Monday, March 26, 2007

The Economist - selective with the facts

The Economist seeks to dismiss TJN's concern about tax havens and tax competition by asserting: "This competition does not seem to have started a downward race." It then presents a striking graph, showing that despite falling corporation tax rates over the past 30 years, corporate tax yields as a share of GDP have risen sharply. So the 'race to the bottom' is an illusion. QED, no?

Wrong. First, according to a study for the Alliance for Competitive Taxation - -no friend of TJN's - - a possible reason for this finding is "an increase in profit-shifting. This could be from high-rate countries to low-rate countries, reducing tax revenues in the former, but increasing it in the latter. Given that larger countries tend to have higher rates, then this could explain an increase in the unweighted average of the ration of corporation tax revenue to GDP across countries."

What The Economist has done, misleadingly, is to use an unweighted average of countries. Using a weighted average, which is the more appropriate measure, and a longer time frame (1965-2004, also based on OECD data), the data shows exactly the opposite trend.

But that is by no means the end of the story. Crucially, corporate profits have risen very sharply indeed over time as a share of GDP. According to the ACT study mentioned above: "the average ratio of taxable profit to GDP nearly doubled from 7.7% in 1988 to 14.5% in 2000, before falling back slightly." If corporate profits have been rising so fast as a share of GDP, then corporation taxation as a share of profits has fallen dramatically.

Yet there is an even bigger problem with The Economist's analysis. The large OECD economies are best able to resist the pressures of tax competition. Poor countries, such as those in Africa, are especially badly affected. Take Zambia as an example. Between 1992 and 2004, the copper industry's total contribution to the Zambian treasury fell from over $200 million to just $8 million - even though copper prices had climbed by more than 25% and copper production remained relatively stable.

There is clearly a race to the bottom. It is an unseemly scramble, which hurts everybody. And it hurts the poorest countries most.

Jeffrey Owens, Jeffrey Owens, head of the Centre for Tax Policy and Administration at the OECD, had this to say about the Economist Survey:

The Economist article fails to distinguish between the advantages offered by low-tax jurisdictions as places that a multinational enterprise can legitimately use to lower its global effective tax rates and the tax havens that are also used to lower tax rates but which do so by breaking the law. It is like saying if one shopkeeper in a neighborhood evades taxes, this gives him a competitive edge, enabling him to re-invest his tax-evaded capital to expand his business. Few politicians are going to stand up and support this approach. The analysis also ignored the additional compliance cost that counteracting havens imposes on all taxpayers; and let’s not forget that much of the profits from going offshore go to the intermediaries that set up the arrangements. Finally, if U.S. multinational enterprises fail to pay their fair share of the tax bill, then other taxes will have to be increased, a view confirmed by Secretary Paulson in his recent testimony to the Senate Finance Committee on the tax gap: ‘‘Where people fail to pay their taxes, it serves as a de facto tax increase on everyone else.’’

(See the blog entry below this for a more detailed look at the Economist's survey, and see this section on TJN's web site for more on tax competition.)

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