Martin Wolf on Tax Competition - again

We recently noted the long comment by the Tax Justice Network's John Christensen in the prestigious Financial Times Economists' Forum. We made several points, but we thought Wolf had been ambiguous about whether or not he favoured co-operation on tax. He had argued that "If Sweden’s taxes can be 56 per cent of GDP, it is not tax competition that keeps the US at just 34 per cent." So John asked a question: can he state clearly whether he favours international co-operation on tax?

Martin Wolf has now replied:

I also appreciate the intervention of John Christensen. My main point was quite a simple one: there is not that much compelling evidence that globalisation, as currently practiced, is eroding nations’ ability to tax. This is not an argument against fiscal co-operation, far from it. But it is an argument against those who argue that, failing such co-operation, there is limited possibility of raising taxes even in a country like the US.

I agree with Mr Christensen that the present ability of corporations to shift income into tax havens is intolerable.

This is right, of course, as far as it goes, though TJN's point is that while nation states can still protect their tax bases, by taxing factors that cannot relocate offshore, tax competition increasingly forces them to use regressive taxation such as VAT, which hit the poorest hardest. Larry Summers also weighed in on this thread, making some vitally important points, such as this one, referring to a point made by the economist Kevin O'Rourke:

Demonstrations of the kind suggested by Kevin O’Rourke and others of circumstances where increased globalization and increased social protection went together prove nothing . . . over time there has been a general trend downwards in the ratio of corporate taxes to corporate profits in the US, and I suspect an even larger downwards trend in their ratio to the market value of us corporations. Moreover he would note a shift from personal income taxation towards more regressive payroll taxation and major declines in top rates of tax . . . Does anyone really believe that the steady march downwards in corporate tax rates globally has nothing to do with issues of tax competition and is just a coincidence?

And he is right too. In other words, the fact that countries like Sweden can have high taxes and equal societies does not mean that tax competition is not a real, and major, threat. Just as important, however, is the fact that Summers knows this, because he has been right at the sharp end: he was U.S. Treasury Secretary in the Clinton administration. And he adds:

I can assert based on proximate involvement that concerns about competitiveness have inhibited efforts to increase tax progressivity, including very recently in discussions of the taxation of carried interest. Questions of competitiveness have been central with respect to proposals to reform international tax collection so as to raise more revenues. Some experts believe that the United States loses tens of billions of dollars year due to various kinds of international tax shelters.

And, as Martin Wolf wisely observes:

Larry Summers . . . argues that it is impossible for politicians to ignore the arguments about tax competition. I bow to his experience on this.

Wolf, interestingly, goes on to point out what he sees as the "huge and obvious" downside to engagement on tax co-operation:

"What if these efforts fail, as is all too likely, given the number of countries and divergent interests involved? Then the opponents of liberal trade will be able to say: “look, globalization is unfair, by your own admission. You have failed to halt the race to the bottom. So we are justified in being protectionists.”

Perhaps he has a point. But what do you want us, or anyone else, to do about this? Brush it under the carpet? The cat is wholly out of the bag on this: it must now be addressed. (Larry Summers answers Wolf's argument here.)

This is a fascinating and profoundly important debate that is emerging - take a look, for there is plenty more back-and-forth on this from some of the world's top economists. This, for example, from Martin Wolf:

"I would focus on two objectives. Full information sharing across the globe; and development of a common base for corporation tax that prevents companies shifting income into offshore tax havens. Both seem to me legitimate efforts."

This is likely to be the most important and influential debate of its kind in the world at the moment. And is highly welcome. As the economist Adrian Wood, who seems sympathetic to TJN's positions, said:

Martin is absolutely right to say that there should be an honest debate about these issues. Maybe I (and Larry Summers) are wrong about this. But maybe not. So yes, let’s proceed with the debate for which Martin calls.