Thursday, July 07, 2011

Tax Havens: Adam Smith would be spinning in his grave

Professor Ed Kleinbard of the University of Southern California, a leading US tax professor, has an interesting presentation looking at the concept of 'stateless income' - that is, income that multinationals stash overseas, typically in tax havens. There's currently a huge, turbulent debate going on in the U.S. about this - a bunch of heavily resourced lobbyists led by Apple want the Obama administration to let them whoosh a trillion dollars or so of this back home, and the forces of justice, reason and honesty are trying hard to stop them.

Anway, Kleinbard makes a point that I and my colleagues at the Tax Justice Network have made many times:

"Stateless income privileges multinational firms over domestic ones by offering the former the prospect of capturing “tax rents” – low-risk inframarginal returns derived by moving income from high-tax foreign countries to low-tax ones."

Indeed. It is incontrovertible what he says - this is a vast, harmful distortion at the heart of global capitalism.

Focus here on the word 'rents,' which is a particular term used by economists to denote unearned income, windfall income, 'the income of the man who loves to reap where he did not sow' for instance. Income from rising land values is a case in point: it's nothing to do with the hard work of the rentier, and everything to do with a free lunch.

Now let's turn to what Adam Smith had to say about taxing rents. He called them

"the species of revenue which can best bear to have a peculiar tax imposed upon them."

In other words tax rents - and at high rates.

He was talking about land, which was the primary source of rent in his day, but the principle can be extrapolated to all forms of rentier income. Today, economists of all stripes accept that it is efficient and just to tax rents at very high rates. This can be done without causing any market distortions.

If you're getting a free lunch from doing something, taxes aren't going to stop you doing it - you'll still have your free lunch, even if you have to cancel the order for the 1969 Dom Pérignon.

Back to Kleinbard. Tax havens are providing multinationals with this particular form of rent, which he calls tax rents. They make bigger profits - not by producing better or cheaper goods or services - but by shuffling around bits of paper. A free lunch.

And here's the real rub - these tax rents are accumulating offshore and cannot be taxed! The tax havens are creating these rents - then actively stopping anyone from taxing them. That's the whole point.

We have always argued that tax havens, or secrecy jurisdictions, foster distortion after distortion. The more you look at it, the more obvious it becomes. They wreck competitive markets.

Adam Smith and legions of economists in his wake would be, at least for the defunct ones, spinning in their graves.

For more on rentiers - and how important they are - see Paul Krugman's recent piece on the subject.

"everything we’re seeing makes sense if you think of the right as representing the interests of rentiers."


Blogger Demetrius said...

Is "rent" a too polite word? I prefer "extraction".

9:14 am  
Blogger Physiocrat said...

If you look carefully and trace them upstream, you will find that most of these revenues are common or garden land or resource rents and arise at particular and identifiable places. They are Ricardian economic rent of land. Most of the rest is other monopoly rights, usually related to patents. All of these monopolies are granted by governments. If the governments were honest, they would charge those who enjoyed these rights to the full extent of their value.

If the revenue were collected at source there would be nothing left to remit to a tax haven.

12:36 pm  

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