The above is the title of a new article by David Cay Johnston for Tax Notes, available on the US based taxprof blog.
Johnston is a first rate journalist who has done a lot of work on tax. But in this article he reviews a book by Prof. Kenneth P. Thomas, a political scientist at the University of Missouri-St.Louis, who documents how tax giveaways to big business are growing around the globe. Entitled 'Investment Incentives and the Global Competition for Capital' the book looks to be somewhat more important than its low key title suggests. What it documents is $70 bn of tax give aways to US businesses by federal and state governments each year, a rate he thinks six times bigger than the equivalent subsidies in the European Union.
Any suggestion that the subsidies somehow result in better economic performance or investment is squashed:
Any thought that giveaways of tax dollars stimulate foreign investment inAmerica is demolished by a little table on page 101 of Thomas’s book. It shows that between 1985 and 2007, the American share ofglobal direct investment fell by two-thirds, from 36.7 to 12.7 percent. However, in the 15 more developed EU countries where subsidies were few, the share of foreign direct investment increased from 28.6 to 40.3 percent.
And FDI investment data involving Ireland and Luxembourg does, admittedly, have to be treated with care, but there is real importance in what this book has to say.
It is a persistent argument of business that the tax gap on corporate profits (which I have estimated to exceed £10 billion a year in the UK) is not the result of any form of avoidance at all, but simply the use of perfectly acceptable allowances and reliefs. And some of it may be - of course that has to be true. But that's not the end of the story. These allowances and reliefs may be legal but the point is that they exist because of the power of the corporate lobby. And when decisions are made as to how to tackle deficits then the existence of those reliefs is an issue in play. And for that reason it is right to highlight that they exist and that corporations do undoubtedly benefit from them in increasing amount. Nothing else can explain the fall in the effective tax rate of major UK corporations from about 28% in 2000 to about 21% in 2009.
And let's be clear, these allowances and reliefs do not happen by chance; they happen because of intense political lobbying. So corporations are not neutral in this debate. Lobbying for the structures that let you avoid tax is part of tax avoidance.
I stress - that does not mean that the activity is illegal. But it does allow anyone to question it. And it does mean that the use of such reliefs is a valid element in the tax gap. This is politics after all. And that's about the choice of "who pays".
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Thank you very much for this.
I am intending to put on a blog shortly about having to clear our minds of much of past thinking and the way we define some of these issues. The world has changed greatly over the last couple of decades, our thinking has simply not kept up with it. Basically, there is the taxable economy and the alternative economy, which will partly be legal, some simply non-recorded (barter) and some illegal in various ways.
“It is a persistent argument of business that the tax gap on corporate profits…is not the result of any form of avoidance at all, but simply the use of perfectly acceptable allowances and reliefs. And some of it may be – of course that has to be true.”
So why aren’t you honest enough to revise your figures then? And how much is “some” of it? Is it a bit of it, most of it, part of it – what is it? 10, 20, 30 per cent?
And wouldn’t it have been better to take it into account in the first place?
@Craig Hopkinson
You miss my point – which is that if these allowances are the result of lobbying then they are within the tax gap
I’ve never said avoidance is anything by legal
But the issue is whether the allowances are appropriate and should be subject to review
That is and always has been the point
That’s interesting. I’m referring in particular to your Tax Gap reports for the TUC a couple of years ago.
I don’t think lobbying was mentioned in the original report so that’s a new one. You made no distinction in the report between allowances obtained by lobbying and allowances not obtained by lobbying. In fact you made no reference to allowances and reliefs at all – which is why so many criticised you on the grounds that you were not taking into account reliefs and allowances deliberately intended by Parliament.
When you realised this was a major flaw in your work you replied with some bluster which I don’t think anyone even now really accepts.
You have now added an extra twist: claiming that the tax gap exists even where Parliament intended reliefs, allowances and exemptions to be available if they were as a result of lobbying. God knows how one separates out tax between allowances that came about as a result of lobbying and those that didn’t.
Your reply is utterly implausible.
@Craig Hopkinson
I respect your right to disagree – of course
But if you do not agree with the original argument re the fact that there is a tax gap then of course you don’t accept the way thinking develops over time
I suspect that the weakness comes from being a neoliberal – one of the core assumptions of which is that a person knows their mind and never changes it
But of course over time arguments develop and are refined and – dare I say it – improve
And for that reason I really don’t accept your position either
Which makes further debate a waste of time
@Craig Hopkinson
Craig – Your reply appears to suggest that you do not believe that corruption ever occurs – that is implicit in the concept of lobbying leading to tax reliefs for the lobbyist or his client. How can you be taken seriously when you display such naivety?