Thanks to tax competition and beginning with the cuts under Reagan and Thatcher, global tax rates have declined over the last several decades. In order to remain economically competitive, politicians have had to refrain from the excessive fleecing of taxpayers and businesses – or at least settled for confiscating less wealth than they otherwise would. But when faced with the likely flight of capital and labor in the face of bad tax policy, politicians would do almost anything not to have to make the obvious choice of adopting pro-growth policies, including rigging international rules to prevent the easy migration of capital and taxpayers or the ability of other nations to adopt more attractive rates.
In other words, politicians constantly scheme and seek ways to relieve the pressures of tax competition in order to allow rates to be raised back to prior heights.
The latest such effort is – once again – being driven by the bureaucrats at the OECD. CF&P President Andrew Quinlan writes in an op-ed published by Forbes today:
Bureaucrats at the Paris-based Organization for Economic Cooperation and Development (OECD) recently conjured a problem to justify a new assault on tax competition. In a recent report titled, “Addressing Base Erosion and Profit Shifting,” the OECD called for a drastic rethinking of international tax norms premised on the idea that governments are no longer seizing from multinational corporation enough money in taxes, the costs of which are inevitably passed on to workers, shareholders and consumers.
…The report on base erosion and profit shifting, or BEPS, complains about “double non-taxation” that occurs when companies take advantage of differences in national tax policies by moving assets to jurisdictions with lower tax rates and less burdensome regulations. Taken at face value the complaint makes little sense, as the report itself acknowledges that revenues from corporate taxes have increased as a share of GDP over the last half-century, from 2.2% in 1965 to 3.8% in 2007…
In the context of the OECD’s long documented antagonism toward tax competition – the organization began its anti-tax competition project in 1998 with a paper on “Harmful Tax Competition” that threw taxpayers under the bus to benefit tax collectors – the purpose behind the BEPS report begins to become clear. It reaffirms the claim that tax competition is harmful by noting that having “no or low effective tax rates” is one of the four key factors to identify a so-called “harmful regime,” while also lamenting that “governments are often under pressure to offer a competitive tax environment.” And though the report does not offer any specific solutions, there are some big hints.
For instance, the OECD notes that business activity could be “identified through elements such as sales, workforce, payroll, and fixed assets,” suggesting that the follow-up recommendations expected in six months will include global formula apportionment.
Formula apportionment would allow tax bureaucrats to concoct a 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 or France. Arbitrary apportionment erodes incentives for investment in jurisdictions with better tax policy, undermining tax competition and thereby leading to an increase in global tax burdens.
If the OECD – which receives a generous subsidy courtesy of US taxpayers – is allowed to succeed in its long war against tax competition, we can expect a global trend toward higher taxes and even bigger government at a time when.
