Taxes are one of the hottest topics in politics today. But where is the debate today, and is it in the right place? To those on the right, inefficiencies are costing us money, and we should adopt a more regressive system of taxes i.e. flat rates. To those on the left, states seem to be in a ‘race to the bottom’ in lowering their Corporate Income Tax rates as a means to attract investment, while at the same time benefits to the poor are being slashed; in other words the rich are getting richer while the poor are getting poorer. Indeed, if you google the phrase ‘tax debate’ you will find:
- A debate in the US over whether they should lower their official Corporate Tax Income rate of just under 40%
- A debate in the UK about whether it is fair to increase taxes based on the number of bedrooms in your house
- A debate in France about the effectiveness/efficiency of the 75% upper limit of tax on income over EUR 1m, combined with govt spending of 56% of GDP
Each of these debates is a pretty traditional debate, based on the values laden division between right and left, and what they teach you in a university about tax policy making. For instance in the UK the left say that the ‘bedroom tax’ is unfair because it targets the poor, and of the 660,000 people affected only a minority are able to move to smaller accomodation. Whereas the right say that this is efficient, because in de facto terms this removes a ‘spare room subsidy’, which ultimately saves the tax payer around GBP 500m.
But to what extent are these debates really in touch with public concerns? They attract interest of course. Yet to the vast majority of people reading newspapers, it is neither fair, nor efficient that firms with greater market power have a lot more room for manouver in negotiating their rates. To think that one of the largest, most widespread protests in human history was the international Occupy Movement, and that this movement is still going on today, it seems odd that the debates today are national. Indeed where the debates are international it is simply in comparitive terms. Right wing tax reformers in the US for instance, like to highlight the fact that the average Corporate Tax Income Rate in the OECD is only 25%, compared to their 40%. But is this the debate that moves public interest? In practice, the 40% rarely applies. And it is not just in tax journals and legal documents that this is realised. The public is well aware.
Dan Lynch et al (Product Market Power and Tax Avoidance: Market Leaders, Mimicking Strategies, and Stock Returns, 2013) found that between 1993 and 2010 there was a positive correlation between product market power and tax avoidance. Furthermore, they found that the effects trickle down to smaller companies, and even to the individual shareholder. Less influential companies seek to emulate the practices of the market leaders. And investors gain a greater return from firms that engage in more aggressive cash tax avoidance. The entire system seems set up to encourage more than discourage, tax avoidance. In fact I spoke with an investment adviser earlier this year. He said to me “some people only want ethical investments in their portfolio, and that’s ok; but it really does hold us back”. He was encouraging us to give him complete autonomy over our investment decisions, and quite explicitly admitting that if we did so then he would have been investing in areas that might be deemed less than ethical…
It seems odd therefore, that in the media and in political literature the stress is on the average rates applied at the national level, together with the right-left debate over efficiency versus fairness; whereas in business, law, and popular culture, the stress is instead on the exceptions, and the application of law. Why for instance, don’t we hear more about the fact that OECD recently released a progress report on tax transparency? In this report, not only countries such as Luxembourg, the Seychelles and the British Virgin Islands, but also countries such as the UK and US were found not to be fully compliant with the OECD’s tax transparency rules. Why don’t we hear more about the US Foreign Account Tax Compliance Act (FATCA) or the OECD’s Base Erosion and Profit Shifting (BEPS) initiative? Why don’t we hear more about the growing popularity of the Financial Transaction Taxes? And what about the Double Tax Conventions? Or the conflicts between different tax laws e.g. EU law on the one hand, and Double Tax Conventions on the other? There really are so many issues that are current, and huge in significance. And yet the major political debates still rage over the classical right-left dispute.
What do you think today’s major tax debate(s) should be? And why?