There is a lot of loaded language in that report, and I got the feeling that the reporter should have taken an economics class before doing it. It was like watching a ignorant economics student get lectured about reality and she not wanting to accept any of it.
So, instead of pulling down a bunch of theory from the shelf and going over it, I'll just point out the obvious flaw: she believes that the country "owns" all the businesses inside of it and that by the companies acting in their own best interest, somehow they are cheating the rest of us. Most folks who have really thought about this realize that everybody acts in their own self interest and that government's role is to set things up so they grow and that a reasonable amount of money can be harvested to help fund things. At times it sounded to me like she wanted the country to be a prison: set up shop here and you can never go abroad. Paying a tax lawyer to make the best moves for your company was cheating. Etc.
I am deeply troubled that people are using mental models of business that look at businesses like the corner shopkeeper when business doesn't work like that anymore. Business is increasingly location-independent. Ranting about how unfair all of this is? It's not going to change that fact. It's 2011. I can live in Aruba, have corporate offices in Switzerland, have officers scattered around the world, make things in a dozen countries, market on the net, and sell in a hundred countries. You're using a mental model that doesn't match up to reality. You'll never make progress like that.
Never once did she mention that the United States double-taxes income where no other country in the world does - a critical part of the entire discussion. That omission alone should tell you how well-researched and thoughtful the piece was.
a) Taxes are used to pay for a whole host of things that large majorities find highly undesirable, including bombing Libya, harassing air travellers, and bailing out Wall Street. Whether you are on the left or right, you can add a slew of other programs that are of dubious or negative value.
b) Taxes are also extracted involuntarily, literally at the point of a gun if one thinks about the limit case of tax resistance. Try protesting the war(s) by not paying your taxes, and soon enough the IRS will come with guns and throw you in jail.
There are some government programs each person will agree with. But it's the lump sum, involuntary nature of taxes that make them a highly inefficient way to fund said programs.
I agree with your view of what the realities are. But I don't see why should applaud them: What happens if a country like Switzerland or Singapore has a sustainable competitive advantage over the USA or Germany, that simply cannot be overcome? They can achieve some efficiencies by "freeloading" that bigger countries cannot match, for example Switzerland doesn't train enough doctors at their own universities but relies heavily on hiring doctors from Germany.
If companies cannot compete, in the long term they goe bankrupt and disappear. But how would a country disappear? It's not like every citizen could simply move somewhere else.
Also the correlation/causality is not entirely clear to me. Possibly countries are more succesful, because they have lower taxes. But at some point it could also be true that only countries that are already succesful are able to lower their rax rates so much.
They can achieve some efficiencies by "freeloading" that bigger countries cannot match, for example Switzerland doesn't train enough doctors at their own universities but relies heavily on hiring doctors from Germany.
How is this "freeloading"? Medical schools located in Germany train doctors, who then pay the medical school. People in Switzerland pay the doctors for services.
Is Germany also freeloading on Switzerland if they purchase Swiss chocolates or watches? Is the US freeloading off India because the US buys BPO services from India?
Not entirely comparable. Most universities don't have tuition fees in Germany, the highest fees are 1000€/year, while it is estimated that the costs of educating a medical student are at least 30,000€ / year. Basically the education is heavily subsidized by the German taxpayer, so if a huge number of doctors later work and pay taxes in Switzerland it is somewhat suboptimal.
> What happens if a country like Switzerland or Singapore has a sustainable competitive advantage over the USA or Germany, that simply cannot be overcome?
You may find the theory of absolute and comparative advantage to be enlightening in its detail; but the broad conclusion is that even if country A is better than country B at everything, it will still make sense for A to focus on some things and B on other things.
I know comparative advantage, but does it really apply to competition with tax rates?
For example inside the European Union it doesn't matter in which country a company is based, you have basically freedom of trade for goods and services.
In Germany the medium age is 45 years, in Ireland it is 35 years; Population > 65 years is 20,6% vs.11,6%. Even if all other regulation in Germany + Ireland was identical, it seems unrealistic that Germany could sustain as low a tax rate, since the government has bigger expenses due to demographic issues alone. (Retirement benefits, medical)
If every company moved to Ireland because of the lower tax rate, what should be done with the old people in Germany?
You seem to labour under the illusion that if the money isn't taxed in a particular country, it somehow disappears from that country altogether. Yet wages are paid to employees and profits are distributed to shareholders. Lower taxes allow companies either to lower their prices or distribute more wages and profits. That's generally considered to be A Good Thing. If Germans want a slice of those profits, they can buy shares in the Irish-domiciled companies like everyone else.
Employees and shareholders do not get their money from the government. But what about old people, government employees, social services? It just seems to me that the "assets" of the government move to a low tax country, but the "liabilities" stay the same...
If there was a hypothetical "ZeroTaxCountry", to which companies could declare their allegiance and pay no taxes at all. Would you consider that "A Good Thing" as well, since it seems to have all the benefits you alluded too?
That's what happen when you tie yourself to a company whose business is to tax away income from a movable source. Economics is about learning the rules of the game, not changing it. If it could be changed, than the economists would look for what can't be changed. And then optimize for that.
As if it is good thing the company moving to a no tax country. From the point of view of the company's clients, it actually would, since it would mean that its products have the potential to be the cheapest of the market.
You're right that future liabilities are a mess. In Australia in the early 1990s the government introduced a program of compulsory superannuation. Already something like a trillion dollars has been saved by Australians against their retirement under the scheme. Singapore does something similar. Australia has also put away tens of billions of dollars against the future liabilities of public service pensions.
Will it completely do away with government liabilities? No. Australia too will face higher health care costs. But some of those costs will be defrayed by the superannuation and taxes levied on an economy that grew faster without the taxes than with them.
I am ambivalent about the Euro-US situation. On the one hand, it sucks that you face a period of painful adjustment to inescapable economic reality. On the other hand, your politicians have steadfastly refused to face up to those realities. As an Australian I find it annoying that profligate governments in Europe and the USA are hurting my prospects, even though here we've largely enjoyed fairly sensible economic policy for the past 25 years.
Foreign companies never even started in the US, so there is no question of them "leaving" or "paying their fair share". If US companies are going to be competitive, they have to get out. Otherwise, investors will just choose non-US companies. It's better to set up overseas to begin with, and save the trouble.
Same thing with the US taxing citizens living abroad (unlike other countries). And so the IRS sticks its nose into every single financial transaction in the world in order to get money it doesn't deserve.
The US government should just stop being so greedy and entitled.
1. Company directors have a duty to maximise profits.
2. Companies have no obligation to maximise, and every right to minimise, their taxes.
3. The USA has one of the highest corporate tax rates in the world, including double taxation of repatriated earnings.
Is it any wonder companies are voting with their feet?
The more you rely on US exceptionalism, the more you place it at risk. If you tie taxes to residency of officers, they'll start moving to the Bahamas, Europe, Australia, Singapore and the like. You'll turn yourselves into a branch office. Good luck with that.
Regarding 3: The US also has a bunch of tax breaks and loopholes which most other countries do not have, leaving the _effective_ tax rate about the same as other industrialized countries.
Which leads to US companies as being the best in how to avoid paying taxes. That's how GE managed to pay no US corporate taxes last year on $5.1 billion of US profit. (Rather, 7.4 percent but those are stored overseas and won't be taxed until "repatriated." And odds are they are holding out for another tax holiday where they can repatriate for free.)
Mate, let me tell you, the USA does not have a monopoly on rent-seeking behaviour.
That said, you have weak party discipline in Congress, which makes horse-trading inevitable. That and the separation of powers means that there is no incentive to run a sensible budget and every incentive to pork-barrel.
I don't blame Americans. The US Constitution was state of the art when it was written. Australia has been lucky in that we got to see how it worked in practice before we wrote ours.
"Almost everybody is in Ireland," Sullivan said. "All the pharmaceutical companies, all the high tech companies. You're stupid if you're not in Ireland," he replied.
And this is why it doesn't change These big companies are telling everyone, the US public, the Irish public, the Irish government that the low tax rate works. The goal of the low Irish corportion tax is exactly this. Create job in Ireland, bring companies to Ireland.
(Ireland is currently almost bankrupt and needs an IMF/ECB loan. Everything is on the budgetry chopping board, income tax, vat, new property taxes, reductions in capital spending, reducing number of teachers per student, delaying the age at which children start school. Everything. Except the 12.5% corporate tax rate, the government parties (a centre left and centre right) view it as that important.)
It sounds like the Irish government is behaving quite responsibly.
Many other governments would be tempted to try to take a bigger piece of the pie from their corporations in order to get reelected, not realizing that they might be killing the goose that laid the golden egg. It sounds like the Irish have their collective heads on straight.
There were staggering levels of corruption and mismanagement both in the Irish government and within the Irish financial industry.
Agreed. There was clearly very little banking regulation, and many private banks were let run wild, combine that with a massive property bubble (prices have falled nationwide by 50% since 2007), and a strong societal urge to get on the property market, and Ireland is in massive financial trouble.
And to give you an idea of how massive the property bubble group think was, here's a video of the Taoiseach (Prime Minister/leader of government) saying in July 2007 that people who talk down the economy are so stupid that they should commit suicide http://www.youtube.com/watch?v=hfjGSfuSQpA
Many other governments would be tempted to try to take a bigger piece of the pie from their corporations in order to get reelected,
That was never suggested. Only the far left socialist (i.e. let's nationalise everything) parties suggested raising the corporate tax rate.
The vast majority of the population knew that there aren't loads of jobs here. Some high profile US companies left Ireland (e.g. Dell's assembly plant). The majority of the population knew that raising the corporate tax rate would cause these companies to close and there would be some massive layoffs.
Suggestions to raise the corporate tax rate would have damaged the chances of getting reelected. Why else would the left wing Labour party (who suggested nationalising the banks (they are all nationalised now anyway)), not suggest raising the tax rate?
They may be right about keeping the corporate tax rate steady, as partly evidenced by the fact that nearly every other large EU country wants Ireland to raise the corporate tax rate.
But the reason the country is in its current state is precisely because the politicians DIDN'T have their heads on straight. They were pointed directly at the gravy train. The Celtic Tiger was IMHO just one big bubble that the Irish didn't see coming until it was way too late.
(Disclaimer: I only lived in Ireland for the last 3.5 years but had many Irish friends there who had been through it all.)
Ireland won't be getting any EU bailout money without raising its corporate tax rate. It'll be convenient for the Irish politicians because they'll get to shift blame onto the other Member States.
So, one is legal and one is not. Is that really the extent of it? This sounds like a pretty clear example of something that should probably be closed to all parties, gov included.
Of course Google, Microsoft et al were telling Ireland the other month that they couldnt raise their rates or they would leave. There is too much power here. Aligning tax rates globally will be necessary, like the EU did in Europe.
On the other hand if GE is paying 3.6% then some loopholes need closing. Remove the ways to avoid tax and you can cut the basic rate. That was the plan for the abortive Reagan tax simplification.
Governments are too weak for all the pork barrelling loophole generation and then get screwed by this type of evasion. Drastic tax simplification should be back on the agenda, but is as unlikely as ever.
Even small governments generally have more financial
resources than all but the very largest corporations. They also have militaries and police forces and can compel people within their borders at gunpoint. The only card the company really has to play is the ability to leave.
Playing the "exit" card is a desperation move, but its importance can be seen by the fact that it was actually revoked in every communist country. This was the purpose of the Berlin Wall, for example: to stop the brain drain of the skilled and talented, and keep them in a country with a 100% tax rate (the abolition of private property = 100% tax).
Therefore, it is somewhat arguable that governments are the "weak" ones here. Playing the exit card for MS or Google would cost them many millions and is a last resort.
Speaking of low taxes, I think US companies are overlooking Turkey and the advantages it offers to tech companies.
1) no corporate tax
2) no income tax for employees
All that is required is for the project to be approved as an R&D project. There is an incredible talent pool, solid infrastructre and a beautiful city waiting...I am just saying...:-)
I think this 'tax amnesty' borders on extortion. So all these companies used every loophole they could find to pay lower taxes, and now they want to bring the booty back, and it has to be for free. Assuming this happens, what prevents them from doing the same thing again?
So, instead of pulling down a bunch of theory from the shelf and going over it, I'll just point out the obvious flaw: she believes that the country "owns" all the businesses inside of it and that by the companies acting in their own best interest, somehow they are cheating the rest of us. Most folks who have really thought about this realize that everybody acts in their own self interest and that government's role is to set things up so they grow and that a reasonable amount of money can be harvested to help fund things. At times it sounded to me like she wanted the country to be a prison: set up shop here and you can never go abroad. Paying a tax lawyer to make the best moves for your company was cheating. Etc.
I am deeply troubled that people are using mental models of business that look at businesses like the corner shopkeeper when business doesn't work like that anymore. Business is increasingly location-independent. Ranting about how unfair all of this is? It's not going to change that fact. It's 2011. I can live in Aruba, have corporate offices in Switzerland, have officers scattered around the world, make things in a dozen countries, market on the net, and sell in a hundred countries. You're using a mental model that doesn't match up to reality. You'll never make progress like that.
Never once did she mention that the United States double-taxes income where no other country in the world does - a critical part of the entire discussion. That omission alone should tell you how well-researched and thoughtful the piece was.