Mythbusters: “A competitive tax system is a better tax system”

April 18, 2013 // By: Stephen Reid

The myth

“Having a competitive tax system is a good thing for the UK. Trying to tax the wealthy and corporations just stifles economic performance and puts off investors.”

In the wild

“We are building the most competitive tax system in the world.”

– George OsborneMarch 2013

 

“Our objective for the UK tax system is both clear and ambitious: we want to establish the most competitive tax system in the G20.

– David GaukeSep 2012

“Every country sets its own tax rates, but I think in a world of global capital, in a world where we're competing with each other, in a world where we want to send a message that we want you to build businesses, grow businesses and invest, I think it's wrong to have completely uncompetitive top rates of tax.”

 – David CameronJune 2012

The reality

Tax ‘competition’ results in the upwards redistribution of wealth

 As tax rates on capital fall in response to competitive pressures, governments make up shortfalls by levying higher taxes on other, less wealthy sections of society. In the United States, for example, “all states have regressive tax systems that ask more from low- and middle-income families than from the wealthiest” due to fierce cross-state tax ‘competition’.

The figure below illustrates the shift away from corporation and excise taxes and towards employment taxes in the US. The trend is replicated globally.

Tax ‘competition’ gives big business an unfair, unproductive advantage

Countries attract tax-shy capital in four main ways:

Usually it’s only multinationals that can afford the expensive tax lawyers and accountants necessary to take advantage of these mechanisms. The result is that smaller, locally-based competitors are driven to the wall - on a factor that has nothing to do with genuine business productivity or true innovation.

Tax ‘competition’ results in a dangerous race-to-the-bottom

A January 2013 study found that the two U.S. States of Kansas and Missouri alone had spent at least $192 million in tax subsidies to poach jobs from one another, despite an “anti-poaching” agreement between the two. The net result appears to have been only a tiny net jobs migration of a few hundred jobs (in favour of Kansas) at very high cost to both.

The race for tax ‘competiveness’ is self-defeating: as one state (or country) takes a step, others respond, and soon everyone is back to square one – yet with a more regressive and complex tax system.

Taxes on the wealthy and on corporations don’t stifle economic performance

The figure below plots GDP growth against the tax take for prosperous democracies (of course, we know GDP is a flawed measure of progress). Dramatic differences in taxes as a share of the economy – from 29 percent in Japan to over 55 percent in Denmark – have no obvious impact on growth.  As the FT’s Martin Wolf concludes: “Such a spread seems to have no effect on economic performance”.

Other studies, focusing on measures other than economic growth, find stronger results. A report by Canada’s Center for Policy Alternatives states:

“High-tax countries have been more successful in achieving their social objectives than low-tax countries. They have done so with no economic penalty.”

Another study examining state-level taxes among individual U.S. States found:

“Residents of “high rate” income tax states are actually experiencing economic conditions at least as good, if not better, than those living in states lacking a personal income tax.”

Correlation is not causation, but the numbers certainly show that good economic performance can be compatible with high taxes on the wealthy and on corporations.

Genuine investors are not put off by taxes

Corporate interests and wealthy individuals routinely say ‘don’t tax us too much we’ll go off to Switzerland.’  All the evidence shows, however, that when their bluff is called, their threats are almost always empty. Warren Buffett explains this from the perspective of an individual investor:

“I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.”

Paul O’Neill, former head of the aluminium giant Alcoa and former U.S. Treasury Secretary under George W. Bush, adds:

“As a businessman I never made an investment decision based on the tax code... if you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements.”

Genuine investors want good infrastructure, a healthy and educated workforce, and the rule of law –all of which mean tax.

In summary

Tax “competition” represents a dangerous race-to-the-bottom. It results in the upwards redistribution of wealth and gives big business an unfair advantage over smaller, locally-based competitors. Taxing corporations and the wealthy doesn’t stifle economic performance, and genuine investors – who realise that tax is essential for decent infrastructure – are rarely put off. Whenever you hear a politician utter the words “competitive tax system”, point them in this direction.

Download the full Mythbuster article by Ellie Mae O'Hagan and Nicholas Shaxson (PDF)

Issues

Macroeconomics, Inequality

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