Monday, June 03, 2013

Ravenous monsters of the deep have woken

The tax leviathan is always hungry, but now it is deep in debt its appetite for taxes has reached a fever pitch in almost every developed economy.

As politicians have found that the imposition of higher taxes has not been raising as much revenue as expected, they have turned their attention to arresting any drain of financial and economic resources to low-taxing jurisdictions.

Some of these efforts are being co-ordinated through the Paris-based Organisation for Economic Co-operation and Development, which, on behalf of advanced-country member states, has been promoting an international tax harmonisation agenda.

A notable aspect of the OECD's efforts has been identifying so-called tax havens, that is jurisdictions that impose low or no income taxes in efforts to attract foreign capital, and exerting pressure on them to disclose which individuals and corporations hold assets in their territories.

Several such jurisdictions have succumbed to threats of prospective financial and other sanctions, by signing multilateral or bilateral agreements with high-taxing countries over the exchange of personal and financial information.

Recently Australia announced a revised tax treaty with an OECD country ironically seen by many as a tax haven, Switzerland, and in so doing hopes that breaking down Swiss financial privacy provisions will rake in more Australian revenues to help fill a substantial budget deficit.

The persecution of tax havens by the OECD and its members represents only one link in a chain of efforts by governments to discourage individuals and companies from availing themselves of the full benefits of tax competition.

Multinational corporations have been especially targeted by national tax authorities seeking to identify what they label as ''aggressive tax planning'' aimed at reducing effective tax liabilities in high-taxing economies.

In egregious subversions of the rule of law, governments have paraded companies, such as Apple and Google, in front of parliamentary ''star chamber'' inquiries to compel them to explain their global corporate tax payments, despite a lack of evidence suggesting such companies are engaging in illegal tax-evasion.

Watchdogs and investigation units, such as Project Wickenby in Australia, have also been set up to endlessly hound selected high-wealth individuals, such as Paul Hogan, about their international financial dealings and tax payments.

Official campaigns against tax competitiveness have been complemented by arguments from certain academics, think tanks and media commentators blaming the present parlous state of Western public-sector budgets on past reductions in the tax burden.

In Australia, the Parliamentary Budget Office last week released a study suggesting that the federal structural budget surplus had been declining since the mid-2000s on the back of income tax cuts pursued by the Howard and Rudd governments.

The Green-affiliated Australia Institute recently claimed that the federal budget would be in surplus today if John Howard had not instigated tax reductions, while Treasurer Wayne Swan lamented he might have achieved budget surpluses if the ratio of taxation to GDP were higher today.

These perspectives not only serve to deflect attention away from the more important contribution of expenditure increases, such as growth in welfare payments, to a deteriorating budget, but ignore that the past tax cuts barely compensated, if at all, for ''bracket creep'' pushing taxpayers into higher tax brackets.

Recent attacks on tax havens, financial and economic mobility by individuals and corporations, and the legacy of previous tax cuts, which all feed into a policy climate of aversion to tax competition, are of great concern on civil and economic liberty grounds.

Tax havens and other low-taxing jurisdictions serve an important role in restraining the worst fiscal excesses of high-taxing jurisdictions elsewhere, not least because people and companies can move their financial and other assets to hedge against fiscal exploitation or public-sector inefficiency.

Financial privacy helps secure people's confidential information from the tax leviathan and criminal elements alike, and, as US economist Daniel Mitchell notes, allows ethnic, religious and other minorities in unfree countries to avoid the threat of expropriation through oppressive tax arrangements.

Tax competition among advanced countries over the past three decades, including a reduction in the top Australia marginal income tax rate from 62 per cent in 1980 to 45 per cent today, played a crucial role in facilitating global economic growth by promoting entrepreneurship, increasing investment and enhancing labour supplies.

Retreating from further international tax competition eliminates the discipline required of politicians to reduce public-sector expenditures as part of their budgetary rescue operations.

The belief that more revenues can be procured, by violating financial privacy or dragging major companies to political show trials, also deprives advanced countries of the growth opportunities they themselves could attain by joining the global low-tax club.

Everyone, from the humble labourer to the wealthy corporate chief executive, has an interest in tax competition and to resist calls for higher taxes, especially when the hunger pangs of overspending, heavily indebted national tax leviathans are heard in unison.

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