JUSTICE FOCUS

the quarterly newsletter of the

fourth quarter 2006 volume 2 number 4 The great American jobs and tax scam In the United States, among states is a major problem. Greg LeRoy looks at the evidence and assesses some of the implications for tax revenues and employment.

ax competition is an interna- cities against each other; ‘business existing jobs from one place to an- Ttional blight, but it is also a climate’ experts with their highly other, where they are proclaimed plague within the borders of the politicised interpretations of tax and to be ‘new.’ United States. In fact, competition jobs data; and an organised corpo- for jobs and tax receipts within rate network orchestrating attacks the United States has been an on state tax systems. ‘economic war among the states’ tax competition issue for more than three decades. Today, this industry has spawned a more elaborate cast of characters: Economic development – defined rented consultants packing rosy The great American jobs and tax scam 1 as spending by states and cities for projections about job creation and Greg LeRoy job creation or retention – now ; subsidy-tracking con- finds the average state with more sultants who help companies avoid Editorial 3 than 30 subsidy programmes: leaving money on the table; and John Christensen abatements, corpo- even an embryonic industry to help rate credits, sales and businesses buy and sell unused eco- processing zones: tax exemptions, tax incre- nomic development tax credits, the Kenyan experience 4 ment financing, low-interest loans now legalised in at least four states. Bob Awuor and loan guarantees, free land and land write-downs, training grants, States and corporate lobbyists jus- Capital mobility and the infrastructure aid – and just plain tify economic development tax effects of tax competition 6 cash grants. breaks by claiming job creation and Alex Cobham tax base enhancements. But they The bottom of the iceberg – in routinely fail to deliver on both Ready, steady, GO for every sense of the word – is tax counts. Investigative journalists, Nairobi 7 breaks. Those granted by states – non-profit researchers, and state income, sales and excise – are the auditors routinely find companies – Tax competition: a case least visible, least accountable, and many companies – that have failed of winner takes all? 8 most corrosive ways states fund to create or retain as many jobs as Richard Murphy economic development. Those they said they would. Companies Reviews and new research 10 granted locally – especially prop- that are paying poverty wages or erty tax abatements and diversions failing to provide healthcare to their Campaigns and TJN news 11 – are especially harmful to schools. employees. Companies that are abandoning the cities and sprawling Calendar 13 This system has a long history and onto farmland and natural spaces. many moving parts. It traces back Even companies that are outsourc- Guest editor: John Christensen to at least the 1930s and the ing jobs offshore. It is not unusual Editor: Jenny Kimmis email: [email protected] Great Depression, and really ma- to find companies that have not Published by the Tax Justice Network tured by the 1970s. By then, most created any new jobs, even some International Secretariat Ltd of the key actors were in place: that have actually laid people off © Tax Justice Network 2006 secretive site location consultants since receiving the subsidies. Oth- For free circulation ISSN 1746-7691 who specialise in playing states and ers that got subsidised just to move FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS

Less well known is the corrosive and state treasurers. effect job subsidies have on state Experts conclude that and local tax revenue. There is a tax breaks enacted in growing body of evidence, from the name of economic national statistics and from individ- development are a ual states, that over the past 25 major problem, along years corporations – especially big with surging corporate ones – are getting lower tax rates use of loopholes like and paying a smaller share of the Passive cost for public services. The evi- Investment Companies. dence is especially disturbing on income : in many states a large First, the national share of big companies are paying evidence. The Congres- zero state income taxes, or tiny sional Research Service minimum taxes. (CRS) – a non-partisan body that works exclusively for Put another way: if corporations University of Iowa Professors Peter Members of Congress – tracks contributed the same share to state Fisher and Alan Peters use a long-term trends in state and local treasuries in income taxes in 2003 ‘representative firm’ computer corporate taxes. It reports that the as they did in 1980, the states model to take a hypothetical new effective corporate rate for all state would have received $27.3 billion factory – with an average-size capi- and local taxes – in other words, more to help pay for smaller tal investment and rate of profit – income, property, sales, excise, util- school-class size, public safety, and project the tax result if the fac- ity taxes, etc. – has declined sharply healthcare and infrastructure. Or tory is built in a state’s enterprise over the past two decades. In the they could have avoided raising that zone, which bundle multiple tax 1980s, companies paid an average of much in taxes, especially the regres- breaks. 6.93 per cent of their profits in all sive consumption taxes that many state and local taxes. In the 1990s, states enacted. In 20 industrialised states, they find the average rate was 5.12 per cent, that “incentive wars have pro- and by 2002, the last year studied, To give a state-specific example, in ceeded to the point that state cor- the rate had declined to just 4.99 Florida, the St. Petersburg Times porate income taxes are on the per cent. That’s an overall rate de- found that 98 per cent of compa- verge of disappearing in some cline of 28 per cent. nies in the state paid no income tax states, at least with respect to new in 2002, including cruise-ship giant investment.” In other words, new Why are corporations paying less? Carnival Corp., with 4,220 employ- factories generate such large tax “Perhaps the most obvious explana- ees in the state, more than $1 bil- credits, they pay little or no income tion is the tax competition among lion in 2002 profits – and a corpo- tax. In fact, for 12 of those 20 states to attract business,” the CRS rate registration in Panama. states, their model indicates that concludes. typical companies building new fac- tories can actually generate net tax More evidence comes from the Despite such findings, progressive state budget advocates are cau- credits – that is, the deals create Center on Budget and Policy Priori- tiously optimistic about their negative income taxes. ties. In the second half of the 1990s, chances for reform. Already, 12 when the U.S. economy was siz- states have some form of annual, Analysing by 16 industrial sectors zling, federal corporate income tax (such as food processing, transpor- revenues grew an average of six per company-specific disclosure of costs and benefits (including four that tation equipment, etc.) they found cent a year. But state corporate disclose on the web); 19 states use that for Texas, in 9 out of 16 sec- income tax collections rose at just money-back guarantee ‘clawbacks,’ tors, companies are getting negative half that rate. Same companies, and one state, Illinois, has enacted a income taxes; in Ohio, it’s 13 out of same profits, same years, half the mandatory Unified Development 16; and in Kentucky, 15 out of 16. tax. Budget that will help expose the In three states – Iowa, Michigan, and South Carolina – they found It’s not just the rate of corporate ‘bottom of the iceberg’ – breaks. that in all 16 sectors, companies are taxes, it is also the share of revenue getting negative tax rates! companies provide. In 1980, corpo- rate income taxes accounted for 9.7 Greg LeRoy directs Good Jobs First. The aggregate evidence of revenue per cent of state tax revenue; by This article is adapted from his 2005 corrosion comes from government 2000, it was down to 6 per cent, book The Great American Jobs Scam: studies of state revenue, academics, and for the next three years, it Corporate Tax Dodging and the Myth of taxpayer watchdog groups, studies averaged only 5.2 per cent. Job Creation (Berrett-Koehler). of large publicly traded companies – even from a few angry governors www.goodjobsfirst.org

2 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Editorial “Companies get away with free-riding because they know that tax incentives John Christensen can be negotiated by playing one national or regional government off Welfare for the rich against another.”

cross the world a scandal has How did we arrive at this scandal- incentives can be negotiated by Aoccurred involving huge sums ous situation where public handouts playing one national or regional gov- of public money handed out to the flow upwards and companies are ernment off against another. Most rich and powerful. The handouts offered negative income taxes? Well governments would prefer to avoid have taken a variety of forms: tax it started with a corruption of the being forced to grant incentives, but holidays, lower profit tax rates, meaning of the term 'competition'. in the absence of a global policy property tax abatements, acceler- In economic theory the purpose of framework to protect weaker ated depreciation rates, corporate competition is to provide consum- states from predatory corporate income tax credits, subsidised infra- ers with a choice between the sup- behaviour the pressure is inevitably structure and energy, ex- pliers of goods and services. This downwards. This is another in- emptions, and so on. The recipients puts pressure on companies to im- stance where bad governance - of this public largesse have generally prove quality and keep prices low. often originating in junk states been big, long-established busi- The same arguments cannot be ap- providing facilities - nesses, typically multinationals. plied to sovereign states. Citizens undermines good governance. Some small businesses have bene- cannot choose between one state fited but not to the same extent. or another to provide their public The solution to this problem lies services, and lowering government with a multilateral agreement, pref- The supposed purpose of these revenues by forcing rates cuts does erably negotiated under the aus- welfare payments has been to at- not translate into more efficient pices of the UN ECOSOC's Tax tract investment in new jobs, but in service provision. In practice the Committee, which would preserve practice companies only employ process which politicians and jour- the fundamental rights of sovereign staff where there is a genuine eco- nalists call tax competition creates states to determine their tax rates nomic rationale to do so, and the market distortions and should more by democratic means and would handouts achieve little apart from accurately be described as ‘tax protect these rights from unregu- increasing the corporate bottom incentivisation’. lated pressure from large corpora- line. The cost to the taxpayer of tions and their advisers to provide this upside-down socialism has been Liberalisation of capital flows has needless and harmful tax incentives. enormous. Subsidy packages in the created a situation in which coun- US are estimated to exceed tries have believed themselves com- As a starting point we propose one US$100,000 for each job created. pelled to offer incentives to attract simple thing: let it be recognised No attempt has been made to es- or retain investment. These incen- that so-called ‘tax competition’ tablish an equivalent estimate for tives achieve nothing in terms of amounts to nothing more than wel- the European Union, though it improving market efficiency; on the fare for the rich. might be higher than the US figure. contrary they distort the crucial feature of the theory of compara- It is not inconceivable that the full tive advantage whereby investment cost to developing countries of so- flows to where it is most produc- called 'tax competition' is consid- tive. Tax incentives don't improve John Christensen directs the TJN International Secretariat. erably more than this, particularly in productivity, but they do increase the case of the mineral exporting the returns to capital by enabling [email protected] economies where greatest political companies to free-ride on publicly www.taxjustice.net pressure has been put on govern- provided resources. ments to lower tax and royalty rates and where few jobs are actu- Companies get away with free- ally created. riding because they know that tax

3 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Export processing zones: the Kenyan experience Export processing zones have been promoted as a panacea to Africa’s investment deficiency, but since 1990 the Kenyan experience has shown a reality of poor working conditions, minimal technology and skills transfer, and a massive increase in . Bob Awuor asks where do we go from here?

he use of export processing tariffs on imports. At that (KHRC), over 35,000 Kenyans are Tzones (EPZs) as a regional or time the Kenyan government antici- employed by businesses offshored national development strategy ex- pated that EPZ programmes would in this way. The majority of these tends back to the 1920s when the create jobs, attract new types of workers are women. first zone was established in Spain. higher value-added processing and More recently, the UK Thatcher manufacturing activity, and diversify At face value the EPZ policy ap- government was a leading advocate export earnings away from reliance pears to have created a lot of jobs of ‘enterprise zones’ and Kenya also on unprocessed agricultural pro- and the businesses established in started to experiment with the idea duce. these zones have recorded profits. in the 1980s. Export volumes have also risen, EPZs are now an established feature particularly since the US govern- EPZs represent a direct form of tax of the Kenyan economy. Approxi- ment negotiated the African and regulatory competition in which mately 40 zones have been gazet- Growth and Opportunity Acts special laws provide for a range of ted, and according to the Kenyan (2000 and 2002). More recently incentives to attract offshore invest- Commission there has been a huge growth in ment for export production. The packages of incentives vary from zone to zone, with some common Giving it all away features including: tax holidays, Investment incentives in the Kenyan EPZ Act -free import and export, unre- stricted repatriation of profits and exemption from national labour Ten year corporate and thereafter corporate laws. Some countries and regions tax at 25%. also offer exemption from environ- Exemption from duty and VAT on all inputs. mental laws and regulations. Critics Exemption from payment of withholding tax. of EPZs argue that tax incentives shift the tax burden onto local busi- Unrestricted offshore borrowing. nesses and labour, and the regula- Freedom from exchange controls with respect to investment tory exemptions undermine hard- by foreigners. won measures to protect labour Repatriation of dividends and operation of foreign currency and the environment. Supporters of accounts. tax incentives regard them as nec- essary for countries wanting to at- Work permits for technical, managerial and training staff. tract mobile capital. Exemption from complying with various laws (e.g., Factories Act, Industrial Registration Act, Statistics Act). Kenya enacted its EPZ Act in 1990. High quality infrastructure at the zones, paid for by the This made it possible for EPZs to be government from public funds into which EPZ enterprises established with incentives such as a make no tax remittances. 10 year corporation tax holiday, Tax-free earnings for foreign workers (expatriates) of EPZ subsidised credit, state sponsored enterprises. infrastructure and exemption from

4 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS

As well as degrading the rights of Kenyan And the picture is no rosier on the workers, EPZs have contributed little to the revenue side. EPZ companies are generating profits, but there is no economy. The great majority of businesses evidence of profits being re- established are engaged in labour intensive, invested in the Kenyan economy. low value-added garment assembly. The majority of profits appear to be being shifted offshore through And although EPZ companies are generating arrangements. Some profits, there is no evidence that they are companies have relocated after the being re-invested in the Kenyan economy. Most expiration of their tax holiday. Needless to say the workers em- appear to go offshore through transfer pricing ployed in EPZs do not earn suffi- arrangements. cient income to pay higher yields of tax revenue, and the trade tax ex- emptions have probably led to a net trade with China. But Chinese in- EPZs have contributed little to the decrease in tax revenues arising terest in investing in Kenya appears economy. For starters, the great from the introduction of the EPZ to be motivated by the possibilities majority of businesses established in policy. for using Kenyan quotas for textile EPZs are engaged in labour inten- to the US market. sive, low value-added garment as- Speaking recently in London, Ken- sembly. The cloth is largely im- yan Finance Minister, Mr Amos Ki- The apparent success of the EPZ ported in finished form (increasingly munya, said: "We have sealed loop- policy was challenged in 2003 when from China) for assembly and ex- holes through which people previ- a series of wildcat strikes by mainly port. The technologies involved are ously evaded tax, and have insti- women workers exposed a pattern basic and require few skills. Further- tuted reforms and legal measures of exploitation and harsh working more the government has not fol- that broaden the tax dragnet, so conditions. These strikes were or- lowed a strategy of targeted incen- that financing for public expenditure ganised in Nairobi and Athi River in tives to promote links between EPZ is largely drawn from internal re- protest against subsistence wages, firms and the onshore economy. sources”. I hope that the tax drag- non-payment of overtime, summary The result being that economic net will be extended to target EPZ dismissals, sexual harassment and links largely consist of employment enterprises because the real cost of failure to observe health and safety for an underpaid workforce forced the EPZ programme far outweighs standards. The workers were not to work exceptionally long hours to any benefits. The question we must supported by the Central Organisa- subsist. Some Kenyan businesses now ask is whether there are any tion of Trade Unions and the Trade also fear that leakage occurs as EPZ grounds for continuing to subsidize Minister branded the strikers as output seeps across the porous big, non-tax-paying foreign business ‘hooligans’. However, subsequent border between the EPZ economy through the EPZ programme. research by the KHRC has revealed and the domestic economy. a pattern of companies pressuring workers to achieve production tar- Even the apparent success of the gets by working long hours of fre- EPZ policy in creating employment Bob Awuor is an urban and regional quently unpaid overtime. The out- is questionable as not all EPZ jobs development planning consultant and come, according to KHRC, was high are new. As happened in Mexico researcher specialising in issues staff turnover, stress, fatigue, absen- during the 1990s when a process of relating to globalisation, urbanization teeism and labour unrest. The gov- ‘maquiladorisation’ occurred as lo- and development. ernment responded in 2004 by call- cal companies shifted to the EPZ ing for freedom of association for sector, Kenyan companies have re- [email protected] workers in EPZs but few companies established themselves in EPZs in have since recognised trade unions. order to take advantage of the fiscal incentives and lower unit labour As well as degrading the rights of costs. Kenya’s unemployment Kenyan workers, it appears that problem remains acute.

5 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Capital mobility and the effects of tax competition International tax competition has damaging consequences for economic development in both the North and the South. Alex Cobham examines new research which shows that richer countries are better able to resist the pressures of tax competition, and discusses some of the policy and research implications.

s part of the study of globalisa- A key problem is the potential for may be better placed to extract Ation, economists have been tax competition to undermine benefits from FDI than their poorer concerned with the overall effects states’ ability to benefit from eco- counterparts. To understand how of greater capital mobility. Simplistic nomic activity in order to provide to maximise the benefits of invest- readings of basic theory suggest that for their citizens. One strand of ment (which need not be the same greater freedom for capital should research has focused on whether as maximising the absolute volume expand global economic possibilities tax incentives are effective in at- of investment) we need to consider and benefit everyone, more or less tracting foreign direct investment ways in which capital mobility will without caveat. Academic studies in (FDI). While the results here are affect countries with different the late 1990s, however, and subse- inconclusive, empirical work has characteristics. quent IMF research, highlighted a questioned the existence of growth contrary econometric result: liber- benefits of FDI. J. Benson Durham Political and media commentators alisation of capital movements has of the Federal Reserve Bank found often give the impression that the had no discernible growth benefits no support for positive effects – impact of corporate tax competi- for developing countries. and in many poorer countries, FDI tion – the general phenomenon of appears actually to be associated which FDI tax incentives are a spe- This finding has raised questions with reduced growth. cial case – may be limited or indeed about whether the current struc- beneficial. Sheila Killian of the Uni- ture and management of interna- If power lies with investors, the versity of Limerick has written that tional finance is beneficial. In par- growth effects for countries may be “the term ‘harmful tax competition’ ticular more needs to be known small, possibly negative. Evidently has become endemic”, contributing about when capital flows are benefi- the relative ‘power’ of the different to the idea that only extremes of cial, and how they may be damaging, agents engaged in the process of behaviour are damaging. The im- in order to improve the outcomes. attracting FDI can affect the out- plied category of ‘benign’ tax com- come; for example, richer countries petition is assumed to allow more flexible and dynamic patterns of economic activity, ultimately to the benefit of society. The actual crite- ria for distinguishing the conditions in which tax competition might be benign, harmful, or merely harm- less, have not been delineated.

Evidence-based analysis of the im- pact of tax competition has been somewhat scarce, however. A newly-published paper from the Central Bank of the Netherlands offers fresh insights into the ways in which increases in capital mobility have changed rates of corporate 6 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS tax. Harry Garretsen and Jolanda operation in, for example, the Car- Peters analyse a sample of annual ibbean as a way of limiting the costs Ready, steady, data on 19 high-income OECD of competition (in the absence of GO for Nairobi countries from 1981-2001, and pre- coherent international action). sent three main findings. Two further issues require consid- ighteen months after launching First, they confirm the reality of tax eration. First, to what extent are Eour consultative process with competition: an increase of 1per cuts in statutory tax rates associ- African , and 12 months cent in capital mobility is associated ated with falling revenues. We need after the proposal to launch a TJN 4 with a reduction in the corporate not deal with the debunked idea Africa received a resounding yes of between one half and a that policy can be made on the basis vote at the World Social Forum in third of one per cent. of a ; but it is certainly Bamako, Mali, we are ready to take true that (i) more aggressive anti- the next steps at WSF 2007 in Nai- Their second result is that the be- avoidance measures and the re- robi, Kenya. haviour of neighbouring countries is moval of exemptions have in some important – where neighbours cases allowed revenues to be main- Events in Nairobi get going with a maintain higher rates, the pressure tained (in the short-term at least); Research Workshop on the theme to cut rates is lower. Tax competi- and (ii) that the extreme cases such of Tax, Poverty and Finance for De- tion may be a global phenomenon, as Ireland have shown increasing velopment on 18th / 19th January but it is additionally effective at the revenues due to profit shifting 2007. Sponsored by the UK-based local level. (albeit at the expense of global tax Network for Social Change (a phil- revenues). anthropic group), and co-hosted by The third result is that agglomera- the University of Nairobi, the Afri- tion effects matter. Larger – and Second, researchers need to ex- can Community Development hence more powerful – economies plore the broader economic and Foundation, the Association for like the UK and Germany are bet- social effects of tax competition. Accountancy & Business Affairs and ter able to resist the pressures of There is an obvious possibility that TJN International Secretariat, the tax competition. falling government expenditure on workshop programme includes pa- public services, on infrastructure pers from 12 researchers, and has If we consider the political implica- and on human capital investment, attracted 50 participants from 18 tions of this last result, it may help has a direct impact on the level of countries. The workshop to explain why counter-action economic growth. In this way tax programme will be finalised for against tax competition has been competition plays a role in vicious download from the Tax Justice 4 limited. If powerful countries tend cycles of low development and low Africa website by 5th January 2007. to be least directly damaged by, for growth. Another area for research example, the behaviour of Ireland in is the direct impact on inequality During the WSF itself, TJN and its seeking to benefit from multination- and poverty rates. partner organisations will be holding als’ profit-shifting, it follows that two seminars and two workshops. attempts to mobilise international It may be only when the full costs of The first seminar programmed for political will to counter tax compe- the current treatment of interna- 21st January, titled 'New Percep- tition are likely to be blocked. tional financial flows are known, tions on Corruption', will focus on that policymakers will start to ques- how financial intermediaries and tax Given that these agglomeration ef- tion the concept of ‘benign’ tax havens encourage and facilitate cor- fects are sufficiently large to be competition – and take steps to rupt practices. Dr Paul Mbatia from found in a sample of exclusively address it. The majority of poorer the University of Nairobi will be high-income countries, the implied and richer countries will suffer in chairing this seminar. costs for medium- and low-income the mean time. countries may be much higher. The second seminar, programmed for 22nd January and chaired by Most vulnerable of all will be Alex Cobham is Director, Political smaller, poorer countries with Economy Section, the Oxford Council on Odour Ong'Wen of SEATINI, will neighbours that pursue aggressive Good Governance and Supernumerary address the issue of the role of tax Fellow in Economics, St Anne's College, in tackling poverty and financing tax competition policies. This sug- Oxford. development. gests the possibility of regional co- [email protected]

7 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS

One workshop is programmed for 23rd January and will be used pri- Tax competition: a case marily to plan and agree a process for launching a continent-wide TJN 4 Africa and regional / national of winners take all? chapters. Chaired by Dereje Ale- Richard Murphy mayehu of Christian Aid, Kenya, this workshop will be open to all t taxation and economic semi- 1. They argue that individuals and organisations and individuals inter- Anars all over the world it is companies spend more wisely than ested in becoming founder suggested that ‘tax competition’ is a government, the logic being that members and supporters of TJN 4 good thing. But, as Professor Mi- government is not subject to mar- Africa. chael Devereux of Oxford Univer- ket mechanisms in making choices sity admitted at the EU tax compe- and is not therefore receptive to The second workshop also on 23rd tition conference in September consumer preferences. January, titled ‘A Rich Seam’ and 2006, this is more a statement of chaired by Charles Abugre of faith than proven fact. 2. They assume that in the absence Christian Aid, will explore issues of competitive pressure, govern- around mining investment and tax The Tax Justice Network does not ment is inherently inefficient, a competition. accept that tax competition is be- trend exacerbated by their belief nign. We consider it harmful be- that all governments are prone to TJN will also be represented at a cause it is designed and promoted spend for the aggrandisement of seminar organised by Social Watch by political and commercial inter- politicians or civil servants. This on the subject of Alternative Budg- ests acting on behalf of a tiny mi- tendency, they claim, is so pervasive eting and Budget Monitoring on nority in society. that even the ballot box is unable to 22nd January, and at a roundtable curtail it. discussion on 23rd January, also This claim requires justification. organised by Social Watch, on the First it is important to define what 3. They claim that business effi- redesign of global financial architec- tax competition is. It is a variety of ciency is undermined by the admin- tures. processes involving preferential istrative and financial burdens that treatment whereby governments taxation imposes. Details of the venues and times of compete to attract mobile capital to these events will be confirmed locate in their country. This might 4. They suggest that taxation gives when WSF Nairobi publishes the involve minimal or zero tax rates, as inappropriate price signals to mar- final programme, which is issued to are offered by tax havens, but it kets and as such all taxation should participants when they register in also includes tax holidays and the be reduced to minimise market dis- Nairobi. subsidies offered through export tortions. processing zones, and other forms of direct and indirect subsidies In combination these arguments For further information about which serve to attract mobile capi- demonstrate that tax competition TJN events in Nairobi, contact tal. The biased nature of tax compe- lies at the heart of the Neo- Alvin Mosioma. tition is demonstrated by the fact Conservative agenda. Because Neo- that it seldom manifests in the form Conservatives believe that democ- [email protected] of lower rates of sales tax, which ratic governments are unable to www.TaxJustice4Africa.net are regressive in nature: indeed in contend with these issues, they sup- the majority of low income coun- port the use of tax havens to en- tries sales taxes have been in- courage the relocation of mobile creased, typically without exemp- capital and to exert pressure on the tions, to compensate for lower tax governments of populous states to yields from capital. reduce their tax rates.

Next it should be noted that those There is no evidence to support the who promote tax competition do case for tax competition. Firstly, so for four reasons: taxation exists because societies

8 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS want the State to act as a provider because fear discourages people Transfer payments are the pension of key services, including law, its from spending and is an impedi- and benefit payments which old, enforcement and defence. In addi- ment to investment. disabled, sick and unemployed peo- tion, most societies recognise that ple – as well as the providers for there are other services which only Third, the assumption that gov- many children – rely on to avoid the State can supply because they ernment is inherently inefficient is absolute poverty. In the same re- must be provided for the benefit of wrong, as is the assumption that port PWC also asserts: their whole population or the market signals are needed in the greater cost of not doing so will be supply of all services. In many Attempts to impose internation- borne by all members of society cases those signals transmit misin- ally uncompetitive tax rates on and not just those that fail to re- formation and misallocate re- these forms of mobile capital ceive them. These services include sources or result in unmet de- may be particularly damaging to the provision of health and educa- mand. Market based arguments an economy in the long-term. tion services and the supply of the for tax competition are therefore complex physical and societal infra- not valid when electorates can Neither assertion is referenced or structure which enable modern make a genuine choice between supported by data. Both are state- commerce to function. Access to centre-left and centre-right politi- ments of preference indicating a these services needs to be available cal actors. bias towards the rich and powerful. to all irrespective of their means. The greatest overall beneficiary of Finally, the argument that low tax Our job is to offer alternative this public provision is business, states are needed to ‘correct’ the choices which provide balance in which as a result of these services result of such ballots reveals con- this debate. Our prime motive is a enjoys the advantage of having a tempt for the concept of democ- concern for poor people, especially healthy and productive workforce racy. This contempt can only be in the developing world, but we with the financial means to enjoy based on the belief that some in also argue that effective markets are the products companies seek to society deserve preferential treat- as important for society as effective supply. ment, which is the belief at the governments. Without the security core of the Neo-Conservative provided by public services there Second, in practice markets cannot argument for tax competition. are compelling grounds for believing function efficiently in sectors such that markets will fail due to a crisis as health care, education and pen- The tax justice argument is based or crises of confidence. Tax compe- sion provision. The need to ensure on the simple proposition that it tition that undermines state reve- service provision for the benefit of is preferable to protect the well- nues could precipitate such a crisis. all means there will never be suffi- being of the majority through cient capacity to provide significant regulation and taxation rather With public services crumbling in choice in these sectors. Conse- than allowing capital to roam many developing countries – and quently, private supply would result without constraint and untaxed. with even developed countries be- in private monopoly which is uni- This proposition recognises that ing forced to switch the tax burden versally considered abusive. The the burden imposed by tax com- increasingly away from capital and ballot box is therefore the best petition arises from the deliber- onto middle and lower income regulator available to avoid abusive ate actions of players pursuing earners – the case for combating market structures and indicate soci- self-interest. As an example, tax competition to protect markets ety’s preferences. The resulting ser- PricewaterhouseCoopers re- and societies from predatory prac- vices may be less than perfectly effi- cently wrote a report for the tices is compelling. cient, but as has been shown by the World Bank* in which they as- experience of privatisation, the serted that: market frequently does worse. This * The report is available on the PWC is especially true when markets are If, for example, [taxes] are website: used to provide welfare services to used for transfer payments, www.pwc.com ensure that people live free from then the net impact on long- fear of destitution or unemploy- term economic growth may Richard Murphy is Director of Tax Research LLP. ment. Freedom from fear is funda- be negative. mental to the success of markets [email protected]

9 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Reviews and new research

Hilton McCann heavily on the dated analysis of R.A. the OECD’s analysis). McCann Offshore Finance Johns and the website of the Center seems unaware of the fact that tax Cambridge University Press, 2006 for Freedom and Prosperity (a is not a cost of production (Hello Unreliable perceptions Neo-Conservative lobbying organi- again?) and treats government ex- sation believed to be funded by off- penditure as inefficient, despite the ffshore Finance is written by a shore banks) to support the un- evidence that direct investment Obanker and former acting chief original proposition that offshore flows to locations which provide executive of the Financial Services acts as a platform for tax mitigation. good infrastructure, well educated Commission of Mauritius. The au- The default position throughout is labour, and buoyant private and thor strongly supports the offshore that paying less tax is an unchal- public sector demand. economy and is unapologetic for its lengeable virtue with winners but use in tax avoidance: “No one is no losers other than the big, bad Other than as an endorsement of obliged to pay more tax than is State. Neo-Conservative politics in gen- due” he writes, “Consequently, tax- eral and offshore tax planning in payers are entitled to use finance The OECD’s 1998 report on harm- particular, it is hard to determine centres to mitigate their tax if they ful tax competition is referenced what readership this book is aimed so choose.” So far, so political, but but dismissed without serious con- at. Most of the ‘facts’ provided, are what about the following: “Perfect sideration of its content: readily obtainable from websites. In positive correlation between “Competition is good, not bad. If avoiding serious analysis of the re- ‘offshore’ finance centres and the tax competition is ‘harmful’, that cent major critiques of the offshore evasion of tax has not been proved implies that other forms of compe- economy, the book fails as a work beyond reasonable doubt.” How tition may also be harmful also – or of scholarly analysis and research. can statistical evidence be deployed at least suspect. This type of argu- But neither is it adequate to serve when offshore secrecy obstructs ment is difficult to defend.” No as a technical manual for financial quantitative analysis? This assertion, mention is made of ’s briefing regulators. This is not a book that like much else about the book, is paper on Releasing the Hidden Billions can be recommended to anyone bogus scholarship, which the pub- for Poverty Eradication, or of the ex- with a serious interest in the sub- lishers should have challenged from istence of the Tax Justice Network. ject, not least because it is, frankly, the start. Despite the accumulated evidence dull. of the abuses of tax havens – includ- And Offshore Finance gets off to a ing several reports by the US Sen- John Christensen very poor start indeed. The attempt ate Permanent SubCommittee on to define offshore, and distinguish it Investigations – informed criticism from onshore, is clumsy and inade- is brushed aside on the grounds quate in making distinction between that: “Such opinions and assess- the political economy of offshore ments are unreliable because they and the physical presence of off- are based on perceptions that may shore finance centres on small is- or may not conform to reality.” lands. This causes confusion Nice one, Hilton. throughout the book. Despite quot- ing at length from the recent works The lack of critical enquiry into the of Mark Hampton and , role of offshore is compounded by the issue of how offshore functions the paucity of the economic analy- as an interface between the licit and sis. No attempt is made to under- stand how offshore promotes eco- illicit is glossed over and no men- The next Tax Justice Focus tion is made of Raymond Baker’s nomic free-riding (Hello?), or cre- will be a special edition on seminal work on this subject. On ates an un-level playing field be- inequality. the other hand, McCann draws tween economic actors (the basis of

10 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Campaigns and TJN news

TJN / South Centre meeting on tax avoidance and development Prem Sikka

ax Justice Network in collaboration with the South Professor Sol Picciotto made a presentation on the de- TCentre held a seminar at the Palais des Nations, Ge- velopment implications of tax treaties and information neva, Switzerland on 30 October 2006. The aim of the exchange. It covered recent history of tax treaties, dou- seminar was to provide a broad overview of tax issues ble taxation agreements, bank secrecy, tax havens and pertinent to developing countries. The seminar was held some of the real world practical problems in trying to to coincide with the commencement of the 2nd Session of combat complex tax avoidance. This was followed by a the United Nations Committee of Experts on Interna- presentation from Professor Prem Sikka on transfer pric- tional Cooperation in Tax Matters. It was attended by ing (the prices used by multinational corporations for some forty ambassadors from developing countries. internal transfer of goods and services). This innocent sounding accounting technique is increasingly used to Dr. Yash Tandon, director of South Centre, opened the launder profits and avoid taxes in developing and devel- seminar. The meeting was addressed by Bruno Gurtner, oped countries. Senior Economist with AllianceSud, Switzerland and a member of the TJN Board of Directors. Gurtner outlined The presentations were followed by a lively discussion the role of TJN and NGOs in raising awareness of tax and consideration of policy developments. We received avoidance and how it deprives developing countries of very positive feedback and are hopeful of further much needed revenues for social and economic develop- developments. ment. www.southcentre.org

UN tax experts support the strengthening of information exchange Bruno Gurtner and Sol Picciotto

trengthening information exchange is essential - was Less clear is the outcome of the discussion related to the Sclearly the opinion of the majority of members and dual criminality requirements. A proposal made by David observers at the second meeting of the UN Committee of Spencer a year ago aimed to include a paragraph saying Experts on International Cooperation in Tax Matters held that the UN Model Treaty does not require double in Geneva (30 October to 3 November 2006). But partici- criminality as a pre-condition for information exchange. pants did not always agree on the details of how to re- form the famous Article 26 of the UN Model Double TJN had previously proposed to ECOSOC that it con- Taxation Convention. Delegates supported an idea, spon- sider the establishment of a Code of Conduct on Co- sored by TJN and proposed in a paper submitted by Pro- operation in Combating Capital Flight and International fessor Mike McIntyre, to start work on a Code of Con- and Avoidance. This proposal generated a lot duct on Promoting Tax Compliance. of interest during discussions in Geneva. Some delegates from developing countries strongly supported the idea. A subcommittee will finalise proposed changes in the Representatives from the USA and other OECD coun- wording of Article 26 by the next meeting at the end of tries, while not openly opposing the idea, did raise ques- 2007. Points of particular interest for TJN included: tions about the status of such a code, the relationship with other codes and doubted if the committee had the • Extensive support for the inclusion of a reference to resources to take on the work at this time. The commit- ‘combating tax avoidance’. tee will do more work on this subject which TJN will • The scope of information exchange should be wide. monitor closely. • Special attention should be paid to the effectiveness of information exchange. Other issues discussed included: anti-abuse provisions in • Bank secrecy should not hinder information exchange. treaties; mutual assistance in tax collection; the definition

11 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS of a ; taxation of development members themselves. This greatly reduces the contribu- projects; restructuring of the UN Manual for Negotia- tion that the experts from developing countries are able to tion of Tax Treaties; dispute resolution; and taxation of make because they are usually already over-stretched. In- Islamic financial instruments (definition of interest). deed, some of the developing country members were not even able to attend the Geneva meeting. The Committee’s agenda is dominated by narrow tech- nical-legal issues because it is mainly concerned with There is clearly still an urgent need for a more inclusive revising the wording of the UN Model Tax Convention. and transparent global organisation to tackle the issues of It tends to build on work done by the OECD Commit- international tax avoidance and capital flight. tee on Fiscal Affairs – making some adaptation for de- veloping countries. Political issues such as measures against tax avoidance and capital flight are not much Background documents are available for download on the FfD discussed. The Committee also has very limited re- website: sources so much of the work must be done by the www.un.ort/esa/ffd/Taxation

Stiglitz speaks out against tax evasion and capital flight Lucy Komisar

oseph Stiglitz, Nobel Laureate in Economics, spoke at Stiglitz was head of the US Council of Economic Advisors Ja meeting on 2 November strongly in opposition to under President Clinton, then served as chief economist the system of offshore-enabled tax evasion and capital of the World Bank, and is now a professor at Columbia flight. The event, before an invited audience of civil soci- University. ety groups and media at Columbia University, was co- sponsored by TJN-USA and Stiglitz’s Initiative for Policy The text of his talk and a video will be posted as soon as Dialogue at Columbia . they are available. www0.gsb.columbia.edu/ipd

Ghana meeting shifts the focus towards tax revenue John Christensen

lthough seldom discussed by civil society, the Drawn from 16 countries - ranging east to west from In- Asources of tax revenues are important determi- donesia to Guatemala - 24 budget analysts representing a nants of good governance, with governments being most range of civil society organisations and research institu- responsive to electorates in states where tax regimes tions took part in the programme of seminars and break- are broadly based. This was the context for a three day out meetings. TJN was represented by John Christensen, workshop in early December co-organised by the Inter- who led discussions around how to introduce tax justice national Budget Project and the Ghana-based Integrated issues in a variety of countries, including Argentina, Bang- Social Development Centre. ladesh, Croatia, and hopefully so on through the rest of the alphabet. Held in Accra, Ghana, the workshop considered why civil society needs to focus more on how governments Judging from the huge interest shown in Accra for focus- source their revenue incomes, and explored several re- ing more research and advocacy resources on tax reve- lated themes, including the (using a Mexi- nue issues, similar workshops will be held in other regions can case study to illustrate the regressive nature of the in 2007, and TJN will commit to providing its expertise to current fiscal regime); the gender impacts of the tax re- support this process of widening budget analysis to in- gime in South Africa; how local government taxes impact clude revenue income. on development in India and Croatia; and how evasion and harmful tax incentivisation have undermined efforts www.internationalbudget.org to reduce poverty around the world. www.isodec.org.gh

12 FOURTH QUARTER 2006 volume 2 number 4 TAX JUSTICE FOCUS Tweedledum and Tweedledee go offshore Calendar 2007 The following unpublished extract from Alice in Wonderland was recently found in a attic…

“It’s obvious” said Tweedledum, adopting a rather condescending tone. 2007 German G8 presidency. “Self-evidently true” snapped Tweedledee, peering at Alice over his reading January 1 glasses. German presidency of the EU.

“If you don’t cut our taxes,” continued Tweedledum, “profits will fall and you January 11/12 will have even less money in the treasury.” The Technical Group of GT-7 Lead- ing Group Countries meet in Alice sighed. She had heard this before, but it still didn’t make sense. Taxes Santiago, Chile. Richard Murphy will on profits were already low, businesses paid far less tax than in the past, but be speaking on TJN's behalf. they just wanted more tax cuts and subsidy. January18-19 TJN Research Workshop, ‘Tax, “We need the money to invest in health and education . . ” Alice began, but Poverty and Finance for before she could finish her sentence, Tweedledee jumped up from his chair Development’, Nairobi, Kenya. and strode to the window. January 20-25 “Privatise.” he snapped “Let business do it more efficiently.” World Social Forum, Nairobi, Kenya. January 21, seminar: ‘New Nonsense, thought Alice. Look at the mess that business had made of the Perceptions on Corruption’ trains and the water industry. And how many people can afford to pay the chaired by Dr Paul Mbatia, rates charged by private schools? University of Nairobi. January 22, seminar on the role Gazing out the window, Alice saw the expensive motorcars in the executive of tax in tackling poverty and fi- car park and thought about how many of her constituents could barely afford nancing development. Chaired by to pay their rent. Odour Ong’Wen of SEATINI. January 22, Social Watch Whilst these thoughts crossed her mind, Alice heard Tweedledee and seminar: ‘Alternative Budgeting and Tweedledum muttering in an agitated way about how business needed lower Budget Monitoring’. taxes and less regulation. Listening hard, she heard words like ‘globalisation’ January 23, Workshop: ‘A Rich and ‘deregulation’ and ‘share options’. Seam’ exploring issues around mining investment and tax “Gentlemen” she interrupted, firmly but politely, “for many years business competition. has been demanding subsidies and tax cuts. I think business should pay its fair January 23, workshop: planning share towards public services.” for the launch of TJN 4 Africa.

But this made them mutter even more loudly, and after a while Tweedledum January 23, Social Watch round- table on the redesign of global strode across the boardroom and stood rather too close for Alice’s com- financial architectures. fort. January 24-28 “You see, my dear” he said, and his smile sent a shiver down her back, World Economic Forum Annual “unless we pay ourselves more money, we won’t have incentive to invest“. Meeting, ‘Shaping the Global Agenda’, Davos, Switzerland. Alice was not impressed by this line of argument. She knew the gap between rich and poor has kept rising, and with debt spiralling out of control, some- February 6/7 thing needed to be done to redistribute wealth and income, because other- The Second Plenary Session of the GT-7 Leading Group of countries wise the economy would stagnate. will be held in Oslo, Norway. John Christensen and Sony Kapoor will As Alice gathered her thoughts to ask why businesses were paying so little speak on TJN's behalf. tax when they were making record profits, Tweedledum leant forward men- acingly and hissed: “If you don’t give us our tax cuts we will go offshore. And April 14-15 then we won’t pay any taxes at all.” 2007 Spring Meetings of the World Bank Group and the IMF, But whilst Tweedledum and Tweedledee marvelled at this splendid idea, Washington D.C. Alice leant forward to read the tiny badge on Tweedledum’s jacket, which said: “Only the little people pay taxes.”

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