Monday, May 26, 2008

Tax competition: TJN in FT Economists' forum

The Tax Justice Network has long argued in favour of international co-operation on tax and regulation. It is necessary in order to restrict the ability of some to free-ride on the services provided by others, and to prevent the race-to-the-bottom dynamics that have helped discredit markets, trade and financial liberalisation in the eyes of many millions of people.
On several occasions we have praised Martin Wolf, the Financial Times' chief economics commentator, for his clarity and ability to explain complex matters simply. His latest article, "Preserving the open economy at times of stress" examines globalisation and the recent comments of former U.S. Treasury Secretary Larry Summers, whom we wrote about very recently and who argued in favour of more progressive taxation, and breathing new life into international co-operation on tax and regulation.

Martin Wolf appears unconvinced so far on the need for strong international co-operation on tax (though he favours it on regulation,) but adds that "what is desperately needed is an honest debate about these issues."

Wolf also presides over the FT's Economists' Forum, where the world's distinguished economists, and occasional guest contributors, are invited to comment on world affairs. TJN's John Christensen, in the spirit of this debate, has just been published in this forum. We hope the FT does not mind that we reproduce our own words here in full:

John Christensen, Tax Justice Network (guest contributor): I welcome Martin Wolf’s timely article about globalisation “Preserving the open economy at times of stress” It is mostly up to his usual standards of clarity and wisdom. There is one section, however, where more clarity would be welcomed.

He says taxes will have to be raised, and points out that the freer movement of capital (or labour) makes it harder to tax and regulate those able to move. Yet his response to Larry Summers’ recent proposal for greater international co-operation is only luke warm. He favours greater international agreement on regulation in some areas, notably finance, but thinks the case for tax co-operation is weaker. If Sweden’s taxes can be 56 per cent of GDP, he says, it is not tax competition that keeps the US at just 34 per cent. “The mobility of capital and people is an excuse, not a justification, for low US tax levels.

This is not quite, but looks like, a rejection of international co-operation on tax. We would welcome more clarity on this. Does he oppose it?

Second, he seems to make an analytical distinction between tax and regulation, but there is no solid dividing line. One area is in the transparency of international taxation. With some flawed exceptions, nations generally cannot “see” the income their residents earn in other countries, and consequently cannot tax it. Tax authorities cannot easily “see” whether multinational companies are mispricing internal transfers or carrying out fake transactions to evade tax. Developing nations are especially vulnerable here. Many hundreds of billions of dollars are involved annually; several strategies are needed to improve transparency; each requires international co-operation on what is both a tax matter and a regulatory one. We believe Martin Wolf would favour a strong push for transparency for international taxation: we would welcome more clarity from him on this.

Third, he recognises that taxes will have to be raised, but then seems to argue that because Sweden can have relatively high taxes (and relatively little inequality) in spite of globalisation and tax competition, this means that tax competition is not the problem to attend to. If this is his argument, he is wrong.

Other countries have not gone Sweden’s way, and they cannot and will not in current circumstances. Aside from the fact that tax competition seriously restricts nation states’ sovereignty and means governments cannot get the tax systems their voters want, tax competition also powerfully shapes and distorts the national debates themselves. Witness the pressure that business lobbyists are currently putting on the UK’s Chancellor, Alistair Darling, using threats by some companies to relocate elsewhere as sticks to beat him with. Witness the debate over “non-domiciled” residents, and what Mr. Wolf’s excellent recent article on that debate described as “special interest ‘the sky is falling‘ pleading.” The domicile rules emerged for historical reasons, but have endured for so long precisely because of tax competition. “Don’t tax us too heavily,” the non-doms threaten, “or we’ll run away to Switzerland.”

Ferocious tax competition is stopping Britons from getting a more progressive tax system, even if they don’t want to go as far as Sweden. Most pernicious is competition from tax havens like Switzerland or Liechtenstein. Their aggressive appropriation of other nations’ taxable incomes – not to mention their conducive climate for organised crime and international corruption – punches special-interest loopholes in reputable nation states’ tax systems. Once again, developing nations are the most vulnerable. They are often in no position to resist the demands from multinational companies to grant them tax concessions and other subsidies which allow them to free-ride on services provided by others. All this distorts markets, tending to shift investment away from where it is most productive towards where it is able to secure the biggest fiscal subsidy.

A race to the bottom on secrecy and regulation is real. The race to the bottom on tax is different: people and many resources are not as mobile as capital, so states can still extract high taxes. Yet that does not mean that tax competition is not a problem. As a result of tax competition, states are under great pressure to replace the taxes lost because of their difficulties in taxing flighty capital, by introducing regressive taxes like VAT and by taxing lower-paid labour more heavily. Taxing capital better must be an essential part of dealing with the challenge of inequality, and only international co-operation on tax will do it.

It is time to recognise that tax competition is harmful, and that that if we want (as I do) to rebuild and preserve a good reputation for globalisation, then real progress is simply not possible without strong international co-operation on both tax and regulation.

Read more here.

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