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2016-04-12 05:05:07
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.