viernes, 7 de octubre de 2005

The world (Tax) is Flat

There is an interesting editorial in the Wall Street Journal, The World is Flat:

"Sooner or later it had to happen: The mainstream press is finally discovering the flat-tax movement that has been sweeping Europe. It must be painful to credit an idea associated with the likes of Milton Friedman and Steve Forbes, but reality can't be ignored forever.

The latest news is that the government of Greece is contemplating a 25% flat-rate income tax to take effect in 2006, replacing a multiple-tier tax structure with rates of 40% or more. The Finance Minister insists that such a flat-tax reform is necessary to reduce a spiraling budget deficit, and that any lost revenue will be recouped "via an overall increase in income."

By our count, this brings to 11 the number of nations with a single-rate, postcard tax system. More dominoes are expected to fall in the next few years: Bulgaria, Croatia and Hungary are also preparing to feed their thousands of pages of tax code into the shredder in favor of lower, flatter rates. A flat-tax proposal was debated as part of Poland's recent election campaign. And one of the countries that started it all, Estonia, plans to lower its rate one more time, to 20% from 24%, which was down from the initial flat rate of 26%. Lithuania hopes to go to 24% from 33%.

As shown in the nearby table, most of the world's flat-tax nations today are the former Iron Curtain nations, which for 50 years attempted to create a workers' paradise through command-and-control economic systems. Many of these nations have swung full circle in the opposite, free-enterprise direction. Daniel Mitchell, chief economist at the Heritage Foundation, notes that Greece's decision would make it the first non-former communist European nation to adopt the flat tax. East Europe is exporting its economic system westward after all, but not in the way Nikita Khrushchev ever could have imagined.

In response, even Old Europe has had to consider tax reform, lest its economies become increasingly uncompetitive. Rather than catching the flat-tax wave, France, Germany and Italy have been attempting to stop it by outlawing tax competition through international entities, such as the OECD, the European Union and United Nations.

But in the meantime, Germany has decided it can't wait and has announced plans to cut its corporate tax rate to 19% from 25%. During last month's election campaign, the opposition party's candidate for finance minister, Paul Kirchhof, championed a 25% flat tax "so that workers don't need 12 Saturdays but 10 minutes to complete their taxes." Some analysts blame the proposal for the opposition's late collapse in the polls, as incumbent Gerhard Schröder's party fanned fears about the flat tax. But the fact that it was debated at all shows that even Germans realize they are under competitive tax pressure.

And what of the United States? The postcard flat-tax concept was virtually invented on these shores, originally by Mr. Friedman. Americans devised the economically optimal tax system and much of the world seems ready to embrace it -- just not us.

Back in the 1980s, a few Democrats (Bill Bradley, Dick Gephardt) entertained a tax reform of flatter rates and fewer deductions. But nowadays the political left derides the concept as some sinister plot to let Rolls Royce and yacht owners slash their tax bills. Their ideological blinders prevent them from learning the lesson that the new political class in Russia, Estonia and now Greece accept as a 21st-century economic reality: The best way to get more taxes out of rich people is to generate more rich people, and then give them more incentive to report their income by keeping tax rates low.

Russia, for example, has reported that it now gets more tax revenues from the rich from its 13% flat tax than from its pre-existing Swiss cheese tax code with massive evasion and 50%-plus tax rates. Russia's revenues with the flat tax grew in real terms by 28% in 2001, 21% in 2002, and 31% in 2003, according to a recent analysis by the Hoover Institution. If the U.S. had that kind of revenue growth, our politicians would be wringing their hands over what to do with budget surpluses.

Last year the Internal Revenue code achieved a new Olympic record for complexity, with nine million words -- 12 times the length of the King James Bible. High tax rates and mindless tax complexity are an economic ball and chain. We hope President Bush's tax reform commission will cut through the class-warfare blather later this month and endorse a simple, broad-based, single-rate tax system."

The WSJ published a table showing the flat tax rates in these eleven countries. I have added below the 2004 GDP growth rates in these countries, which usually exceeds the worldwide growth rate of major industrialized countries:

Flat Tax Rates and GDP Growth Rates
Country Flat Tax Rate GDP Growth Rate
Estonia 24% 4.8%
Georgia 12% 5.5%
Greece 25% 4.0%
Hong Kong 16% 2.9%
Latvia 25% 6.8%
Lithuania 33% 7.1%
Romania 16% 4.5%
Russia 13% 7.3%
Serbia 14% 2.0%
Slovakia 19% 3.9%
Ukraine 13% 8.2%
October 8, 2005 in News | Permalink

miércoles, 29 de junio de 2005

E-Commerce and International Tax Planning

Carla Carnaghan ( University of Lethbridge) and Kenneth J. Klassen (University of Georgia) posted the paper "E-Commerce and International Tax Planning"

Here is the Abstract:

This paper investigates whether the increased flexibility afforded by e-commerce has allowed firms to increase their tax planning activities. We specifically address whether multinational firms that make greater use of e-commerce have greater sensitivity to tax incentives relative to firms making less use of e-commerce. Using proxies for e-commerce activity, we find that the relation between exports and tax incentives is increasing in the e-commerce measures.

Alternative tests of foreign tax expense and country-level trade activity corroborate the main test. This research is an important first step in understanding the larger impact of e-commerce on international tax planning behavior.

Available at SSRN: or DOI: 10.2139/ssrn.557124

martes, 7 de junio de 2005

Corporate Expatriations: The Tension Between Symbols and Substance in the Taxation of Multinational Corporations

The Congressional Response to Corporate Expatriations: The Tension Between Symbols and Substance in the Taxation of Multinational Corporations

Michael S. Kirsch (Notre Dame Law School) published this report at Virginia Tax Review, Vol. 24, 2005

Here is the Abstract:

During the past few years, several high-profile U.S.-based multinational corporations have changed their tax residence from the United States to Bermuda or some other tax haven. They have accomplished these expatriations, and the resulting millions of dollars of annual tax savings, merely by changing the place of incorporation of their corporate parent, without the need to make any substantive changes to their business operations or their U.S.-based management structure. Congress and the media have focused significant attention on this phenomenon. Despite this attention, Congress initially enacted only a non-tax provision targeting corporate expatriations - a purported ban on expatriated companies entering into contracts with the Department of Homeland Security.

This Article addresses this alternative sanction, concluding that it is prototypical symbolic legislation, with no instrumental effect. The Article also discusses the extent to which the initial Congressional debate over expatriations may have had indirect instrumental effects by furthering the informal enforcement of social norms. Ultimately, after almost three years of debate, Congress enacted a tax provision intended to deny the desired tax benefits to expatriating corporations. The Article also addresses the substantive tax policy implications of this response, concluding that it illustrates the tenuous normative underpinnings of the place-of-incorporation rule for determining corporate residence and the need for Congress to reconsider what makes a corporation American in an increasingly globalized world.

Available at SSRN:

viernes, 6 de mayo de 2005

David R. Francis has published an article entitled "Secretly, tiny nations hold much wealth" in CS Monitor:

"Although they have only 1 percent of the world's inhabitants, they hold a quarter of United States stocks and nearly a third of all the globe's assets.
They're tax havens: 70 mostly tiny nations that offer no-tax or low-tax status to the wealthy so they can stash their money. Usually, the process is so secret that it draws little attention. But the sums - and lost tax revenues - are growing so large that the havens are getting new and unaccustomed scrutiny.

For example: When London's Tax Justice Network (TJN) reported a month ago that rich individuals worldwide had stashed $11.5 trillion of their assets in tax havens, it caused a fuss in Europe. "Super-rich hide trillions offshore," blazed a British newspaper headline.

Although that report received little notice outside Europe, there are rumblings of concern in the United States. That's not surprising. Nations lose an estimated $255 billion in tax revenues a year because of the havens, according to TJN. The US alone probably loses $60 billion a year, a tax expert estimates.

The loss hits not only prosperous industrial countries, but also developing nations. As a result, dozens of church groups and other nongovernmental organizations concerned with world poverty are joining tax reformers in what will probably become a major political battle. They aim to stem the outflow of money from poor nations into tax havens - an outpouring that may exceed today's global foreign aid of some $60 billion a year.

"If we are serious about reducing poverty, one of the first things we need to tackle is an international financial system run by the rich, for the rich, at the expense of the poor," states David Woodward, director of the New Economics Foundation, a London think tank.

Corrupt officials in poor nations, illegally, and multinational corporations, mostly legally, siphon huge amounts of money into bank accounts and shell companies in 70 tax havens, such as the Cayman Islands, Bermuda, and Jersey.

"It's going to be the next major issue," forecasts Lucy Komisar, a New York journalist writing a book on offshore banking. She compares the drive against tax havens with the civil rights movement of the 1960s, in which she participated, and the feminist and environmental movements of more recent decades.

Ms. Komisar helped organize a meeting on Capitol Hill April 7 to get an American branch of the TJN going. Representatives of several members of Congress, the AFL-CIO and a few other unions, several prominent tax research groups, and the United Church of Christ attended. About a dozen well-known activist groups were also present, including Public Citizen, Greenpeace, and the National Council of La Raza.

By cracking down on capital flight and corruption in developing countries, "we wouldn't have so much poverty in the world," says Robert McIntyre, executive director of Citizens for Tax Justice. He offered at that meeting to find funding for the TJN group in the US and recruit a paid director.

Not everyone sees it this way. The Center for Freedom and Prosperity in Washington, for example, sees tax havens as "an escape hatch for overburdened taxpayers." It relishes "tax competition" between nations. The center also argues that bank secrecy in countries like Switzerland can protect the money of those who face persecution by repressive regimes.

The tax-haven numbers in the TJN report were calculated by a British research firm from conservative sources - such as Merrill Lynch's "World Wealth Report" and the Boston Consulting Group's "Global Wealth Report." The trillions of dollars reported don't include money parked in tax havens by companies - probably also a massive sum.

There are about 3 million shell companies (set up largely to duck taxes) in offshore tax havens, Komisar reckons. These tiny tax havens hold 31 percent of total world assets and 26 percent of the stock of US multinationals.

"As our economies have globalized, our tax systems remain nationally based and measures that should have been put in place decades ago to improve international tax cooperation have not been put in place," says John Christensen, international coordinator in London of TJN. "So the tax burden has been shifted from those who can afford it to middle- and low-income households, and from businesses to working people and consumers."

In the late 1990s, industrial-nation negotiators reached an agreement to pressure tax-haven countries to stop facilitating money laundering, drug dealing, and tax evasion. The deal was championed by the Clinton administration. But it was squashed by the new Bush administration, keen for tax cuts.

Then came 9/11 and a recognition that terrorists and drug dealers use the same international finance channels as tax dodgers. So the Bush administration "has become less strident in its support for bank secrecy and other nondisclosure policies," notes Mr. McIntyre.

Now, a pioneer opponent of tax evasion through tax havens, Sen. Carl Levin (D) of Michigan, has joined with Sen. Norm Coleman (R) of Minnesota to sponsor the Tax Shelter and Tax Haven Reform Act. It would enable the Treasury secretary to designate a tax haven as "uncooperative" with Internal Revenue Service investigations. Though not a panacea, the bill, soon to be reintroduced in the current Congress, would give tax investigators a weapon: Income from such designated tax havens would lose some tax advantages.