Rebellion, Rascals, and Revenue by Michael Keen;Joel Slemrod;

Author:Michael Keen;Joel Slemrod;
Language: eng
Format: epub
Publisher: Princeton University Press
Published: 2021-01-09T00:00:00+00:00

Tumbling Taxes

The governments of countries that are not tax sanctuaries have, to a large degree, brought their problems on themselves—or are at least deeply complicit. Outrage at the little tax paid by some multinationals has been directed mainly at the companies themselves, but they may reasonably believe they are doing no more than their duty in enriching their shareholders to the maximum legal extent, just as Lord Clyde encouraged them to do. It is, after all, governments that set the tax rules, and they have long competed with each other—with the encouragement, of course, of those who will benefit—to make their jurisdiction more attractive in tax terms than others. Such “tax competition” not only leads to generally low tax rates on things that can move across borders; it has created many of the opportunities for profit shifting just discussed.

Tax sanctuaries are just the extreme example. This game has been going on for centuries. Catherine the Great, anxious to build up Russian industry, in 1763 offered to “foreigners that have settled themselves in Russia [to] erect Fabricks or Works, and manufacture there such Merchandizes as have not been made yet in Russia” the right to “sell and export the said Merchandizes out of our Empire for ten Years, without paying any inland Tolls, Port duties or Customs on the Borders.”76 James Watt, of steam engine fame, is reported to have been seriously tempted.77 Alexander Hamilton, seeking to establish his Society for Establishing Useful Manufactures in 1791, intended to impose a 10-year tax exemption in the belief that manufacturers, to escape “the burthens and restraints, which they endure in the old world … would probably flock from Europe to the United States.”78 And many governments since have done much the same. Some go beyond tax breaks to offering outright subsidies: Free looms were provided for immigrants into the Silesian linen industry in Prussia during the 1750s.79 And there are plenty of even earlier precedents. In medieval Venice, foreign craftsmen, glass and lace-makers, and the like, were given a 2-year tax exemption.80

The game continues. It is most obvious in the massive reduction in headline rates of corporation tax around the world since the mid-1980s. The median rate in the advanced economies has fallen from about 38 percent in 1990 to less than 20 percent. Already seeing the problem, in 1992, a report for the European Commission recommended a minimum rate in the European Union of 30 percent81—which now looks laughably anachronistic. The dramatic reduction in the U.S. federal corporate tax rate as a centerpiece of the 2017 tax reform was an arguably belated recognition of the reality of competing tax rate cuts. Tax competition is not, however, simply a matter of headline tax rates. All kinds of special attractions can be offered. Tellingly, the LuxLeaks revelation was not about low headline rates of tax, but of generous tax rulings being provided by Belgium, Luxembourg, and the Netherlands, on such matters as transfer pricing arrangements.

These downward pressures on corporate taxation are a real issue.

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