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Governments often make out that raising taxes on big business would be a terrible mistake. International corporations would take their investments elsewhere ± to countries with a so-called µcompetitive¶ tax systems ± and our position in the global market would crumble.

This Mythbuster reveals just how unhealthy this emphasis on tax competition between countries is. It shows individual countries need not participate in what is essentially a global race to the bottom, and that tax µcompetition¶ harms everyone but for a wealthy few.

The myth and services, at better prices. If they cannot compete they go bust and disappears. It sounds Few slogans are as easy for a politician to VDGEXWWKLVµFUHDWLYHGHVWUXFWLRQ¶LVDVRXUFHRI SURQRXQFHDVWKHFU\³We must have a the healthy dynamism of markets. Employees, FRPSHWLWLYHWD[V\VWHP´ customers and suppliers may well find equivalent opportunities elsewhere. It sounds so reasonable. Competition and competitiveness are good things, right? But the tax-cutters have hijacked this idea of healthy market competition to justify something Not in the context of tax. Such calls almost always completely and utterly different: the idea of 1 rest on a giant economic fallacy. Here is the µcompetition¶ between countries on tax. This is a problem, at its simplest. totally different economic beast.

Competition between companies in a market is The theory broadly a good thing. The competitive race, for all Theoretical arguments used to support tax its warts and imperfections, makes the business µFRPSHWLWLRQ¶EHWZHHQFRXQWULHVDUHIRXQGHGRQD world go round. It means that companies must 1956 paper2 by the economist Charles Tiebout. constantly innovate to produce better products He wrote that when citizens can choose between

Published by nef (the new economics foundation), April 2013. Authors: Nicholas Shaxson DQG(OOLH0DH2¶+DJDQ. www.neweconomics.org Tel: 020 7820 6300 Email: [email protected] Registered charity number 1055254. nef/Tax Justice Network Mythbuster: ³$FRPSHWLWLYHWD[V\VWHPLVDEHWWHUWD[V\VWHP´ many communities where to live, with each All this has knock-on effects. Corporate tax cuts community offering different mixes of public also lead governments to cut individual income JRRGVDQGWD[HVWKHUHVXOWLQJµFRPSHWLWLRQ¶forces tax rates on the wealthy. IIWKH\GRQ¶WULFK jurisdictions to collect and spend their taxes individuals will find ways to reclassify their efficiently. ordinary income as capital income, to enjoy the capital income tax rate that has been forced lower This argument is repeated to the present day.3 E\WD[µFRPSHWLWLRQ¶5 More wealth flows upwards. But unfortunately, there is no evidence, anywhere, to support it. Quite the opposite.4 7D[µFRPSHWLWLRQ¶KLWVGHYHORSing countries particularly hard. Because collecting corporation 7LHERXW¶VDUJXPHQWUHVWVRQVKDN\DVVXPSWLRQV± tax is more simple and lucrative than trying to not least the idea that hordes of perfectly extract small sums of income tax from large knowledgeable citizens flit from one jurisdiction to numbers of poor people6, developing country the next like shoals of fish, at the drop of a tax governments tend to rely heavily on it to make up inspecWRU¶VKat. That is clearly nonsense. their income. So, as one IMF report explains, the HIIHFWVRIWD[µFRPSHWLWLRQ¶RQGHYHORSLQJ But although people rarely move in response to couQWULHVPD\EH³PXFKPRUHWURXEOLQJ´WKDQWR changes in the tax rate, there is something that is developed ones.7 far more mobile: tides of financial capital, sluicing around the world in a constant hunt for better But rich countries suffer greatly too. Inside the returns. And in tKHJULSRIWD[µFRPSHWLWLRQ¶PDQLD United States, for example, individual states governments try to make their tax systems more engage in fierce cross-VWDWHWD[µFRPSHWLWLRQ¶ZLWK µFRPSHWLWLYH¶WROXUHWKLVVNLWWLVKFDSLWDl by the result, as one report puts it, that ³$OOstates lowering tax rates on it. have regressive tax systems that ask more from low- and middle-income families than from the But is this a good thing? In a word, no. ZHDOWKLHVW´8

The combination of iQWHUQDWLRQDOWD[µFRPSHWLWLRQ¶ The reality forcing taxes on the wealthy lower, plus this 7D[µFRPSHWLWLRQ¶UHVXOWVLQZHDOWKEHLQJ regressive effect on state tax systems, add up to redistributed upwards a tax system where rich, poor and middle class 9 7KHILUVWPDMRUFRQVHTXHQFHRIWD[µFRPSHWLWLRQ¶LV pay roughly the same effective tax rate. Figure 1 to redistribute wealth upwards. As tax rates on illustrates a worldwide trend. FDSLWDOIDOOLQUHVSRQVHWRWKHVHµFRPSHWLWLYH¶ pressures, governments make up shortfalls by Falling corporate income tax contributions have levying higher taxes on other, less wealthy accompanied a worldwide trend of rising 10 sections of society, or by cutting back on essential corporate profits as a share of the economy. SXEOLFVHUYLFHV6RWD[µFRPSHWLWLRQ¶ERRVWV The result of these two opposing trends has been inequality and deprivation. flat corporate tax receipts in money-of-the-day terms, and falling receipts once inflation is taken Tax havens are the sharpest edge of this into account. µFRPSHWLWLYH¶D[H2ZQHUVRIFDSLWDOVKLIWSURILWV into tax havens, paying zero or very low taxes ,QVXPPDU\WD[µFRPSHWLWLRQ¶FRPSUHVVHVHQWLUH WKHUHWKHQWHOOSROLWLFLDQVLQWKHµRQVKRUH¶ tax systems, so that the rich pay less and the countries where the genuine wealth is being poor pay more. Voters would never independently created that they will bring the money home into choose such an outcome; tax competition the tax net only if the politicians cut their home effectively forces them into it. This also weakens taxes on capital some more. Too often the popular support for government itself and politicians quail, and cut some more. Wealth shifts heightens social tensions. upwards.

Published by nef (the new economics foundation), April 2013. Authors: 1LFKRODV6KD[VRQDQG(OOLH0DH2¶+DJDQ. www.neweconomics.org Tel: 020 7820 6300 Email: [email protected] Registered charity number 1055254. nef/Tax Justice Network Mythbuster: ³$FRPSHWLWLYHWD[V\VWHPLVDEHWWHUWD[V\VWHP´

Yet this is just part of the damage from tax Far worse, though, is the fact that multinationals µFRPSHWLWLRQ¶ can use these tax subsidies to out-compete smaller, locally-based competitors, which do not exploit the loopholes in the international tax 7D[µFRPSHWLWLRQ¶GLVWRUWVPDUNHWV Countries attract tax-shy capital in four main system and are typically the true innovators and ways: job creators. Multinationals kill them in markets using a weapon (tax) that has nothing to do with x cutting tax rates genuine business productivity or true innovation. x offering tax loopholes and special incentives It promotes the big at the expense of the small, and thus stifles true market competition. This x offering financial secrecy to facilitate tax leads to higher prices for everyone, and higher evasion wealth concentrations too. x being deliberately lax about tax enforcement. By allowing multinationals to free-ride on the Countries race against each on all four. In each public goods paid for by others, it also further case the result is typically a reduction both in tax erodes democracy and a sense of trust in the rates and in the tax base (that is, which items get system. taxed). All this distorts markets, potentially reducing efficiency and raising prices. Worsening matters further, the outcome of tax µFRPSHWLWLRQ¶ (ever lower tax rates, more tax For example, multinational corporations can use loopholes, secrecy or lax enforcement) tax haven loopholes to cut their tax bills. As with XQGHUPLQHV'DYLG5LFDUGR¶VWKHRU\RI all tax avoidance, this is merely the unproductive comparative advantage which says that capital extraction of taxpayer-funded tax subsidies by and production should gravitate to where it is multinationals: it helps nobody, anywhere, most genuinely productive ± cheap manufactures produce a better product or service. It comes with from China, say, or fine wines from France or high associated costs of expensive tax advice Chile. Instead, companies relocate to zero-tax paid to lawyers, accountants and bankers. Bermuda, even though there is almost never any genuine economic value added there.

Figure 1: Federal receipts by source as share of total receipts 60

50 Individual income tax

40 Corporate income taxes

Employment taxes 30

Per Per cent Excise taxes 20 Estate and gift taxes 10

0 1950 1960 1970 1980 1990 2000 2010

Source: Joint Committee on Taxation, 2011.11

The sum of tax credits and non-tax subsidies can 7D[µFRPSHWLWLRQ¶LQYROYHVHFRQRPLFZDUIDUH and a dangerous race to the bottom mean that state revenues from some corporations 7D[µFRPSHWLWLRQ¶LVQRWMXVWDQLPSHUVRQDOIRUFHLW VRPHWLPHVGRQ¶WVWRSIDOOLQJZKHQWKH\UHDFK is often funded, networked and organised. Greg zero: they can turn negative. Oklahoma and West Leroy, a long-term analyst of what he calls Virginia give up amounts equal to a third of their ³HFRQRPLFZDUIDUH´DPRQJ86VWDWHVVD\V entire budgets to these incentives, the above New York Times story reported, far outstripping any ³7KLVV\VWHPKDVDORQJKLVWRU\DQGPDQ\ corporate tax revenues paid. In one notorious moving parts. It traces back to at least the case, Rhode Island provided a $75 million loan in 1930s and the Great Depression, and really 2009 to a video game company, 38 Studios, matured by the 1970s. By then, most of the which soon went bankrupt leaving the loan key actors were in place: secretive site unpaid, far more than wiping out any tiny taxes location consultants who specialise in paid15. playing states and cities against each other; µEXVLQHVVFOLPDWH¶H[SHUWVZLWKWKHLUKLJKO\ politicised interpretations of tax and jobs This race is ultimately self-defeating: as one data; and an organised corporate network country takes a step, others respond, and soon orchestrating attacks on state tax systems. everyone is back to square one ± yet with a more regressive and complex tax system. (Ireland, an Today this industry has spawned a more old poster child for tax-cutters, is a good elaborate cast of characters: rented example16.) consultants packing rosy projections about job creation and tax revenue; subsidy- tracking consultants who help companies If individual countries are harmed by tax avoid leaving money on the table; and even µFRPSHWLWLRQ¶WKLVLVGRXEO\WUXHZKHQFRQVLGHUHG an embryonic industry to help businesses from a global perspective. Multilateral institutions, buy and sell unused economic development with responsibility for tackling global problems, 12 WD[FUHGLWV´ have been particularly myopic here.

An in-depth New York Times report provides an Taxes on the wealthy and on corporations example of how virulent the problem has become: GRQ¶WVWLIOHHFRQRPLFSHUIRUPDQFH What is the evidence from the real world? Do ³$UHFHQWELGGLQ HV>«@ g war for United Airlin KLJKHUWD[HVPDNHFRXQWULHVµXQFRPSHWLWLYH¶? And drew more than 90 cities. The airline had set up negotiations in a hotel, and its even if the effects are globally harmful, can representatives ran floor to floor comparing individual states really afford not to keep up in this bids. Jim Edgar, then the governor of arms race? Illinois, called for a truce, but many states 13 ZRXOGQRWVLJQRQKHVDLG´ The chart overleaf from the Financial Times illustrates one reason why states need not A January 2013 study found that the two U.S. participate. States of Kansas and Missouri alone had spent at least $192 million in tax subsidies to poach jobs Astonishing differences in taxes as a share of the from one another ± dHVSLWHDQ³DQWL-SRDFKLQJ´ economy ± from 29 percent in Japan to over 55 agreement between the two. The net result percent in Denmark - seem to have had no impact appears to have been only a tiny net jobs on growth rates.17 7KH)7¶V0DUWLQ:ROIFRQFOXGHV migration of a few hundred jobs (in favour of from this graph: 14 Kansas ) at very high cost to both. ǲSuch a spread seems to have no effect on Again, this bears no relation at all to market economic performance.ǳ18 µFRPSHWLWLRQ¶,t is an unseemly scramble for subsidies.

Figure 2: Taxation and growth of real GDP per head in advanced democracies 4.5

4 Ireland

2011 - 3.5

2.5 Finland Australia Sweden Spain 2 Austria NZ UK Netherland Canada Belgium US 1.5 Denmark Germany France 1 Switzerland Italy Growth of real GDP per head at PPP, 1989 0.5 Japan

0 25 30 35 40 45 50 55 60 Average government revenue (as per cent of GDP, 1989-2011)

Source: IMF, World Economic Outlook database and Conference Board

(That is the GDP growth picture; a similar story However, the top tax rate reductions appear can be told with respect to the per-capita absolute to be associated with the increasing size of GDP. And it should be noted that by concentration of income at the top of the income distribution.19´ plotting only average GDP per capita, these graphs mask inequality, which tends to be worse Other studies, focusing on items other than in low-tax states than in high-tax ones.) economic growth, find stronger results. A report

E\&DQDGD¶V&HQWHUIRU3ROLF\$OWHUQDWLYHVIRXQG A September 2012 report by the nonpartisan U.S. that: Congressional Research Services (CRS) concluded that tax fluctuations did not seem to ³+LJK-tax countries have been more affect US economic growth, but did affect successful in achieving their social inequality: objectives than low-tax countries. They KDYHGRQHVRZLWKQRHFRQRPLFSHQDOW\´ ³&KDQJHVRYHUWKHSDVW\HDUVLQWKHWRS marginal tax rate and the top capital gains Another study examining state-level taxes among tax rate do not appear correlated with individual U.S. States found: economic growth. The reduction in the top tax rates appears to be uncorrelated with ³5HVLGHQWVRIµhigh rate¶ income tax states saving, investment, and productivity growth. are actually experiencing economic The top tax rates appear to have little or no conditions at least as good, if not better, relation to the size of the economic pie >«@

than those living in states lacking a personal 20 income tax ´ Politicians the world over need to understand that all the evidence shows that time and again: when Others have argued that even if high overall taxes their bluff is called, their threats are nearly always GRQ¶WPDWWHUFRXQWULHVVKRXOG cut corporate or empty.23 capital tax rates to promote growth. The idea is that capital income taxes discourage savings and Warren Buffett explains this from the perspective investment and hinder economic growth. Indeed, of an individual investor: there are many studies out there that purport to show that low corporate taxes benefit growth. Yet ³,KDYHZRUNHGZLWKLQYHVWRUVIRU\HDUV 21 every one ZH¶YHVHHQKDVIDWDOIODZV . As one and I have yet to see anyone ² not even recent review of the academic evidence puts it: when capital gains rates were 39.9 percent in 1976-77 ² shy away from a sensible ³7KHJURZWKDUJXPHQWKDVQRUHDOEDVLV investment because of the tax rate on the >«@Zhen the negative growth effects of SRWHQWLDOJDLQ´ offsetting increases in labor income taxes or government borrowing are also taken into 3DXO2¶1HLOOIRUPHUKHDGRIWKHDOXPLQLXPJLDQW account, uncertainty begins to shade into Alcoa and former U.S. Treasury Secretary under doubt. Attempting to spur economic growth George W. Bush, adds: with tax preferences for capital income may be like trying to repair one side of the roof 22 ³$VDEXVLQHVVPDQ,QHYHUPDGHDQ with shingles from the other. ´ investment decision based on the tax code >«@if you are giving money away I will take The long historical picture tells us still more. In the it. If you want to give me inducements for µ*ROGHQ$JHRI&DSLWDOLVP¶ lasting roughly a something I am going to do anyway, I will quarter century from World War II, economic take it. But good business people do not do 24 growth was high and broad-based in many WKLQJVEHFDXVHRILQGXFHPHQWV´ developed and developing countries ± at a time when tax rates were generally very high by Which is common sense. For genuine foreign modern standards. Top marginal income tax rates direct investment, tax is typically a fourth- or fifth- in the U.S., for example, were around 90 per cent (or lower) order consideration for the investor, for much of that time, and capital income tax rates after political stability and strong institutions, that are high by modern standards. The tax- infrastructure, access to markets and inputs, a cutting era that followed has been a period of healthy, educated and skilled workforce, and the lower growth. like. These benefits are heavily tax-financed. Nobody would site a semiconductor factory in Correlation is not causation, but the numbers Equatorial Guinea just because it offers a more certainly show that good economic performance generous tax break than South Korea does. can be compatible with high taxes on the wealthy and on corporations. Research on the effect of tax policies on investment flows has produced many different results, but the Organisation for Economic Co- Genuine investors are not put off by taxes operation and Development (OECD) summarises: So much for the broad national and international trends. How do individual actors respond to tax ³7KHUHLVDFRQVHQVXVLQWKHOLWHUDWXUHDERXW µFRPSHWLWLRQ¶ and associated tax incentives? the main factors affecting (foreign) investment location decisions. The most Corporate interests and wealthy individuals important ones are market size and real routinely say ³'RQ¶WWD[XVWRRPXFKRU\RXUWD[ income levels, skill levels in the host V\VWHPZLOOEHXQFRPSHWLWLYHDQGZH¶OOJRRIIWR economy, the availability of infrastructure and other resource that facilitates efficient Switzerland.´ But talk is cheap: how often do specialisation of production, trade policies, those making these threats really relocate?

and political and macroeconomic stability of infrastructure, the macroeconomic environment, the host country. health and primary education; higher education and training; labour market efficiency; financial Survey analysis shows that host country market development; technological readiness; taxation and international investment incentives generally play only a limited role market size; business sophistication; and in determining the international pattern of innovation FDI.25´ Not everyone would agree with all these choices27 Tax is often mistakenly viewed from the EXWWKH,QGH[¶VJRDORI measuring ³WKHset of perspective of an individual investor: if the tax rate institutions, policies, and factors that determine in one jurisdiction rises, that investor may, just the level of productivity RIDFRXQWU\´VHHPV possibly, flit elsewhere. But from the perspective reasonable. of the country involved, the picture changes completely. 0RVWRIWKHµSLOODUV¶GHSHQGKHDYLO\RQSXEOLF investment ± ZKLFKPHDQVWD[6RLW¶VQRW Consider an international tender inviting obvious, even in theory, that tax cuts will make companies to bid for rights to exploit an oilfield, countries more competitive, as many people say, or to win a valuable telecommunications EHOLHYH$IWHUDOOWD[HVUDLVHGGRQ¶WJRXSLQ licence. If the country suddenly boosts the smoke! TKH\DUHQRWDµFRVW¶LQDQ\PHDQLQJIXO headline or effective tax rates facing investors, sense of the word, but a transfer, from one one or two suitors may look elsewhere, but if a (private) sector to another (public) sector: good net after-tax opportunity is available, others shingles taken from one side of the roof to put on will replace them: the oil is still there in the ground the other. DQGLILW¶VSURILtable to extract it, someone will exploit it. After all, corporation tax is a tax on In the World Economic FRUXP¶V&ompetitiveness profits not on turnover: so tax only kicks in if Index for 2012-13, two of the top four most profits exist. µFRPSHWLWLYH¶FRXQWULHVLQWhe world are Finland and Sweden, WZRRIWKHZRUOG¶VKLJKHVW-taxed There may or may not be a difference at the countries. Although some lower-tax countries margin, and perhaps a slightly smaller pool of such as Singapore also rank highly, there is no interested investors. But the cost of such evidence that lower taxes make countries more incentives in terms of foregone tax revenues is competitive. likely to far outweigh the marginal changes in investment quality or quantity that might ensue: $QGWKHHQGRIWKHGD\WD[µFRPSHWLWLRQ¶KDV these tax breaks typically end up feeding many nothing whatsoever to do with competition corporations that were never going to move between firms in a market. It is always harmful: a away26. beggar-thy-neighbour race to the bottom, worse than a zero-sum game. +DYLQJDµFRPSHWLWLYH¶WD[V\VWHPLQWKLVFRQWH[W typically means making unnecessary donations of tax revenues to foreign owners of capital.

So what does make a country competitive? There are meaningful ways to talk about µFRPSHWLWLYHQHVV¶among countries.

The World Economic Forum produces an annual µ&RPSHWLWLYHQHVV,QGH[¶IRUFRXQWULHVEXLOWRQ µSLOODUV¶ of competitiveness: institutions,

Endnotes 7 See Is Tax Competition Harming Developing 1 Countries more than Developed?, Tax Notes We recommend that anyone writing about tax µFRPSHWLWLRQ¶EHWZHHQFRXQWULHVPXVWDOZD\VSXW International, June 28, 2004, by Michael Keen WKHZRUGVµFRPSHWLWLRQ¶RUµFRPSHWLWLYH¶LQ and Alejandro Simone. inverted commas, to show they understood the 8 issues! Who Pays? Institute for Taxation and Economic Policy, Jan 2013. 2 A pure theory of local expenditures, Charles Tiebout, 9 See Who Pays Taxes in America in 2013? Citizens 1956 for Tax Justice, April 2013 3 See, for instance, Diversity, Competition and 10 In the U.S., for instance, corporate profits hit 12 µ5HVLOLHQW'\QDPLVP¶, Address by President Ueli percent of GDP in 2012, nearly twice the average Maurer at the World Economic Forum Annual rate over the past half century. See Graph: Meeting 2013, 23 January 2013 in Davos. Corporate Profits After Tax (CP)/Gross Domestic 4 See the section on U.S. states, for example, below. Product, 1 Decimal (GDP), St Louis Fed, 2012 One useful study that has looked at this is 11 Testimony Of The Staff Of The Joint Committee On Millionaire Migration and State Taxation of Top Taxation Before The Joint Select Committee On Incomes: Evidence from a Natural Experiment, Deficit Reduction, Sept 22, 2011 Cristobal Young and Charles Varner, National 12 Tax Journal, June 2011. The study examined the See The Great American Jobs and Tax Scam, Greg introduction of a new tax bracket in New Jersey Leroy, Tax Justice Focus, Q4 2006. The books in 2005 resulting in an effective 41% jump in the Barely Legal and Free Lunch, by the Pulitzer- top marginal state tax rate (to 8.97%) for winning journalist David Cay Johnston, provide a incomes above $500,000. The researchers found wealth of further detail on this. ³DPLQLPDOHIIHFW´RYHUDOOWKRXJKVRPHJURXSV 13 like wealthy retirees were a little more As Companies Seek Tax Deals, Governments Pay susceptible to the changes. See also Evidence High Price, New York Times, Dec 1, 2012. This &RQWLQXHVWR0RXQW6WDWH7D[HVGRQ¶W&DXVHWKH quote has been slightly shortened from the Rich to Flee, Citizens for Tax Justice, Oct 25, original. 2012, which links to several other studies. 14 See The Jobs Creation Shell Game, Good Jobs 5 There are other effects too. Particular dynamics First, January 2013, and subsequent follow-up concerning corporate taxes make matters worse. blog. As governments cut corporate tax rates in 15 UHVSRQVHWRµFRPSHWLWLYH¶SUHVVXUHVIURPRWKHU See The Job Creation Shell Game, Good Jobs First, jurisdictions, they have tried to shore up Jan 2013, p37 corporate tax revenues by broadening the tax 16 base (in other words, expanding the range of See, for example, The dangerous game of tax economic activities that are taxed.) Again, the competition, Sheila Killian, University of Limerick, choice they make here, in order to stay with more detail here. µFRPSHWLWLYH¶ZLWKRWKHUMXULVGLFWLRQVUHGLVWULEXWHV 17 The big outlier here is Ireland, whose growth record the tax charge away from large multinational stems partly from catch-up amid European enterprises and towards smaller enterprises. All integration, and partly from an boom which this is exacerbated by the fact that although few eventually turned out to be unsustainable. people move in response to tax changes, the 18 very wealthiest section are somewhat more 6HH0DUWLQ:ROI¶VH[FKDQJHTaxation, productivity mobile or at least perceived by governments to and prosperity, Financial Times Blogs, May 31, be so; this can add further to the pressure to tax 2012 these wealthy individuals less. 19 6 See Nonpartisan Tax Report Withdrawn After See, for example, Justice and International Tax G.O.P. Protest, New York Times, November 1, Competition, by Thomas Rixen and Peter 2012. The story provides a link to the report Dietsch, Academia.edu, 2010 itself. That report, which came near the end of a

hard-fought presidential election campaign, was Development Studies, December 20 2012. Also withdrawn under heavy political pressure from see Is Tax Competition Harming Developing Republicans. Countries More Than Developed? Tax Analysts, 20 -XQHE\WKH,0)¶V0LFKDHO.HHQDQG 6HH³+LJK5DWH´,QFRPH7D[6WDWHV$UH Alejandro Simone. See also Selling Snake Oil to Outperforming No-7D[6WDWHV'RQ¶W%H)RROHG the States, Good Jobs First, Nov 2012 by Junk Economics, Institute on Taxation and 26 Economic Policy, February 2012 5LFKDUG%URRNV¶ERRNThe Great Tax Robbery 21 provides a good example. The UK in 2011 First, corporate tax cuts often happen as part of announced tax changes making it easier for UK- government stimulus packages, when economies based to multinationals use tax havens, in a shift are doing poorly, at or near low points in the expected to cut their taxes by £7bn over four economic cycle ± which is just when subsequent years. Tax haven finance companies would be growth is likely to be greater than average. taxed at 0 - 5.25 percent: a rate chosen, Second, tax-financed public goods such as according to tax chief Edward Troup, because education or railways often bear fruit over the ³WKH'XWFKKDYHDUDWHRI´- an overt case of medium, long, and very long-term: these studies WD[µFRPSHWLWLRQ¶0DUWLQ6RUUHOOKHDGRIWKH exclude a good fraction of such benefits. Third, multinational WPP, led a blaze of publicity to sell capital gains taxes throw a large spanner in the the move to a skeptical public, promising to calculations. Unlike wages, interest, dividends UHORFDWH:33¶V+4WRWKH8. ZKLOHSD\LQJOLWWOH and rent, which are taxed when earned, capital H[WUDWD[ $WD[ZULWHUQRWHG³(YHU\RWKHU gains are only realised when the underlying multinational with no intention of leaving the UK asset is sold, and remain untaxed until that LVHFVWDWLF´$FFRXQWDQF\$JHDGGHG³7KH happens ± which may be years in the future. So chancellor is paying a lot of money for very good the stock of potentially taxable capital gains is 35´ much larger than the amount of gains that may 27 arise in any given year. Cutting capital gains Several recommendations focus on tax-cutting and taxes may unlock some of these gains, which RQUHPRYLQJµEXUGHQVRPH¶UHJXODWLRQV)RU may have arisen over decades, leading to a example, Pillar Six emphasiseV³FRPSHWLWLYHQHVV temporary surge in revenue. But this revenue is hindered by distortionary or burdensome surges is likely substantially to reflect tax WD[HV«´6RWKH:()LQGH[SHQDOLVHVFRXQWULHV payments being shuffled through time, not for high taxes, distorting the picture. Even so, a genuine growth. (This last analysis is drawn from JUDSKSORWWLQJFRXQWULHV¶UDQNLQJDJDLQVWWKHLU ³Dynamic Scoring Once again´%UXFH%DUWOHWW GDP per capita slopes mildly upwards, indicating New York Times Economix blog, April 2, 2013. some positive correlation between higher WEF That article contains many other points pertinent competitiveness DQGKLJKHUWD[HV,IWKHLQGH[¶ to this analysis. inherent anti-tax bias were removed, the line 22 would be steeper. Do Capital Income Taxes Hinder Growth? By Prof. Chris William Sanchirico, University of Pennsylvania/Wharton, Feb 22, 2013 23 See, for instance, Financial Times finds evidence of huge flight of rich after French tax hikes, Tax Justice Blog, March 13, 2013 24 2¶1HLOO speaking at his confirmation hearing to be 3UHVLGHQW*HRUJH:%XVK¶VILUVW6HFUHWDU\RIWKH Treasury, January 17, 2001 25 See Tax Incentives for Investment: a Global Perspective, Experiences in Mena and Non- Mena countries, OECD, 2008. Also see, for instance, Tax incentives and exemptions not necessary to attract investment, Institute for