Tim Worstall

International Tax Avoidance.

Duncan Campbell gets very het up about the way in which companies and individuals avoid tax internationally.

Six out of 10 US corporations pay no tax,

Leave aside the obvious truth that corporations shouldn’t pay tax at all. Even within his own belief bubble the only interesting number is how many corporations make a profit and don’t pay tax?

and the recent Enron
scandal demonstrated how cynically major household names in the US
exploit the system. Enron used around 800 different "Caribbean
financial dumps" to hide its debts.

Err, you mean Enron wasn’t making profits and thus should not have been paying tax? Which, I think, it actually did?

John Christensen of the
Tax Justice Network, a former adviser to the Jersey government, says
that more than 50% of the cash holdings of rich individuals in Latin
America is now held offshore and that some 30% of the GDP of sub-
Saharan African nations disappeared offshore in the second half of the
1990s. The situation in the Middle East and north Africa is even worse.
Since the 1980s, banks have targeted the world’s roughly 8 million
"high net-worth individuals" and encouraged them to hide their funds
offshore. As a result, around $11.5 trillion of their assets are now in
tax-free or protected havens.

There’s actually something of a major problem here. The assumption seems to be that once in these tax havens the money just sits there, is not invested or anything. Which of course is nonsense. It goes back into the general capital markets and is used just like all other savings, to finance industry and so on. Sure, maybe they’re not paying tax on the profits but that doesn’t mean that the money isn’t being used.

Try this for a moment. If you were a reasonably well off Argentinian, you remembered what your own Government has done to you in recent years (hugely devalued the currency, confiscated your dollar savings in local banks and so on), what would be, from your point of view, a rational response? Getting your cash offshore and out of their reach of course.

That so much money is indeed held offshore is not anything other than an example of just how little trust there is in the rulers of these places. And as recent history shows, that lack of trust is not misplaced.

In

9 responses

  1. dsquared Avatar
    dsquared

    Leave aside the obvious truth that corporations shouldn’t pay tax at all.
    Tim, do you think that this sort of thing helps your economic arguments get taken more seriously, or less?
    (also, “reasonably well off” Argentinians etc are not the problem here. The article clearly refers to “high net worth individuals”)
    Tim adds: What’s the problem with stating that companies shouldn’t pay tax on retained profits? Perfectly respectable economic point to make.

    Reply
  2. Peter Spence Avatar
    Peter Spence

    Spot on Tim. With presidential elections in Peru next year possibly resulting in a run-off between a mad national socialist and someone who already wrecked the country in ’85 – ’90 am I going to keep my hard earned – and tax paid -savings here? Like fuck I am!

    Reply
  3. Paul Staines Avatar
    Paul Staines

    If developing nations reduced their tax rates, capital flight would not be an issue.
    Low taxes attract capital. War and penal taxes frighten capital.

    Reply
  4. Matthew Avatar
    Matthew

    Why is it an ‘obvious truth’?
    Tim adds: Because we actually want companies to retain their profits, reinvest them and grow.
    I’m perfectly fine with teh taxation of distributed profits (although with some changes to the way it is done now) but get annoyed when people talk about “underinvestment by companies” and fail to note that 30% of teh money they would like to use to do thatgoes to El Gordo.

    Reply
  5. K Avatar
    K

    I agree with the theory that corporations should not be taxed. An income tax should be paid by the shareholder.
    The problem is (or would be) that individuals can own and/or totally control corporations. And the captive corporation can then provide any luxury the controller wants: housing, cars, travel, aides, etc. So in effect there is no tax paid at all.
    Many corporations today provide their CEO with incredible amenities. And most are reported as business expenses not taxed at all. Most others are so understated that there is no meaning to the tax process.
    In America there is a strong move to eliminate all inheritance tax (i.e. death taxes). Once that is done it will be easy for the wealthy to arrange corporate ownership so as to never pay any tax either while alive or upon death.
    Taxes are not fun. But if we have them then they should be paid by the wealthiest as well as the mere wage earner.

    Reply
  6. David Gillies Avatar
    David Gillies

    With the impending ascendancy of Brown to the Premiership, tax avoidance becomes less a matter of sound financial planning and more of a moral imperative. Every penny that’s kept out of his grasping talons is one less to be spent on his army of bureaucrats, to the benefit of all.

    Reply
  7. Stella Baskomb Avatar
    Stella Baskomb

    “Leave aside the obvious truth that corporations shouldn’t pay tax at all”
    My take is a lot simpler and less theoretical. I’m probably not nearly as smart as you all. My reason for thinking that corporations should not pay taxes is that they cannot be made to pay taxes in the first place. They just raise their prices – or lower the quality of their goods. If it were just that simple it would be bad enough. But big-companies have armies of accountants and lawyers devoted to “tax strategies” and those don’t help me. I don’t want that. Why would anyone want that? It’s just another cost that I have to pay for that should be more honestly acounted as a tax.
    It seems our politicians haven’t the guts to make it that simple. So they force corporations to be the publicans of the age.
    So I think it’s an obvious truth that corporations shouldn’t pay tax at all.

    Reply
  8. dsquared Avatar
    dsquared

    It’s not an “obvious truth” at all. Corporations have legal personality and one of the things about legal personality is that you pay income tax. The idea of not taxing undistributed profits is pure-and-simple an avoidance creation machine, and your suggested solution for “encouraging investment” doesn’t make sense; under your proposal retained profits would be untaxed whether they were invested or not (they could just be left in the bank and most likely would be).
    Come off it; are you really suggesting that it’s an obvious truth and a view universally held among experts that the rate of corporation tax should be zero? It isn’t.
    Tim adds: Of course it’s not universally held. I hold it though.
    And are you trying to claim that money in bank accounts doesn’t get invested? Come on, you work in the markets, you know that it does.

    Reply
  9. dsquared Avatar
    dsquared

    doesn’t get invested in capital goods in any way which would be encouraged or otherwise by changes in the marginal tax rate on the company which is the owner of the bank deposit. It might be lent out on a credit card to someone who wants to buy a holiday for all we know.

    Reply

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