The bureaucrats at the Organization for Economic Cooperation and Development (OECD) recently conjured a new problem to justify yet another assault on tax competition. Beholden to the interests of high-tax European welfare nations, the OECD has repeatedly sought, beginning with its “Harmful Tax Competition” project in 1998, to undermine good tax policy around the globe in a misguided effort to shield member nations from the consequences of their own bad domestic tax policies.
The latest attempt at ending tax competition was kicked off with an OECD report called “Addressing Base Erosion and Profit Shifting.” The paper is deeply troubling for advocates of tax competition and pro-growth policies.
The Big Government Solution to a Nonexistent Problem
The OECD uses anecdotes and class-warfare based rhetoric to assert in the paper that there is a serious problem created by multinational corporations not paying taxes, despite also acknowledging that corporate tax revenues are trending up as a share of economic output. OECD economists, in contrast to the authors of the study, also acknowledge that corporate taxes are the most economically destructive form of taxation per dollar collected.
As an opening salvo that will be followed up by specific solutions in about 6 months, the report’s authors were careful to hide their intentions, relying on buzzwords like talk of developing a “comprehensive action plan” based on “collaboration and coordination” to “provide countries with tools, domestic and international.” However, the report does leave some big hints about the intended outcome and future direction of the project, noting that the effort “will require some ‘out of the box’ thinking…to overcome…the existence of current tax treaties.” In other words, current international tax norms, as bad as they are, must be overcome and made even more onerous to satisfy global tax collectors.
The Problem of Formula Apportionment
The OECD also notes in the report that business activity could be “identified through elements such as sales, workforce, payroll, and fixed assets.” This almost certainly suggests that the OECD intends to push global formula apportionment, which would mean a set of mandatory rules that would severely undermine tax competition and lead to a more onerous tax environment for the business community – and thus lower wages and fewer jobs for workers.
Formula apportionment would allow tax bureaucrats to concoct some sort of system for arbitrarily changing the existing distribution of business income, with a clear goal of forcing companies to over-state their taxable income in high-tax nations. For example, apportionment would allow governments to say that a company’s earnings in a low-tax jurisdiction are actually taxable income for high-tax nations like Germany, France or the United States. This would erode incentives for investment in jurisdictions with better tax policy, undermining tax competition and thus leading to an increase in the corporate tax burden.
Tax Competition Needs Defending
Over the last several decades, tax competition has resulted in global reductions in both corporate and personal income tax rates. Politicians have not done this because they understand it to be good policy, but rather because the mobility of capital and labor compels them to maintain reasonably attractive tax environments. Undermining tax competition would reverse the current trend, and lead to higher tax rates across the globe. CF&P cannot – and will not – stand by to let that happen.
We’ve led the fight against the OECD before during their “Harmful Tax Competition” project and will do so again now. On our side is the fact that the BEPS project is just getting started. We have a unique opportunity to nip it in the bud, and that’s what we intend to do.