Treasure Islands - Nicholas Shaxson [95]
It is a hard point to prove, but it is reasonable to think that while the world has fixated on ideas and ideologies as the driving force behind global tax-cutting and financial deregulation, tax competition may have been the bigger force.
Many economists see this as a nonstory, though. Although tax rates have fallen, tax revenues have been fairly steady. Since 1965 personal income taxes in rich-world OECD countries have remained remarkably stable at 25 to 26 percent of the total tax haul,10 and total corporation taxes have even risen slightly, from 9 to 11 percent. Some say this proves that tax competition does not matter. But look behind the numbers, and an unhappier picture emerges.
Though rich countries have preserved their overall tax revenues, corporations and rich folk have paid much less as a share of revenues. Corporate profits, on which their tax liabilities are assessed, have increased sharply.11 Meanwhile, the rich have not only seen their wealth and income soar, but they have shifted their income out of “personal income tax” categories and into “corporation tax,” to be taxed at far lower corporate tax rates. For example, the richest four hundred Americans booked 26 percent of their income as salaries and wages in 1992 and 36 percent as capital gains. By 2007 they only recorded 6 percent as income and 66 percent as capital gains.12 The same has been happening across all high-income categories and in all OECD countries since at least the 1970s. So falling corporation taxes are being masked by rich people’s tax dodges.13 The working population has seen its personal income taxes and social security contributions rise over the last 30 years, as their wages have stagnated. Mitchell is right to say that tax competition is real, and it bites.
Look at how tax competition smites developing countries, and a bigger story emerges.
One of the only studies ever made was a short IMF paper in 200414 that notes how little attention has been paid to how international tax competition has been affecting developing and emerging-market economies and takes what it calls a “first look at those issues.”
Its results are remarkable. Tax rates have fallen at least as fast as in rich countries, if not faster, and furthest of all in sub-Saharan Africa. But tax revenues fell sharply too: Just in the short 11-year period from 1990 to 2001, corporation tax revenues in low-income countries fell by a quarter. This is especially troubling because developing countries find it much easier to tax a few big corporations than to tax millions of poor people, so corporate taxes are a bigger deal for them.
One reason for the falling corporate tax revenues has been special tax incentives. In 1990, only a small minority of poor countries offered these incentives; by 2001 most of them did. The IMF’s first detailed study on this in July 2009 concluded15 that these tax incentives, which are supposed to attract foreign investors, slash tax revenues but do not promote growth.16
As I have mentioned, tax, not aid, is the most sustainable source of finance for development. Tax makes governments accountable to their citizens, while aid makes governments accountable to foreign donors. Tax competition is destroying developing countries’ tax revenues and making them more dependent on aid. Brazilians talk about tax competition in terms of a guerra fiscal—a tax war—a term that reveals far better what is really happening here and echoes the words of U.S. Senator Carl Levin when he says tax havens are “engaging in economic warfare against the United States and honest, hardworking Americans.