Friday, July 10, 2015

Can Countries Tax Businesses?

Greece proposes to raise the Corporation Tax rates from the current 26% to 28% (and possibly to 29%, if needed) in the plans submitted to its various creditors, alongside other measures such as tax rises and pension savings. This immediately draws the usual complaints - that businesses would have less money to invest and create jobs - and makes an interesting contrast with the UK, where the Chancellor has proposed a reduction of Corporate Tax rates, all the way down to 18% by 2019. The rationale presented is simple - that this would attract businesses and create jobs. Both countries are technically in austerity, though in completely different economic positions. Though the welfare cuts in UK were no less severe than those proposed by the Greeks, the two countries are taking two different lines as far as businesses are concerned. Greeks are proposing to raise corporation tax - something that is completely out of fashion at this day and age - while UK is trying to become, almost, a tax haven.

So, can countries tax businesses?

The two sides of the argument are pretty clear. On one hand, it is a question of fairness. Businesses must bear their fair share of the public expenses. They indeed benefit as much from all the infrastructure, schools, health services, public pensions, security that the State has to provide for. Besides, it makes little sense to let them go free when everyone else is paying taxes. On the other, one may argue that this means they do not invest in the jurisdiction at all, do not create local jobs. This is indeed the fashionable view, one taken by George Osborn, but media loves this as do the companies. The development through investment from abroad, where the question of tax attractiveness really comes in, has become the reigning orthodoxy of policy making in developing country, and in India, a new government has just won an election on the basis of this promise. 

Reading through these arguments, one knows that the fairness argument is a moral one, appealing but less persuasive than the practical logic of the country attractiveness. Creating jobs is essential in a modern economy, which is constructed around consumption and exchange, rather than Walden-style restraint and self-reliance. Framed in these terms, the case for making countries attractive to companies is a no-brainer.

But there is more to this debate which we usually overlook, perhaps intentionally. Being a tax haven does not necessarily create local jobs, though certain professional trades - accountants and lawyers - may somewhat benefit. Companies invest in countries, particularly larger ones, not because they are tax havens, but because they have one of the two things - plentiful human or natural resources, or a large consumer base. Both of these are pretty geographical, perfectly in control of national governments. It is not just fair, but also practical, to tax companies which want access to these - local resources or local demands - and allow the proceeds to go to further development of skilled and healthy workforce, for productive capacity, and physical and institutional infrastructure, for consumer demand. 

Now, in all fairness, it may be different in George Osborn's case as he may be thinking more about investment banks, which are vastly more mobile than the other businesses which need to produce something. But, the usual jobs argument usually do not apply to investment banks, because, at the very least, they employ people who would anyway find employment (the impact on the wider economy is much larger, per dollar of revenue, of any other enterprise compared to an investment bank). 

One may make taxing businesses sound like the North Korea option (or the Greek option, soon perhaps). But, in all proven cases of development, tariff barriers and business taxes played a role. Taxing businesses who wants access to local markets or resources create a space for local businesses to grow, which is really the experience one should take from the developing countries like China and India. Some may have used the tax money well whereas others may not have (and one could indeed argue that there are more of the former kind), but the existence of at least one - my favourite example is Botswana - may prove that the model is workable. 

In conclusion, being well-informed today is defined by the ability to understand what the media does not say and why. Business taxes are one clear example, where policy-making reflects power balances, rather than common sense. And, therefore, the arguments in favour of it, repeated so many times in the media, reflect merely the need for justifying it over and over again [If this worked, one would make an open-and-shut case - this happened in Country X and we know this works - rather than talking always in future tense, as they do, that jobs will happen!]. Countries can tax companies, they do, and should continue to do so - and it is indeed a fair and sensible policy.


 






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