Dogma Driven Policy Making: The Big Myth Surrounding Corporation Tax

Since the 1930s when the idea of a “tax haven” (as we would understand them today) first came into being, taxation policy has broadly been adjusted under the assumption that lower corporation tax rates are how to attract investment into your country.

But do these policies actually have an evidential basis behind them? It would appear not. The broad consensus that corporation tax rates have a correlation with the level of investment (commonly phrased as “the rich people will take their money elsewhere”) appears to be built on utter fallacy. Bogus logic.

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Nor are tax havens an inevitability, it must be said, since the two are always brought up in partnership.

Right wing commentators often like to play down the significance of the “shadow economy” that moves through offshore funds and tax havens, but with the IFS estimating in 1994 that half of cross-border lending is conducted through offshore accounts [1], it is clear that the amount of tax evasion conducted through these accounts makes it a considerable sum of money to ignore.

Although we can’t know the exact amount of assets stored in offshore accounts worldwide, because the definition of a “tax haven” is contested, it is broadly agreed that this figure is in the trillions of pounds [2]. The economist Richard Murphy estimates the figure lost through tax avoidance in the UK at about £25,000,000,000 per annum, and the amount the UK loses to tax evasion at £75,000,000,000 per annum [3]. Although this is hotly contested by HMRC figures, which put it much lower [4] it is almost universally estimated to cost the UK billions of pounds per year.

Between 2000 and 2006, Murphy conducted a study into the top 50 largest UK companies for the British Trade Union Congress, and found that they paid an average of 5% less of their profits in tax than they actually declared [5]. A small amount in percentage figures, but an absolutely staggering sum of money in real terms.

Why should we care though?

Well, to put it quite simply, the fact that companies are getting away with this is nothing short of criminal. That is money which should be going toward infrastructure projects and developing our country so that we can run our public services. Educating the next generation. It should be being invested to keep people fed and to keep our economy growing. Money put in tax havens is not flowing through the British economy, and so is wasted in every sense of its growth potential.

So why did David Cameron water down our Controlled Foreign Company (CFC) rules [6] which allowed us to tax profits which MNCs moved outside our jurisdiction as though they were still on British soil? This is encouraging tax evasion, far from being concerned about it.

And tax evasion has many other consequences beyond just being a theft from the duty which should be paid for access to our society (the taxes pay for the education and wellbeing of the workforce that these companies use, and investment in the markets that they will operate in); NT Naylor has expressed concerns that terrorist groups could be using anonymous offshore accounts and tax havens to protect their funding [7] in the same manner that the CIA have done in covert operations. It is a security concern, in every sense of the word.
An OECD report in 1998 on the harmful nature of tax competition also found that tax havens are eroding the tax basis of other (and importantly, developing) countries, distorting trade and investment patterns, eroding the fairness of the tax system, and diminishing global welfare [8]. The current trajectory of our tax system has to be stopped before it crumbles in on itself. It is not just a matter of justice for the country, but justice and security for the world. We have a duty to tackle this issue, I would argue.

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So again, why do Cameron and others seem to be encouraging tax evasion, and bending over backwards to please the world’s corporations demands for low taxation?
Is it perhaps, because we have little power over the most common tax havens? How can this be, when 7 of the world’s most notorious tax havens (Bermuda, The Cayman Islands, British Virgin Islands, Gibraltar, Turks and Caicos, Anguilla, and Montserrat [9]) are old colonies which we retain a great deal of control and influence over?

The answer lies in the common fallacy that companies invest in low taxation areas. Actually, the rate of taxation and the level of greenfield investment (genuine investment as opposed to mere dummy mergers for tax purposes, which actually bear little economic benefit to the host country) have little correlation. The truth is that they simply do not affect each other.

Investigations be Reuters, for example, found that only 13 businesses could be found to have relocated to the UK for tax purposes over the period 2010-2015, despite the corporation tax rate in the UK being relentlessly cut by the conservatives from 28% to 20% in the same period [10]. The correlation between low tax rates and the level of investment simply isn’t there.

Similarly, the faux exodus claimed by the right wing media surrounding France’s tax hikes in 2013, (which right wing ideologues have been perpetuating as though France has lost billions in potential investment [11]) have equally been found to be bogus claims [12]. The correlation is not there once again.

But what about Ireland? They have some of the lowest tax rates in Europe, and as a consequence have grown faster than most other OEDC countries, haven’t they? It is a popular myth amongst the right wingers, but once again, completely wrong. A simple look at the figures in this growth show that the investment in Ireland, and the growth it has seen, is much more to do with its language and the access it gives to European markets than its level of corporation tax [13].

It works the same way across all countries, and even in the case of tax havens, it is not necessarily those havens with the lowest regulation which receive the most interest: Sharman and Rawlings (2006) found that some of the least regulated tax havens, the Pacific atolls, were some of the least successful at attracting money to their shores, because banks, companies, and hedge funds did not want to risk attracting attention by having their names associated with disreputable, poorly managed tax havens [14]. Exploiting reputation, with this information in mind, could be a potential solution to tax evasion in years to come, and the ‘Publish what you Pay’ campaign is one way which has been suggested for us to go about the task of cracking down on tax havens [15].

Far from investment being driven by low corporation tax and deregulation, the OECD has actually stated that average income and market size, as well as skill levels, infrastructural investment levels, and macroeconomic stability are what drives businesses to invest in a country [16]. Despite the ludicrous arrogance of Boeing threatening to refuse to carry out safety checks on their aircraft if they didn’t receive adequate tax breaks [17], the threats of corporations like this, in real terms, are nothing more than lobbyist hot air. The reality is that they go where the markets are and this is unlikely to be affected by tax rates.

A 50 year study into US tax incentives which concluded in 2013, found that “there is no conclusive evidence from research studies conducted since the mid-1950s to show that business tax incentives have an impact on net economic gains… nor is there conclusive evidence from the research that taxes, in general, have an impact on business location” [18].

It can therefore be concluded with certainty that scaremongering about “rich people leaving the country due to corporation tax” is an utterly ridiculous line of argument for right wing ideologues to use, without even getting into the fact that (even if it were the case that there was a correlation between low corporate taxation and investment) the UK has one of the lowest corporation tax rates in Europe [19].

There is no truth to the bogus line of argument whatsoever.

[1] Chavagneux, C. Murphy, R. & Palan, R. Tax Havens: How Globalisation Really Works (Cornell University Press 2010), p.50
[2] Chavagneux, C. Murphy, R. & Palan, R. Tax Havens: How Globalisation Really Works (Cornell University Press 2010), pp.61-63
[3] Chavagneux, C. Murphy, R. & Palan, R. Tax Havens: How Globalisation Really Works (Cornell University Press 2010), p.66
[4] https://fullfact.org/economy/tax-avoidance-evasion-uk/
[5] Chavagneux, C. Murphy, R. & Palan, R. Tax Havens: How Globalisation Really Works (Cornell University Press 2010), p.66
[6] Christensen, J. Shaxson, N. Tax Competitiveness: A Dangerous Obsession -in- Global Tax Fairness (eds. Pogge, T. Mehta, K.) (Oxford University Press 2016), p.276
[7] Chavagneux, C. Murphy, R. & Palan, R. Tax Havens: How Globalisation Really Works (Cornell University Press 2010), p.208
[8] Chavagneux, C. Murphy, R. & Palan, R. Tax Havens: How Globalisation Really Works (Cornell University Press 2010), p.212
[9] Chavagneux, C. Murphy, R. & Palan, R. Tax Havens: How Globalisation Really Works (Cornell University Press 2010), p.124
[10] Christensen, J. Shaxson, N. Tax Competitiveness: A Dangerous Obsession -in- Global Tax Fairness (eds. Pogge, T. Mehta, K.) (Oxford University Press 2016), p.274
[11] http://www.dailymail.co.uk/news/article-2292189/Two-MORE-executives-join-French-exodus-including-Moet-champagne-empire-boss.html
[12] http://economistsview.typepad.com/economistsview/2013/03/-huge-flight-of-rich-after-french-tax-hikes-nope.html
[13] http://foolsgold.international/did-irelands-12-5-percent-corporate-tax-rate-cause-the-celtic-tiger/
[14] Chavagneux, C. Murphy, R. & Palan, R. Tax Havens: How Globalisation Really Works (Cornell University Press 2010), p.160
[15] http://www.publishwhatyoupay.org/about/
[16] Christensen, J. Shaxson, N. Tax Competitiveness: A Dangerous Obsession -in- Global Tax Fairness (eds. Pogge, T. Mehta, K.) (Oxford University Press 2016), p.281
[17] Christensen, J. Shaxson, N. Tax Competitiveness: A Dangerous Obsession -in- Global Tax Fairness (eds. Pogge, T. Mehta, K.) (Oxford University Press 2016), p.267
[18] http://origin-states.politico.com.s3-website-us-east-1.amazonaws.com/files/131115__Incentive_Study_Final_0.pdf
[19] https://tradingeconomics.com/country-list/corporate-tax-rate

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