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International tax avoidance - Simple, independent and multinational; another

2016-04-12 05:05:07

rlp

Apr 6th 2016, 19:28 by Buttonwood

THE scandal over the leaked Panama papers may dominate the headlines for a few

days yet. It seems to reinforce the populist narrative that there is one law

for the global elite and another for the rest of us. There is little scope for

tax evasion for "wage slaves", who find that tax is deducted from their pay

before they get hold of it.

The issue may be another example of that common political problem; the

trilemma, under which three options are available, but only two at most can be

selected. In this case, it is a simple tax system; independent national tax

policies; and the existence of multinational companies and investors. Economies

agree that simple tax systems are the best; they do not distort behaviour. But

countries also like to set their own tax policies; hence some of the resentment

in Britain at EU rules that restrict the ability to change value added tax

rates. The existence of national tax policies also allows economies like

Ireland to offer themselves as an attractive place to do business; without such

tax competition, one suspects the global tax take would creep higher and

higher. But that freedom also means that multinational companies and investors

can arrange their affairs so as to minimise their tax charge. Governments react

to that possibility with a series of carrots and sticks; tax breaks to persuade

companies to stay and regulations designed to close loopholes that

multinationals try to exploit (as the latest spat over the Pfizer-Allergan deal

illustrates). This makes the tax system more complex.

So a world of simple taxes, and independent tax policies, would probably

undermine the tax base governments need to fund the welfare states that most

voters still favour, unless there were a way to eliminate multinationals and

capital flows. High tax rates did exist during the Bretton Woods era when

capital movements were restricted. When the system collapsed, governments had

no exchange rate pegs to defend and capital controls were dropped; tax rates

were lowered soon after but codes have become ever more complex. Simplifying

the tax code would need international harmonisation; something the OECD is

trying to address via its base erosion and profit shifting (BEPS) initiative.

But that's very tricky to do when national governments think they can steal a

march on their rivals by offering a sweetheart deal to the right multinational.

So a simpler code would require harmonised tax rates and rules across a wide

area, like the EU.

Although the EU hasn't managed a harmonised tax regime, it can hardly be

blamed; the US, in existence for nearly 250 years, hasn't managed it either.

Individual states still compete on income and sales taxes and on attracting

corporate headquarters (Delaware, for example). Voters seem to value this

freedom (Scotland is edging in this direction as part of devolution). But the

trilemma means they can't have that freedom and a simple tax system at the same

time.