This article appeared in Forbes on March 8, 2013.
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 corporations enough money in taxes, the costs of which are inevitably passed on to workers, shareholders and consumers.
The OECD’s new effort is designed specifically to increase taxes so that politicians in member states can continue growing their respective governments.
In other words, the OECD wants to undo taxpayer gains made in recent decades thanks to tax competition. Since the 1980′s, average global income taxes on both individuals and corporations have dropped significantly, improving incentives in the productive sector of the economy to generate economic growth.
These pro-growth reforms are the result of tax competition, or the pressure to adopt competitive economic policies that is put on governments by an increasingly globalized society where both labor and capital are mobile. Tax competition is the only force working on the side of taxpayers, which explains the organized campaign by global elite to defeat it.
Without globalization and the tax competition it enables, income taxes would be far higher today. Politicians would subsequently have yet more of other people’s money to spend and expand the burden of government. That is why the OECD, whose membership consists largely of European welfare states, is once again attacking tax competition.
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. While revenues subsequently and understandably decreased during the recent recession, they are again trending up. Moreover, even OECD economists – typically more sensible than the tax collectors who make-up the Committee on Fiscal Affairs – acknowledge that corporate taxes are the most destructive per dollar raised. So why all the fuss?
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.
Formula apportionment appeals to governments with high corporate tax rates because it would increase their revenues, while jurisdictions with pro-growth policies would lose out. This creates a perverse incentive for governments to adopt uncompetitive tax rates that would be bad for everyone but tax collectors.
Eternal vigilance is said to be the price of freedom. If taxpayers want to preserve gains made thanks to tax competition, they must be weary of the threat posed by global tax cartels though organizations such as the OECD.
