Lowtax Network

Back To Top

Your Lowtax Account

this debate is food for thought

Kitty Miv, Editor
11 July, 2016

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

In the olden days, taxes were used to raise money, initially to help governments wage wars, then later to fund public services. Taxes still help governments wage war and run public services of course, but they are now much more than mere revenue-raisers. They are an instrument of economic policy, and a symbol of the "social contract" between rulers and the ruled. Thus, governments cut taxes in an attempt to stimulate the economy, and raise them to cool overheating markets (it wasn't that long ago, in the pre-crisis age, that the IMF would routinely advise countries to raise taxes because their economies were growing too fast). That taxes are typically used also to promote income distribution makes tax policy a political issue.

Now taxes are so politicized, it's very hard to get rid of one – even when it could be argued that it serves little purpose. And South Korea's debate about corporate tax got me thinking about the role of corporate tax in particular.

To most people it would unthinkable for a government to abolish income tax on large corporations, as they often wield more clout and influence in the world (and have more money) than many small countries. However, some suggest that corporate taxes cause more problems than they solve.

Certainly, in absolute terms, corporate taxes raise a lot of money. However, relative to other taxes, their importance to the fisc is diminishing in many countries. This is partly because corporate tax rates have fallen worldwide over the last 10 to 15 years, and the financial crisis caused profits to fall. However, it is also because governments now lean more heavily on individuals and consumers for revenue, and companies are apt to avoid corporate taxation by various legal means.

Some economists and conservative economic commentators think that the United States for one should scrap its corporate tax. They believe that billions in offshore corporate earnings "locked out" of the US economy by existing corporate tax rules (which amounts to about USD2 trillion in total), would boost domestic investment, wealth, and incomes to the point that it would probably end up being a revenue-positive move for the Government. It would also eliminate the double taxation of company earnings – first at the corporate level and then in the hands of shareholders – and shift the US tax code's bias away from debt and in favor of equity. Another positive effect is that it would cut the incidence of tax planning and tax avoidance dramatically. Just think, there would be no more "ill-conceived" anti-inversion regulations laced with unintended consequences, and no more BEPS!

Of course, such ideas are highly controversial, and by no means mainstream. Why, goes the counter-argument, should large corporations go without paying tax when they are benefiting from the protections provided by the social contract in much the same way as individuals? And it seems inevitable that governments would seek to make up the lost corporate tax revenue elsewhere, probably from easy targets like salaried workers, and through a multitude of stealth taxes. Nevertheless, this debate is food for thought.

So, if governments aren't about to start repealing corporate taxes en masse, what is the appropriate level of corporate tax? How much tax, or what rate of tax, should a corporation pay in order to fulfill its side of the social contract? Naturally, it depends on what you believe, and on which side of the ideological divide you stand. Having noted this, it is undeniable that governments generally have recognized that high rates of corporate tax – over 30 percent is now considered "high" – are counter-productive, hence the recent downtrend in corporate tax rates. Governments in countries with high corporate taxes tend to aspire towards a rate in the mid-20s, and indeed the world average is now about 23 percent. Yet there is recognition that even though corporate tax is just one of many factors companies consider when weighing up one jurisdiction against another, corporate tax rates do have a powerful influence on these sorts of decisions. So you could argue the lower the better. Just look at how Ireland's 12.5 percent rate helped transform the country from European backwater to Celtic Tiger.

Ah, but what about the race to the bottom? If nations keep trying to outdo each other on corporate tax – the UK is now considering a 15 percent rate, for example – at some point corporate tax will surely cease to become a meaningful tax anyway? We're probably a long way from that happening, especially in an era of OECD/EU hostility to "harmful" tax regimes. But there is probably plenty of mileage in the corporate tax cut tank yet. America for one has a lot of catching up to do.

And now to the Brexit, or rather the lack of progress towards it. I can't think of a major economy in recent history that has experienced the sort of a power vacuum-inducing bout of political paralysis as is enveloping the UK right now. On the one hand, you've got a Government led by a Prime Minister who is probably chomping at the bit to claim his ministerial pension and take early retirement, and on the other a political opposition that is fragmented and appears to be falling apart. What's more, it's going to take up to two months for Conservative Party members to choose their next leader (and Prime Minister) from a field narrowed down to two candidates. Surely the process needs to be, and could be, done and dusted inside two days, given the exceptional circumstances at play. The words fiddling, Rome, and burning spring to mind.

Nevertheless, having chastised the UK yet again for the chaos it is visiting on taxpayers and investors across the EU, there are signs that some sort of plan might just be about to break out. I refer to UK Business Secretary Savid Javid's visit to India, where he is putting feelers out regarding a potential bilateral trade deal. Indeed, by the end of this year, Javid's air miles account is going to look pretty impressive, as he prepares to test the trade waters in China, Japan, South Korea, and the United States. This is all well and good, and worthy of an encomium this week, if only for the reason that the UK is being seen to be doing something about its future. Still, the bleak truth is that, as the EU and Canada prepare to seal what is being described as a highly ambitious trade deal, the UK is going to miss out on these sort of opportunities until the all-important trade agreement is sorted out – the one with the EU. And it is hardly starting from a position of strength.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums

South Korea trending

United Kingdom feelers

Canada ambitious

Kitty's Execrations

United States counter-intuitive


IFrame

Ciao

Kitty



About the Author


Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

 

 

« Go Back to Blogs

Blog Archive

Event Listings

Listings for the leading worldwide conferences and events in accounting, investment, banking and finance, transfer pricing, corporate taxation and more...
See Event Listings »