A Land Grab by the Ruling Elites

The White House has outlined a plan to give the nation’s millionaires and billionaires a massive tax break while adding trillions of dollars to the U.S. deficit. The plan would lower the corporate tax rate to 15 percent, end the estate tax and end the alternative minimum tax—a move that would solely benefit the richest Americans, including President Trump. A leaked 2005 tax return shows Trump paid out $36.6 million in federal income taxes that year—most of it due to the alternative minimum tax. Former Labor Secretary Robert Reich described Trump’s tax plan as a form of class warfare. The tax plan was unveiled Wednesday by two former executives at Goldman Sachs—Trump’s chief economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin—who hailed the tax cuts.

James Henry talking:

this is nothing less than the largest wealth transfer that has ever occurred, if it were passed. I doubt that it will pass. But it amounts to a tax heist by the ruling class, by Trump and the richest administration we have ever had. It would not only effectively gut the progressive corporate income tax and initiate a race to the bottom among all countries that have corporate taxation around the world, because they would be competing with each other, it would also effectively gut the estate tax, eliminate that, so we’re basically heading toward a kind of oligarchy. And it would reduce the top rate for personal income tax to—from 39.6 percent to 35, so it’s an immediate paycheck.

This is also going to blow up the federal deficit by an estimated $3 [trillion] to $7 trillion over the next 10 years, so that’s going to not make deficit hawks happy. And I know—you know, the Republicans have time and again insisted on budget balances in this—under the Obama administration. The Congress was deadlocked many times. Well, this just throws that completely out the window.

It’s, I think, especially interesting to see what’s going on with the corporate income tax, because, basically, most of the benefits of this tax plan will actually go to the Googles and Microsofts and Apples of the world, which have—now are going to get an enormous tax rate on the $2 trillion of offshore assets that they have accumulated, many times using bogus schemes like transferring intellectual property to places like Ireland. Now they’re going to be able to bring all that back and only pay, at most, 8 percent on it. We tried that in 2004; we saw Bush do something similar. It did not create jobs. Multinationals took the money back. They used it to do shareholder buybacks that enriched their senior executives. But in this case, we’re going beyond that, beyond the margin. They’re going to have a global territorial tax. So, U.S. companies like General Electric, that realize more than 60 percent of their income from offshore, are no longer going to have to pay any tax on that at all, and, you know, whereas domestic companies are going to be stuck with the 15 percent rate.

This is going to be a tremendous boon to Trump’s own personal pocket, because the only reason he paid any taxes at all—we only have one tax year for him. That was from 2005. The only reason he paid any tax that year was really because of what’s called the alternative minimum tax. And he’s abolishing that under this plan. And all of his rich friends are actually also subject to that same alternative minimum tax.

So the list goes on and on. But basically this amounts to transferring the costs of essential services of government, the federal government, to middle class and the poor, that are not going to be able to benefit this. They’re going to be paying the debts that this plan will increase. And they’re going to also be watching as other countries around the world engage in this tax competition war that Trump has just initiated.

But I would also emphasize many other provisions here. The drop of the top rate to 35 percent for personal income taxpayers at the same time that they’re cutting the corporate rate to 15 percent is going to create this enormous incentive for rich people to park all their income in companies. And then, you know, they won’t pay any tax on it until it’s distributed. So, that’s just another—and they’ve also eliminated the pass-through tax, where income goes from corporate to personal use. So there are a lot of games that are going to be played by the very wealthy. But 90 percent of the benefits of this plan go to the top 1 percent of the population—that’s the clear—the shareholders of major companies, many of which are—most of which are multinationals, that are going to be actually given an incentive to offshore their businesses by this. This is actually going to increase the use of offshore havens by companies like Apple and Google, because there’s now a territorial tax.

The president doesn’t keep his word on this or many other issues. I think his supporters should really be distressed about the fact that, going forward, they’re going to live in a country that is essentially much more unequal, where the costs of government are basically on their backs. We’ve tried this experiment before. We’ve had 30, 40 years of Arthur Laffer-type tax cuts, where they were supposed to pay for themselves. They never have. At most, this will pay for maybe one—you know, add a 0.2 percent of growth to the economy. But, overall, tax revenue will drop by up to $7 trillion over this next decade. And so we’re going to be saddled with increased debt, multinational companies that are now citizens of nowhere for tax purposes, and a much more unequal society.

substantial number of Democrats who will oppose this just on principle and because of the track record we’ve had that this is going to cause huge deficits. This is really going to be a litmus test for the Republicans to, you know—I mean, they’re going to be put to a choice here. They are supposed to be interested in fighting deficits. But here we have—you know, I think, ultimately, this was what the election was all about. This is a land grab, essentially, by the ruling elites in this country. And I think, you know, the Republicans are—who said all along they were deficit hawks, are really going to be flushed out here. It may produce some of the same divisions we saw on the Obamacare matter. But, you know, ultimately, I’m pessimistic. I mean, I think, put to the test, many Republicans will just give up on their anti-debt principles.

James Henry
economist, lawyer and senior adviser with the Tax Justice Network. He is former chief economist at McKinsey & Company.

— source democracynow.org

Why are Tax Haven Users Getting Govt Contracts?

The federal government is giving lucrative contracts to suppliers who avoid paying their share of taxes by using tax havens. This includes individuals and organizations named in the Panama Papers. Those findings, and recommended changes to the current rules, are contained in a report by Canadians for Tax Fairness and the labour organization Unite Here.

The organizations have sent that report to the Minister of Public Works and Government Services (PWGS) urging changes in the procurement rules. Currently, those rules do not penalize businesses that avoid taxes by moving money to offshore tax havens.

— source taxfairness.ca

15,080 Profitable Indian Companies Paid No Tax in 2015-16

Tax incentives allowed 15,080 profit-making Indian companies to have effective tax rates of zero, and in some cases less than zero, in 2015-16, according to an IndiaSpend analysis of the latest available national tax data or more specifically a government analysis called the Revenue Impact of Tax Incentives under the Central Tax System.

The central government introduced minimum alternate tax (MAT) in the late 1980s to tackle this anomaly, but even MAT has exemptions that appear to have negated its original intent partially: 52,911 companies made profits in 2014-15 and paid no tax, IndiaSpend reported in March 2016.

— source indiaspend.com by Rohit Parakh

New estimates reveal the extent of tax avoidance by multinationals

New figures published today by the Tax Justice Network provide a country-level breakdown of the estimated tax losses to profit shifting by multinational companies. Applying a methodology developed by researchers at the International Monetary Fund to an improved dataset, the results indicate global losses of around $500 billion a year. The figures appear in a study published today by the United Nations University World Institute for Development Economics Research (UNU-WIDER, in Helsinki).

While this global total is more cautious than the $600 billion estimate of the IMF researchers, the distribution is also different. Losses are now estimated to be even more intense in lower-income countries in relation to GDP and as a proportion of total tax revenues. In addition, today’s estimates include the full country breakdown.

Profit shifting is the process whereby companies move profits from their subsidiaries in higher tax countries, where the real economic activity takes place, to other subsidiaries in ‘tax havens’. This is typically achieved by the multinational company setting up internal trades which exploit international tax rules to move taxable profits from one jurisdiction to another.

Profit shifting has been a big focus of international attention since scandals at companies like Apple and Amazon revealed the scale of distortions – and the systemic nature of avoidance schemes marketed by big 4 accounting firms was then laid bare in the ‘LuxLeaks’ revelations.

Tax Justice Network Chief Executive, Alex Cobham and Petr Janský of Charles University in Prague, carried out the analysis which recreates the methodology of a study published by researchers at the International Monetary Fund in 2016. Cobham and Janský replicate the IMF analysis, and then repeat it using a more robust source of national tax revenue data.

The data showed that whilst the largest losses occurred in rich economies such as the United States, lower-income countries were the biggest victims of profit shifting. Some countries, such as Argentina (4.42%) lost a significant proportion of their GDP to profit shifting. In Chad, the estimated losses to profit shifting were larger than all of the (non-resource) taxes collected in the country that year. In Pakistan the losses were 40% of tax revenues. While any estimates of this deliberately hidden phenomenon are necessarily uncertain, the order of magnitude indicates that the economic development of countries may in some cases be significantly undermined by the activities of multinational companies.

— source taxjustice.net

Estimating tax avoidance

There are now a range of estimates of the global scale of tax avoidance. These include:

the $600 billion annual tax loss estimated by IMF researchers Crivelli et al. (2015; 2016), which divides roughly into $400 billion of OECD losses and $200 billion elsewhere;
the $100 billion annual tax losses that UNCTAD’s World Investment Report 2015 estimated for developing countries due only to conduit FDI investment through ‘tax havens’;
the $100 billion to $240 billion globally that OECD researchers estimate;
the $130 billion globally that we have estimated as annual losses due to avoidance by US multinationals only; and so on.

With the exception of the latter, which deals only with multinationals responsible for around 1/5 of global FDI, the estimates have not been broken down to country-level to show the underlying pattern. While the OECD research indicates losses in a range from 4% to 10% of corporate income tax revenues, the IMF researchers’ estimates suggest that OECD countries may lose 2-3% of their total tax revenues, and lower-income countries much more: to 6-13%.

Petr Jansky and I have now reworked the IMF researchers’ estimates to provide the country-level detail, in a paper published by UNU-WIDER today. We chose the IMF paper because it is the only one of the institutional researchers’ efforts to date which has been published in a peer-reviewed journal. The researchers were kind enough to share their code, and we were able to replicate quite closely the original findings. We then revised the results by using the ICTD-WIDER Government Revenue Database, which provides significantly better revenue data, and these are our main findings:

The global tax losses are estimated at around $500 billion (compared to $600 billion in the original);
The pattern of greater relative intensity in lower-income countries (measured by losses/GDP or losses/tax revenue) is stronger in our results than in the original; but
The methodology, and country-level findings, raise a number of questions.

Estimates of tax losses to profit shifting. Graphic by James Stewart from WIDER

The main questions are three. First, the methodology takes statutory tax rates as the determinant of profit-shifting. The authors do experiment with one set of effective tax rates, and we try with another, but without finding a satisfactory fit. The result is that countries like Luxembourg, with relatively high statutory rates compared to the (often near-zero) effective rates for multinationals, appear to suffer rather than benefit from profit-shifting. Countries with low statutory rates (e.g. in eastern Europe) appear to attract profit-shifting.

Second, looking at country-level results highlights the rather mechanical nature of the model. Once the regression model has determined the sensitivity of taxable profits to the statutory rates elsewhere, the losses in a given country are a simple function of rates and economy size, and so multiple countries are estimated to suffer the same loss as a share of GDP – which is not inherently unreasonable for such estimates, but jars with the intuition that patterns of profit-shifting in practice respond to very particular legal, political and economic conditions.

Estimates of tax losses to profit shifting as a percentage of total tax revenue. Graphic by James Stewart from WIDER

Third, some of the individual results appear extreme. Does Chad lose more than its actual (non-resource) tax revenue? Perhaps, as resources are dominant. And yet… Does Pakistan lose 40% or so of its tax revenue? The country is known to face extreme tax difficulties, but still… Do a number of countries from Argentina to Zambia lose 4% or more of their GDP? Here’s the thing: if numbers like the IMF’s $600 billion estimate include country-level findings we’re not sure of, these should be out in the open – and that’s what we’ve done here.

More broadly, can we be comfortable with results based on national-level data rather than using data from individual multinationals? Here, there may be a sense of some convergence. Our estimates using data on US multinationals implied global tax losses annually of $130 billion. Scaled up from the rough US share of 20% in global FDI, and assuming all multinationals are equally aggressive to US multinationals, the extrapolated losses would be in the region of $650 billion. A global total of $500 billion does not seem inherently implausible then; and might perhaps suggest US multinationals to be among the most aggressive internationally.

We don’t think the methodology is perfect; nor of course, the estimates precisely accurate. But we hope that this is a valuable step in the ongoing process of assessing more closely, and responding more effectively, to this first-order global policy problem.

As is often the case, we conclude that there will only really be certainty on the scale of global profit-shifting when governments decide to require that multinationals’ country-by-country reporting must be made public. Now that the OECD has created a standard, based on the 2003 Tax Justice Network proposal by Richard Murphy, the compliance costs are effectively nil – and the accountability and revenue impacts likely to be large indeed. And in that vein, the work of Open Data for Tax Justice to bring together existing country-by-country data and demonstrate its value, continues. We welcome support there, and of course comments on the paper published today.

— source taxjustice.net

The Panama papers are not about tax

This deliberately provocative headline is of course not fully true: tax is clearly a tremendously important aspect of the Panama papers scandal, as it continues to roil governments and élites and their advisers, around the globe. But there are far too many commentators who seem to be putting this into a ‘tax’ pigeonhole. Many have dubbed this “the Panama tax avoidance scandal” (or variants of this) — which reflects a profound misunderstanding of what is going on.

First, as an aside, we should probably banish this word ‘avoidance’ from the tax lexicon, because it’s so widely misused and misunderstood (it helps use words like ‘tax cheating’ or ‘escape’ instead, to keep you out of the thorny thickets of what’s legal or not.) But more importantly for today’s blog, these commentators have erred when they put Panama into the ‘tax’ box. Tax is a subsidiary story.

The Panama papers are, most importantly, about secrecy, and . . . hiding: hiding drugs money, hiding money from spouses, hiding from angry creditors, hiding from Mafia-hunting police, and of course hiding from tax too. It is a more general story about wealthy, law avoiding folk and “tax havens” (which are, again less about tax than about other things, as we’ve noted.). Aditya Chakrabortty, writing in The Guardian, cites a TJN expert:

“Thirty years of runaway incomes for those at the top, and the full armoury of expensive financial sophistication, mean they no longer play by the same rules the rest of us have to follow. Tax havens are simply one reflection of that reality. Discussion of offshore centres can get bogged down in technicalities, but the best definition I’ve found comes from expert Nicholas Shaxson who sums them up as: ‘You take your money elsewhere, to another country, in order to escape the rules and laws of the society in which you operate.’ “

Note that the t-word is absent from that loose definition.

One of the few people in the world who has a well-informed insider’s perspective who is also happy to speak out about it is Brooke Harrington of Copenhagen Business School, who took the remarkable step of actually obtaining a professional qualification in wealth management to pursue her studies. As she told our Taxcast recently:

“Tax avoidance was really only the tip of the iceberg. I didn’t realise how much bigger the problem is. Really what wealth managers do extend much more generally to law avoidance. And that creates problems of legitimacy for whole governments: it’s bad enough that people think they are getting shafted because the rich aren’t paying their fair share of taxes: it’s quite another matter when you say there is one law for the rich and one for everyone else and they are not the same: that is the sort of thing that can potentially topple governments.”

— source taxjustice.net

The problems with measuring tax systems

In the past few years there have been several efforts to understand and even measure ‘spillovers’ – that is, how one state’s tax or legal system can transmit damage to other states’ tax or legal systems. Perhaps the best known of these efforts is the Tax Justice Network’s Financial Secrecy Index (FSI), which attributes a secrecy score to every country measured, then combines that score mathematically with a size weighting, to create a ranking of the world’s most important secrecy havens. The index has been extremely effective in drawing attention to the issues, and in uncovering a lot of new data and analysis and understanding of the offshore phenomenon which lies at the heart of financial globalisation.

The FSI deals with secrecy: there is a clear need for something similar in the area of tax. Corporate tax loopholes in one country, for instance, can have similarly damaging effects on the corporate tax systems of other countries, by encouraging multinationals to shift profits to the lower-tax jurisdiction, depriving the higher-tax jurisdiction of revenues. People are, rightly, rather angry about this.

A little work has already been done in this area. The IMF published a paper in 2014 entitled ‘spillovers in international corporate taxation,’ a first stab at measuring the scale of the phenomenon. Coming at it from a different angle, Oxfam recently published a report on ‘the world’s worst corporate tax havens’ whose methodology produced a ranking a bit like Financial Secrecy Index’. The corporate tax havens of Ireland and the Netherlands recently published ‘spillover analyses’ of their own tax systems which, surprisingly or unsurprisingly, depending on how cynical you’re feeling, largely absolved themselves of blame.

This is an area where much more work needs to be done. Now Andrew Baker and Richard Murphy offer a new, broad framework for thinking about how one might go about it.

Their blog Reframing Tax Spillovers, and the associated paper for the APPG, rightly highlights the flaws in these other projects, and offers something more comprehensive and useful.

Crucially, Andrew and Richard recognise that there are different dimensions of spillover: not just from one country or state to another, but also between different taxes in the domestic economy. For instance, the corporate income tax was originally set up in order to defend the ordinary income tax: if you have no corporate tax then rich folk simply convert their ordinary income into corporate income and escape the income tax. As they put it: ‘Taxpayers will try to divert part of the income that should be subject to this tax to another tax or location, or both.’ This happens all the time – and of course there are spillovers that cross both tax boundaries and national borders. This early-stage concept is highly welcome, and I can imagine it flowering into something big and useful.

Yet there is another generic issue that also needs highlighting: the conservative bias in measurement itself.

Much has been said about neoliberalism – the disenchantment of politics by economics, as Will Davies has put it – in a sense, the effort to shoe-horn as many aspects as possible of life, the universe and everything into the price system.

Much has been written about how neoliberalism, neoclassical economics and the economics faculty at Chicago University have injected a conservative bias into economics. But there’s an even deeper problem than this: in the area of tax, the very act of measurement is likely to impart a conservative bias.

This is for a pretty simple reason. Take a corporate tax cut, for instance. Leave aside the question of tax spillovers to other countries, and start by asking: ‘does this tax cut help my own country?’ What does it look like from a purely selfish national perspective?

Many studies have done this. Does the corporate tax cut foster new corporate investment, or bring in Foreign Direct Investment (FDI)? Oceans of work have been done here, and plenty of the political discourse in Britain, and in many other countries, leaves the matter at that. If it attracts FDI then that tax cut is ‘competitive’ – so let’s do it. After all, who could oppose a ‘competitive’ tax system?

But of course the story doesn’t end there. FDI is a means to an end, not an end in itself. If you have to spend a lot of treasure to attract that FDI, the cost may not be worth it. Britain’s corporate tax rate cuts since 2010 are forecast to cost nearly £15 billion a year in lost tax revenues by 2021 – which is well over a third of the education budget. It’s hard to see that this equation makes for a ‘competitive’ tax system – whatever ‘competitive’ might mean in this context. I would argue that pretty much all of that academic work just measuring elasticities is, for this reason, pretty meaningless from a policy perspective.

If one could do a good cost-benefit analysis – as in ‘here are the benefits of a given tax cut, weighed against the costs’ – then one might be able to draw a better conclusion about the merits or disadvantages.

But this is where the conservative bias comes in. It’s relatively much easier to measure the ‘benefits’ side of a tax cut – FDI responses, elasticities and so on – than it is to measure the costs.

That is, it’s relatively easier to measure things like investment responses, elasticities, which in isolation tend to favour tax-cutting, than to measure the other side of the ledger where the damage of tax cuts shows up: such as by reducing the long-term benefits of (tax-financed) infrastructure or education, which might play out over decades; or confidence in the overall tax system and democracy itself, as corporate tax rates fall far below personal income tax rates, or the effects of higher inequality exacerbated by corporate income tax cuts, and so on.

As the US public finance expert Robert G. Lynch put it to me recently: ‘It is much harder to measure the damage from reductions in public investment due to tax cuts than it is to measure the benefits from tax cuts.’

Researchers often stick to what they can measure, and to the extent that they do acknowledge the other, harder to measure side of the equation, it tends to be in more narrative form. So even when there’s a suitably nuanced report, policy-makers can cherry-pick out the numbers and throw away the narrative as so much fluff. This happens all the time. And that’s before we even get to the lobbying and role of private finance sponsoring some academic research.

There’s no obvious way around this: more narrative emphasis on the hard-to-quantify stuff will just get airbrushed out of the way of tax cuts. What is necessary is to de-emphasise of the role of economics and measurement in these debates, and to rekindle the politics. Civil society has been doing a decent job here: but academia and policy-makers have too often been in the thrall of the economists.

What is needed, at the end of the day, is to pursue the disenchantment of economics by politics.

— source speri.dept.shef.ac.uk by Nicholas Shaxson