Waterloo, the band's style was influenced in part by laws that allowed the cost of outfits to be deducted against tax – so long as the costumes were so outrageous they could not possibly be worn on the street.
When I read the story, I kept waiting to get to the scandalous part.
But then I realized that the scandal - according to our statist friends - is that ABBA could have paid even more in tax if they wore regular street clothes for their performances.
In other words, this is not a scandal at all. It's simply the latest iteration of the left-wing campaign (bolstered by tax-free bureaucrats at the Paris-based OECD) to de-legitimize normal and proper tax deductions.
So I guess this means that the New York Yankees should play in t-shirts and gym shorts since getting rid of the pinstripes would increase the team's taxable income.
And companies should set their thermostats at 60 degrees in the winter since that also would lead to more taxable income.
Or, returning to the example of ABBA, perhaps they should have used these outfits since there wouldn't be much cost to deduct and that would have boosted taxable income.
Shifting to the individual income tax, another potential revenue raiser is for households to follow this example from Monty Python and sell their kids for medical experiments. That would eliminate personal exemptions and lead to more taxable income.
Heck, maybe our friends on the left should pass a law mandating weekend jobs so we could have more income for them to tax.
Though I'm not sure how that would work since the statists are now saying Obamacare is a good thing because it "liberates" millions of people from having to work.
I'm not sure how they square that circle, but I'm sure the answer is more class-warfare tax policy.
P.S. A very low tax rate is the best way of encouraging taxpayers to declare income and minimize deductions.
When ABBA first became famous, the top personal tax rate in Sweden was at the confiscatory level of about 80 percent and the corporate tax rate was about 55 percent. With rates so high, that meant taxpayers had big incentives to reduce taxable income and little reason to control costs.
After all, a krona of deductible expense only reduced income by about 20 öre for individual taxpayers.
Corporate taxpayers weren't treated as badly, but a rate of 55 percent still meant that a krona of deductible expense only reduced after-tax income by 45 öre.
But if the rate was very modest, say 20 percent, then taxpayers might be far more frugal about costs (whether the cost of uniforms or anything else) because a krona of deductible expense would reduce income by 80 öre.
By the way, the United States conducted an experiment of this type in the 1980s and the rich wound up declaring far more income to the IRS.
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.
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.
because the levy reduces investment, which then means lower productivity and lower wages.
Statists would like us to believe that capitalists and workers are enemies, but that's utter nonsense. Both prosper by cooperating. There's a very strong correlation between a nation's capital stock (the amount of investment) and the compensation of its workers.
So it's no surprise to see that's precisely what the authors found in their new research.
This paper posits, calibrates, and simulates a multi-region, life-cycle dynamic general equilibrium model to study the impact of U.S. and global corporate tax reforms. ...when wage taxation is used as the substitute revenue source, eliminating the U.S. corporate income tax, holding other countries' corporate tax rates fixed, engenders a rapid and sustained 23 to 37 percent higher capital stock... Higher capital per worker means higher labor productivity and, thus, higher real wages.
The impact is significant, both for worker compensation and overall economic output.
...real wages of unskilled workers wind up 12 percent higher and those of skilled workers 13 percent higher. ...on balance, output rises - by 8 percent in the short term, 10 percent in the intermediate term, and 8 percent in the long term... The economy's endogenous expansion expands existing tax bases, with the increased revenue making up for roughly one third the loss in revenue from the corporate income tax's elimination.
By the way, the authors bizarrely then write that "we find no Laffer Curve," but that's presumably because they make the common mistake of assuming the Laffer Curve only exists if a tax cut fully pays for itself.
But that's only true for the downward-sloping side of the Laffer Curve.
In other cases (such as found in this study), there is still substantial revenue feedback.
And I guess we shouldn't be surprised that full repeal of the corporate income tax doesn't raise revenue. The Tax Foundation, after all, estimates that the revenue-maximizing rate is about 14 percent.*
Now that I'm done nit-picking about the Laffer Curve, let's now look at one additional set of results from this new study.
...each generation, including those initially alive, benefits from the reform, with those born after 2000 experiencing an 8 to 9 percent increase in welfare.
I should point out, incidentally, that economists mean changes in living standards when they write about changes in "welfare." It's a way of measuring the "well being" of society, sort of like what the Founders meant when they wrote about "the general welfare" in the Constitution.
But, once again, I'm digressing.
Let's focus on the main lesson from the paper, which is that the corporate income tax imposes very high economic costs. Heck, even the Paris-based Organization for Economic Cooperation and Development (which is infamous for wanting higher tax burdens on companies) admitted that the levy undermines prosperity.
The study even finds that workers would be better off if the corporate income tax was replaced by higher wage taxes!
To learn more about the topic, here's a video I narrated many years ago about cutting the corporate income tax. There was less gray in my hair back then, but my analysis still holds today.
* For the umpteenth time, I want to emphasize that the goal should not be to maximize revenue for politicians. Instead, we should strive to be on the growth-maximizing point of the Laffer Curve.
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.
The Wall Street Journal obviously understands this and was simply trying to avoid wordiness, so this is a friendly amendment rather than a criticism.
Anyhow, back to the editorial. The WSJ notes that the lower corporate tax rate in the United Kingdom is expected to lose far less revenue than was predicted by static estimates.
The Treasury's answer in a report this week is that extra growth and changed business behavior will likely recoup 45%-60% of that revenue. The report says that even that amount is almost certainly understated, since Treasury didn't attempt to model the effects of the lower rate on increased foreign investment or other "spillover benefits."
And maybe this more sensible approach eventually will spread to the United States.
...the results are especially notable because the U.K. Treasury gnomes are typically as bound by static-revenue accounting as are the American tax scorers at Congress's Joint Tax Committee. While the British rate cut is sizable, the U.S. has even more room to climb down the Laffer Curve because the top corporate rate is 35%, plus what the states add—9.x% in benighted Illinois, for example. This means the revenue feedback effects from a rate cut would be even more substantial.
The WSJ says America's corporate tax rate should be lowered, and there's no question that should be a priority since the United States now has the least competitive corporate tax system in the developed world (and we rank a lowly 94 out of the world's top 100 nations).
But the logic of the Laffer Curve also explains why we should lower personal tax rates. But it's not just curmudgeonly libertarians who are making this argument.
Writing in London's City AM, Allister Heath points out that even John Maynard Keynes very clearly recognized a Laffer Curve constraint on excessive taxation.
Even Keynes himself accepted this. Like many other economists throughout the ages, he understood and agreed with the principles that underpinned what eventually came to be known as the Laffer curve: that above a certain rate, hiking taxes further can actually lead to a fall in income, and cutting tax rates can actually lead to increased revenues.Writing in 1933, Keynes said that under certain circumstances “taxation may be so high as to defeat its object… given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more—and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”
For what it's worth, Keynes also thought that it would be a mistake to let government get too large, having written that “25 percent [of GDP] as the maximum tolerable proportion of taxation.”
But let's stay on message and re-focus our attention on the Laffer Curve. Amazingly, it appears that even a few of our French friends are coming around on this issue.
Here are some portion of a report from the Paris-based Institute for Research in Economic and Fiscal Issues.
In an interview given to the newspaper Les Echos on November 18th, French Prime Minister Jean -Marc Ayrault finally understood that "the French tax system has become very complex, almost unreadable, and the French often do not understand its logic or are not convinced that what they are paying is fair and that this system is efficient." ...The Government was seriously disappointed when knowing that a shortfall of over 10 billion euros is expected in late 2013 according to calculations by the National Assembly. ...In fact, we have probably reached a threshold where taxation no longer brings in enough money to the Government because taxes weigh too much on production and growth.
This is a point that has also been acknowledged by France's state auditor. And even a member of the traditionally statist European Commission felt compelled to warn that French taxes had reached the point whether they “destroy growth and handicap the creation of jobs”
But don't hold your breath waiting for good reforms in France. I fear the current French government is too ideologically fixated on punishing the rich to make a shift toward more sensible tax policy.
P.S. The strongest single piece of evidence for the Laffer Curve is what happened to tax collections from the rich in the 1980s. The top tax rate dropped from 70 percent to 28 percent, leading many statists to complain that the wealthy wouldn't pay enough and that the government would be starved of revenue. To put it mildly, they were wildly wrong.
I cite that example, as well as other pieces of evidence, in this video.
P.P.S. And it you want to understand specifically why class-warfare tax policy is so likely to fail, this post explains why it's a fool's game to target upper-income taxpayers since they have considerable control over the timing, level, and composition of their income.
P.P.P.S. Above all else, never forget that the goal should be to maximize growth rather than revenues. That's because we want small government. But even for those that don't want small government, you don't want to be near the revenue-maximizing point of the Laffer Curve since that implies significant economic damage per every dollar collected.