Marcus Cake

This article will not deal with the very real social responsibilities that communities’ have toward other members of the community. Nor will it address the governments role as as a representative of the community for looking after those less fortunate or investing infrastructure for long term benefit. This is intended to provide an additional perspective on tax competition and corporations that minimise tax to maximise dollars for investment or return to shareholders.

The cost of government is higher than you think, Nationalreview.com , 26th June 2006

“Thus, when the question is, ‘How much does it cost the private sector to provide government with another $1 in tax revenue?’, the answer is $1 plus the amount by which people’s incomes in the future are smaller than they otherwise would be, but for the negative effects that the tax increase has on economic growth.”

“Voters are still being misled and government is still taxing and spending on the false assumptions that $1 spent on a bridge-to-nowhere costs $1 in tax revenue, and that $1 in government tax revenue costs the private economy only $1. In fact, the cost to the private sector of providing the government an additional $1 in tax revenue is about $2.50, and in some circumstances much more.”

“Even academics on the left now acknowledge that taxes adversely affect economic performance and, therefore, when taxes go up, it is not just the private sector’s after-tax income that goes down; its pre-tax income suffers as well. Thus, when the question is, “How much does it cost the private sector to provide government with another $1 in tax revenue?”, the answer is $1 plus the amount by which people’s incomes in the future are smaller than they otherwise would be, but for the negative effects that the tax increase has on economic growth.”

According to this article, this means that a tax dollar saved represents $2.50 of shareholder value. Given the opportunity cost to corporations and shareholders, it is understandable that major corporations are tempted to locate their activites “offshore”. Trading businesses located overseas, even in “offshore” countries are generally not subject to taxation at home. They can locate subsidiaries overseas without their home country taxing earnings of overseas subsidiaries.

Craig Barret, Chairman of Intel comments on this issue were highlighted in an article titled US Is Not Tax Competitive, Intel Boss Tells Lawmakers published on 28th June 2006.

“Barrett pointed out that Malaysia provides a 10-year tax holiday, and tax depreciation for capital building and equipment costs equal to 160% of their cost. He also noted other countries with considerable tax advantages, including: Ireland, with its 12.5% corporate tax rate and a 20% research tax credit; Israel, with a capital grant of up to 20%, a 10% tax rate and a two-year tax holiday; and China, which grants a 5-year tax holiday, followed by 50% of the normal tax rate for 5 more years.”

“While the majority of Intel’s plants are located in the United States, Barrett told the committee that “considerable business reasons exist for locating a number of our wafer fabrication facilities in foreign locations.”

“According to Barrett, a critical issue that Intel considers when deciding where to locate a new wafer fabrication plant is that it costs $1 billion dollars more to build, equip, and operate a factory in the US than it does outside the US - the largest portion of which is attributable to taxes.”

“Last week, Intel officially opened its third high volume manufacturing facility in Ireland - said to be the most modern of its type anywhere in the world. However, in the industry in general, two-thirds of the new 300 millimeter wafer fabrication facilities currently under construction, being equipped, or in production are located in Asia. If all types of plants are considered, China leads with eighteen semiconductor plants.”

“Barrett argued that there are several potential solutions to close the gap in tax competitiveness between the US and the rest of the world. These include a corporate rate reduction, an investment tax credit (ITC), full expensing of a factory in year one (or expensing plus a write-off of an additional percentage above and beyond the facility’s cost), or a combination of these items.”

Tax competition is strong. Russia introduced has a flat income tax of 15% in 2001. They recently debated a return to progressive taxation but instead highlighted a need to bring the corporate tax rate down to 15%.

Russia To Keep Flat Tax - For Now, by Tatiana Smolenskaya, Tax-News.com, Moscow 26 June 2006

Extract:

“Russian Finance Minister Alexei Kudrin has dismissed a suggestion by the country’s audit chief that Russia would benefit from a return to a tiered system of income tax whereby higher incomes would be taxed at a higher rate - at least in the short term.”

“Sergei Stepashin, the head of Russia’s Audit Chamber told a conference last week that such a progressive system of income tax was fairer, and would bring Russia into line with ‘global practice’ where the more one earns, the more one pays in tax. Stepashin said this could be put in place by 2008/9.”

“Finance Minister Kudrin responded to the proposal by stating that a progressive tax scheme in Russia ‘would not work for long’, and would be a retrograde step that inhibits economic growth.”

“I am against a progressive scale for levying income tax,” he was quoted as stating by the Russian news service, RIA Novosti.”

“Such a step would also run counter to the trend in Central and Eastern Europe, which has led the way in sweeping away complex tax systems in favour of simpler flat taxes to attract investment. Russia was one of the early flat tax pioneers, putting in place its 13% flat income tax in 2001, but many other countries in the region have since gone further than Russia by pegging both personal and corporate income taxes together at one level. In Russia, corporate tax is set at 24%.”

Shareholders may sacrificice $2.50 for every dollar they pay in taxation. Tax competition may encourage lower levels of global taxation. Structural changes could include simpler systems and an alignment of income and corporate tax rates. Of equal importance will be how government spends every dollar it receives. Some governments are better than others in balancing social needs, long term infrastructure investments and immediate needs of business and tax payers. Government’s may not receive $1 of value for each dollar they spend. Whoever receives the dollar, it must be spent wisely for the greatest social and economic benefit in a mix endorsed by the community.