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The tax competition debate part three: What would a regulatory framework look like?

Richard Murphy and Arthur Laffer exchange views on whether regulating tax competition could work, and how it would affect countries.

Tax justice campaigner Richard Murphy explained how countries can be both victims and perpetrators of tax competition. He echoed calls by the UN, IMF, World Bank and OECD for action on spillovers, saying that to be a success, efforts must be truly multilateral.

His opponent used examples of economies with harmonised tax systems to argue against regulation. Economist Arthur Laffer, who was the first American to enter China as the communist nation relaxed its isolationist policies in the 1970s, contrasted the fortunes of China pre-1970 with its fellow superpower, the US, which began cutting tax rates in earnest during the 1960s.

Would regulation of tax competition be positive?


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Richard Murphy

Can we defeat tax competition? I’ve been engaged in debate here and in many other arenas over the last 15 years asking this question. My answer is yes, I think we can, but no, we haven't succeeded as yet. And I think that's why this type of debate is so important.

The reason why we have to keep the tax competition as yet is that we haven't fully comprehended the scale of the problem and the way we should think about it holistically. Let me just put that in context. Tax competition, I think, is created and suffered by many jurisdictions simultaneously. In other words, they are the victims of tax competition and very many of them create tax competition simultaneously.

Tax competition is international, it is domestic between parts of the tax systems, and it's not just about corporation tax and taxes on mobile capital, it's about the interaction between many taxes. So, income tax against corporation tax and income tax against capital gains tax. Social security plays a part in this as well, all of which goes in combination to create the revenue of the state. It's more than that too.

We tend to think about tax competition as between tax systems, but of course it's about the politics of tax as well. Some states are very inclined to political tax competition and others are not. Some tax administrations are very effective in beating tax competition, some almost seem to go out of their way to encourage it.

Company and trust administrations around the world are particular creators of tax competition by providing the secrecy that lets so many people get away with tax abuse from behind that veil of secrecy that they create simply by not asking the right questions. We have to look so far at the effectiveness of international agreements. When so many of the BEPS outputs are still to be put into place and asked the question at the time about whether they'll really work.

So we need, if we are going to beat tax competition, to not be bilateral, which so many of the attempts today have been, but very definitely multilateral. And we not only have to think quantitatively about the amount of tax collected, but about the qualitative nature of the tax systems that we need.

Now, the UN, the IMF, the World Bank and the OECD combined to make a statement in February, saying that they wished to tackle tax spillovers. Now that's something I'm quite concerned with: It's a core focus of my work. Tax spillovers recognise the danger of tax competition: How one state can impact upon the wellbeing of another state and how one tax can impact another.

The difficulty with that commitment is that there is as yet no effective tax spillover regime in place. There is a quantitative method produced by the IMF, which some physical difficulties with econometrics – to be candid, the data doesn’t withstand the analysis. So with a colleague, Andrew Baker, we are currently working on creating a tax spillover framework to be able to assess all these interactions between states to make sure that we can defeat tax competition.

Now, it's my belief that if we can actually get states to work together, we liberate states to make their own decisions. We liberate to make the decisions that they can present to the electorate [he shakes the cross-emblazoned napkin again] on the ballot box, about what taxes they really want.

They can uphold their belief in democracy, their right to the decide they can uphold the rule of law, and all those other things that I've already mentioned. And this is the way, by doing effective spillover analysis, to achieve this result. What would the outcome be? I believe that if we could prevent those spillovers, so if each nation state could reinforce its own right to decide on tax as it wished, then we would transform the stability of world markets, focus international business on their true goal of meeting customer needs in pursuit of long-term sustainable profit – which those pension funds I advise say that they are also keen to know about – and we would also generate the secure basis of financing that so many countries, including in particular the developing world, are in current expert need of. That is why the cost of defeating tax competition is worth paying.

Arthur Laffer

We are at a major disagreement. Do I think we can enforce tax harmonisation? Yes, I do, but it's not a world I wanted to live in, let me tell you.

Fortunately, the world we do live in is moving in the opposite direction. We [in the United States] have gone from I think the highest marginal tax rate – when [Harry] Truman was in office [1945-1953] it was 92.5%. We've dropped it now down to 37% [pre-Trump]. We had it as low as 28%. The corporate tax during the immediate post-war period was in the nineties, it's now down to much, much lower today, 21%. All of it [is] moving because of the marketplace pushing taxes there. If it had not been for the US doing its major tax reforms during the roaring twenties, [the] US would still be a tax rates that are extraordinarily high and very counterproductive.

I don't think the government has the wisdom to know what the right taxes are. And God knows that Europe doesn't have the electoral system where you can actually vote on specific taxes and whether you want tax harmonisation. I mean, China pre-1970 had tax harmonisation, and you can see what China looked like. It was because the rest of the world was open that China really opened up. I was the first American in modern times to go to China. I went in October of 1970 with George Shultz and John Ehrlichman and saw the opening of China. At that time in 1970, China had something like 97% of all production [going] through state-run enterprises. Today it's down to around 8% – that’s a tax cut!

And look at the growth rates China's experienced. Look at what's happened with their currency competition. Look what's happening with their regulatory competition, with trade. Competition is really important, especially for governments and it gets them to behave correctly. Now, you had a problem in 1939 with a tax harmonisation that was being done in a very unpleasant way. That’s not the way to go. Venezuela today has tax harmonization. That's not what you want.

Without competing governments, none of these horrible situations would have been reversed. What you really need is to have taxes, and I'm going to use tax this year, but regulations, taxes, all of these have to be reasonable. Business is not your enemy. You want to have a tax system that businesses and people think is reasonable. They’ll pay their taxes then! But if businesses and individuals believe that taxes are unreasonable, they’ll do all they can to get around it.

It has to be a partnership between businesses and governments and individuals to get a tax system that is efficient, reasonable and fair. But as long as you try to exploit or beat down or make them as your enemies, you're going to get tax evasion, avoidance, underground economies, offshore shifting, all of this stuff will occur. What you need is a reasonable tax code that the taxpayers believe is right, and a tax code that provides the requisite revenues for government to act in its proper function as referee not as a participant.

Who do you think argued their case better?

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This is the third of a three-part series of articles. Part one can be viewed here and parttwo can be viewed here.

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