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Almost every day there is a news story about a free trade agreement between
two countries or between groups of countries, or on really good days there is
news about the Doha Round. In just the last few days the countries mentioned
include Australia, Indonesia, India, Japan, Canada, Panama, South Korea, the
European Union, Taiwan and China; but no mention of Doha.
Needless to say, free trade is a Good Thing. It increases the prosperity of
the countries that engage in it, and the economic opportunities on offer to
the citizens of both parties. Since the Second World War we have witnessed an
unparallelled boom in world-wide trade in goods, which exploded by a factor
of 217 times between 1948 and 2005, due evidently in large part to the reduction
in tariff barriers brought about by the successive 'Rounds' of the GATT (General
Agreement on Trade and Tariffs) which became the World Trade Organization.
Since free trade is so beneficial, why isn't there more of it? Because of the
protectionism of producers, in six words, and to a much lesser extent because
governments are reluctant to give up tariff revenues. A producer of shoes in
Italy cannot be expected to welcome the tariff-free importation of finished
shoes from China, much as he may be happy to buy tariff-free leather from Brazil.
Also, in the modern world, various 'social' agendas have attached themselves
to free trade, particularly in the USA, slowing down the signing of free trade
agreements in the name of progress. This is mis-conceived: trade itself will
do the job of improving the lot of poor people in partner countries, without
any help from do-goodery. But try telling that to the delicate left-wing flowers
blooming in Washington or the proponents of 'fair' trade.
Lack of progress on the WTO's Doha Round is due more to recalcitrance on the
part of member countries than to political sloganeering, however. After the
comparatively easy low-hanging fruit of manufactured goods, the WTO is now trying
to get agreement on agricultural products, still the political third rail in
many countries, despite the ever-lower proportion of national output formed
by agriculture, and also on services, which formed a comparatively small part
of previous Rounds.
Unlike goods, the taxation of services is a significant factor for many countries.
Obviously they are 'invisible', non-tangible, so that there is no physical crossing
of borders which can be the point of taxation. Instead, countries mostly tax
cross-border services with the little devils called 'withholding taxes'. If
you, owner of a German construction company, buy in labour from Ireland, you
will have to withhold a certain percentage of the money you pay out. Withholding
taxes apply to a vast range of types of service, from intellectual property
royalties to bank interest. Global statistics on cross-border services are hard
to come by, but it is reasonable to suppose that in our increasingly post-industrial
society they match or exceed trade in goods.
One approach to controlling the taxation of cross-border services is through
Double Tax Treaties, which ensure at least that payment flows are taxed in only
one of the two partner countries. And withholding taxes in one country are also
often creditable against tax in the other country, in any event. One of the
more disgraceful and negative actions of the Obama administration has been to
limit the availability of tax credits to US firms as part of a generalized 'anti
tax haven' agenda, something that will be damaging to the US firms themselves,
to the interests of the USA as a whole, and to world trade.
So let's raise a cheer for the Doha Round, and hope that it is loud enough
to be heard in the Oval Office, No 10 Downing Street, Canberra, Brazilia, the
Kremlin and of course the Berlaymont. It will have to be mighty loud!
Penelope Wise
Penny Wise but not Pound Foolish! But remember: I am not offering investment advice. My comments are just for your general information; I do not recommend investments, and you should take professional advice before entering any investment contract.
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UK Chancellor George Osborne has unveiled plans for a new Office of Tax Simplification.
The UK tax code - a somewhat amorphous concept since what is included depends
on what you choose to call a tax - is said to be around 30,000 pages long. Again
that begs the question of what you call a page, what size type, how many lines
etc etc. Anyway, no-one questions that there is too much tax legislation, and
every annual Finance Act adds another thousand pages or so. Even tax practitioners,
who you would think might benefit from complex tax legislation, are complaining
that it has become impossible to answer straightforward questions from their
clients. And the Inland Revenue has taken to making up the rules as it goes
along, for instance on tax residence, probably thinking to itself that since
no-one knows what the law actually says any more, it may as well use whatever
interpretation suits its purposes, which, surprise, surprise, is usually to
extract more tax.
The UK is not alone in having an overgrown tax code. In the USA, no-one even
seems to know how long the Tax Code really is. It has capital letters because
unlike in the UK, there is something called the Tax Code, and you can even buy
a printed copy of it from the government for a mere thousand dollars. President
George W Bush said: "The tax code is a complicated mess. You realize, it's
a million pages long." Most estimates though are down in the tens of thousands
of pages. One of the problems in the United States is that Congress quite frequently
tacks tax legislation on to other bills, being very often the only way of getting
it through. Then of course there is State-level tax legislation as well.
For there to be any chance of simplifying and shortening the tax code in an
advanced country like the US, the UK, France or Germany, you would first of
all have to understand why tax legislation grows like Topsy, and the answer,
inconveniently, lies in the word 'Democracy', ably assisted by public choice
theory. Getting and keeping political power nowadays means taking the part of
the innumerable groups, factions and interests that make up your constituency,
whether that be a small patch of countryside (for a local councillor) or a whole
nation (for the leader of a national political party). And the first thing that
any group wants from its politicians is to pay less tax, whether the group is
the motoring public, cyclists, commuters, train motormen (sorry, motorpersons),
car manufacturers, gas station operators or bus companies.
And in that microcosm of just one part of human life (getting to work) you
can immediately see the problem: these seven constituencies have conflicting
interests from a fiscal perspective. Some people belong to more than one of
those groups, as well. It's impossible to optimize a tax system to please everyone
all the time; the best you can do is to please some of the people some of the
time. But that doesn't stop politicians from trying. In the USA, where the system
is best developed (and the tax code is longest) the game is famously played
with 'pork', or 'earmarks', the little add-ons to a bill in progress that secure
the votes of enough legislators to get the bill through. Then it has to go to
the other House, and perhaps back again, each time gaining more weight. Certainly
you could never have a saying in the USA that 'a rolling bill gathers no pork'.
What is to be done, then? Abolish democracy? As Winston Churchill said: 'Democracy
is a very bad system. But all the others are worse.' No, we can't do that. So
what we do is to invent new quangos called The Office of Tax Simplification
or similar. Both Bush presidents did it; so did Bill Clinton. The only reason
that President Obama hasn't done it yet is that he has been too busy making
the Tax Code longer. Just give him time.
Reducing the number of countries would work, in terms of reducing the total
amount of tax legislation, and possibly the total number of tax lawyers. The
Romans proved that; but empire-building has become unfashionable lately. In
fact it's going in the opposite direction: in the UK, regions like Scotland,
Wales and Northern Ireland are all becoming more rather than less independent,
and along with that independence goes tax-raising and spending power, with,
yes, you guessed it, brand new regional tax codes.
Flat taxes work, too, and are even efficient at optimizing tax-gathering; but
they are a non-starter in advanced democracies. The new, Eastern European members
of the European Union got away with introducing them ten years ago because clever
Harvard-trained economists slipped them through before domestic politicians
had cottoned on to the usefulness of a bulky tax code. They are learning quickly,
now, and one by one the countries with flat taxes are undermining or abandoning
them.
So there it is: fat tax codes go along with fat people as shining achievements
of our civilization. You'll just have to learn to love them.
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