tag:theconversation.com,2011:/africa/topics/corporate-taxation-44192/articlescorporate taxation – The Conversation2023-02-23T19:57:31Ztag:theconversation.com,2011:article/2000342023-02-23T19:57:31Z2023-02-23T19:57:31Z$1 trillion in the shade – the annual profits multinational corporations shift to tax havens continues to climb and climb<figure><img src="https://images.theconversation.com/files/512027/original/file-20230223-2492-ja174s.jpg?ixlib=rb-1.1.0&rect=45%2C32%2C1033%2C685&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Looks like paradise – especially if you're a multinational corporation in need of a tax haven.
</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/relaxing-on-hammock-after-a-beach-day-in-the-royalty-free-image/897476216?phrase=cayman%20islands">LeoPatrizi/E+ via Getty Images</a></span></figcaption></figure><figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/512024/original/file-20230223-18-7m6a9x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/512024/original/file-20230223-18-7m6a9x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=255&fit=crop&dpr=1 600w, https://images.theconversation.com/files/512024/original/file-20230223-18-7m6a9x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=255&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/512024/original/file-20230223-18-7m6a9x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=255&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/512024/original/file-20230223-18-7m6a9x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=321&fit=crop&dpr=1 754w, https://images.theconversation.com/files/512024/original/file-20230223-18-7m6a9x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=321&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/512024/original/file-20230223-18-7m6a9x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=321&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>About a decade ago, the world’s biggest economies <a href="https://www.oecd.org/g20/summits/los-cabos/">agreed to crack down</a> on multinational corporations’ abusive use of tax havens. This <a href="https://doi.org/10.1787/23132612">resulted in a 15-point action plan</a> that aimed to curb practices that shielded a large chunk of corporate profits from tax authorities.</p>
<p>But, according to our estimates, it hasn’t worked. Instead of reining in the use of tax havens – countries such as the Bahamas and Cayman Islands with very low or no effective tax rates – the problem has only gotten worse. </p>
<p><a href="https://doi.org/10.35188/UNU-WIDER/2022/254-6">By our reckoning</a>, corporations shifted nearly US$1 trillion in profits earned outside of their home countries to tax havens in 2019, up from $616 billion in 2015, the year before the <a href="https://doi.org/10.1787/23132612">global tax haven plan was implemented</a> by the group of 20 leading economies, also known as the G-20. </p>
<p><a href="https://doi.org/10.35188/UNU-WIDER/2022/254-6">In a new study</a>, we measured the excessive profits reported in tax havens that cannot be explained by ordinary economic activity such as employees, factories and research in that country. Our findings – which you can explore in more detail along with the data and an interactive map in <a href="https://missingprofits.world">our public database</a> – show a striking pattern of artificial shifting of paper profits to tax havens by corporations, which has been relentless since the 1980s. </p>
<h2>Global crackdown</h2>
<p>The current effort to curb the legal corporate practice of using tax havens to avoid paying taxes began in June 2012, when world leaders at the <a href="https://www.oecd.org/g20/summits/los-cabos/">G-20 meeting in Los Cabos, Mexico</a>, agreed on the need to do something.</p>
<p>The Organization for Economic Cooperation and Development, a group of 37 democracies with market-based economies, <a href="https://doi.org/10.1787/23132612">developed a plan that consisted</a> of 15 tangible actions it believed would significantly limit abusive corporate tax practices. These included creating a single set of international tax rules and cracking down on harmful tax practices.</p>
<p>In 2015, the G-20 adopted the plan officially, and implementation began across the world the following year.</p>
<p>In addition, following leaks like the <a href="https://www.icij.org/investigations/panama-papers/">Panama Papers</a> and <a href="https://www.icij.org/investigations/paradise-papers/">Paradise Papers</a> – which shed light on dodgy corporate tax practices – public outrage led <a href="https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses">governments in the U.S.</a> and Europe to initiate their own efforts to lower the incentive to shift profits to tax havens. </p>
<h2>Profit-shifting soars</h2>
<p><a href="https://doi.org/10.35188/UNU-WIDER/2022/254-6">Our research shows</a> all these efforts appear to have had little impact. </p>
<p>We found that the world’s biggest multinational businesses shifted 37% of the profits – or $969 billion – they earned in other countries (outside the headquarter country) to tax havens in 2019, up from about 20% in 2012 when G-20 leaders met in Los Cabos and agreed to crack down. The figure was less than 2% back in the 1970s. The main reasons for the large increase were the growth of the tax avoidance industry in the 1980s and U.S. policies that made it easier to shift profits from high-tax countries to tax havens.</p>
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<p>We also estimate that the amount of corporate taxes lost as a result reached 10% of total corporate revenue in 2019, up from less than 0.1% in the 1970s. </p>
<p>In 2019, the total government tax loss globally was $250 billion. U.S. multinational corporations alone accounted for about half of that, followed by the U.K. and Germany.</p>
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<h2>Global minimum tax</h2>
<p>How do policymakers fix this?</p>
<p>So far, the world as a whole has been trying to solve this problem by cutting or scrapping corporate taxes, albeit in a very gradual way. In the past 40 years, the global effective corporate tax rate <a href="http://globaltaxation.world/">has fallen from 23% to 17%</a>. At the same time, governments have relied more heavily on <a href="https://gabriel-zucman.eu/files/PikettySaezZucman2022RKT.pdf">consumption taxes</a>, which are regressive and tend to increase income inequality.</p>
<p>But the root cause of profit-shifting is the incentives involved, such as generous or lenient corporate tax rates in other countries. If countries could agree on a <a href="https://www.jstor.org/stable/24437292">global minimum corporate tax rate</a> of, say, 20%, the problem of profit-shifting would, in our estimation, largely disappear, as tax havens would simply cease to exist. </p>
<p>This type of mechanism is exactly what more than <a href="https://www.oecd.org/newsroom/130-countries-and-jurisdictions-join-bold-new-framework-for-international-tax-reform.htm">130 countries signed onto in 2021</a>, with implementation of a 15% minimum tax set to begin in 2024 in the EU, U.K., Japan, Indonesia and many other countries. While the <a href="https://apnews.com/article/russia-ukraine-biden-poland-2577a450b3cb18f325d61e9920e2593d">Biden administration has helped spearhead</a> the global effort to implement the tax, the U.S. <a href="https://www.politico.com/news/2022/07/15/manchin-rejects-global-tax-plan-00046103">has notably not been able</a> to get legislation through Congress. </p>
<p>Our research suggests implementing this type of tax reform is necessary to reverse the shift of ever-greater amounts of corporate profits going to tax havens – instead of being taxed by the governments where they operate and create value.</p><img src="https://counter.theconversation.com/content/200034/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ludvig Wier is also Head of Secretariat at the Danish Ministry of Finance, holds a PhD from the University of Copenhagen and does research for UNU-WIDER, which provided funding for the underlying research in this story. The views expressed in this paper are those of the authors, and do not necessarily reflect the views of the Ministry of Finance of Denmark, UNU-WIDER, the United Nations University, nor its program/project donors. All data are available online at <a href="https://missingprofits.world">https://missingprofits.world</a>.</span></em></p><p class="fine-print"><em><span>Gabriel Zucman receives funding from the Stone Foundation, the Carnegie Foundation, the European Research Council, and the European Commission grant TAXUD/2020/DE/326.</span></em></p>New research shows that companies are shifting record amounts of their profits to tax havens, despite a global effort to crack down on the practice.Ludvig Wier, External Lecturer of Economics, University of CopenhagenGabriel Zucman, Associate Professor of Economics, University of California, BerkeleyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1477902020-10-13T11:50:54Z2020-10-13T11:50:54ZTaxing financial winners from coronavirus to pay for the crisis – lessons from WW1<p>The enormous impact of COVID-19 on the world has drawn comparisons with the first world war. Historian Niall Ferguson, for example, <a href="https://www.hoover.org/research/black-swans-dragon-kings-and-gray-rhinos-world-war-1914-1918-and-pandemic-2020">points to</a> the financial panic, global reach, economic dislocation and popular alarm of both crises. Both events have cost the UK enormous sums, driving government debt today to over <a href="https://www.theguardian.com/business/2020/aug/21/covid-19-drives-uk-national-debt-to-2tn-for-first-time">£2 trillion</a>, equivalent to over 100% of GDP. In 1919, it was even higher at <a href="https://www.ukpublicspending.co.uk/debt_history">135% of GDP</a>. Both crises, though, have also generated winners as well as losers with respect to finance, as well as health.</p>
<p>We are now in the second wave of the COVID-19 virus and have no idea how much this pandemic will eventually cost. But we can learn lessons from the first world war and subsequent crises on how to reduce the final bill. Faced with a similar dilemma in 1915, the war cabinet’s solution was to target the financial winners from the war with a special tax. More recently, Margaret Thatcher and Gordon Brown adopted a similar strategy during hard economic times. Today’s government can learn from this approach by targeting those organisations that have profited from the pandemic to help those that are struggling.</p>
<p>During the first world war, despite the suffering, there were some financial winners, even among working-class families. Labour shortages caused wages to rise and women took the absent men’s jobs or worked in the newly established munitions factories. This all added to the household budget. A <a href="https://www.gutenberg.org/files/15012/15012-h/15012-h.htm">cartoon in satirical magazine, Punch in 1917 </a> shows a munitions worker at the factory gates wearing a smart overcoat and smoking a cigar, telling his friend he has just bought a piano. </p>
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<a href="https://images.theconversation.com/files/363148/original/file-20201013-21-1lu7y4x.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Sketch of two men in 1917, one smoking a cigar." src="https://images.theconversation.com/files/363148/original/file-20201013-21-1lu7y4x.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/363148/original/file-20201013-21-1lu7y4x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=934&fit=crop&dpr=1 600w, https://images.theconversation.com/files/363148/original/file-20201013-21-1lu7y4x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=934&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/363148/original/file-20201013-21-1lu7y4x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=934&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/363148/original/file-20201013-21-1lu7y4x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1174&fit=crop&dpr=1 754w, https://images.theconversation.com/files/363148/original/file-20201013-21-1lu7y4x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1174&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/363148/original/file-20201013-21-1lu7y4x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1174&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Punch magazine cartoon from 1917 where a munitions worker tells his friend he’s just bought a piano.</span>
<span class="attribution"><a class="source" href="https://www.gutenberg.org/files/15012/15012-h/15012-h.htm">Project Gutenberg EBook of Punch</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
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<p>Some companies also profited from the war. In 1915, Spillers and Bakers, a flour-milling company, <a href="https://www.tandfonline.com/doi/abs/10.1080/21552851.2014.963954?needAccess=true&journalCode=rabf21">felt obliged to apologise to the nation</a> for having made profits of £300,000 compared with £50,000 before the war. Sectors such as shipping, or that supplied the army with weapons, uniforms and food supplies, did well too. </p>
<p>These gains were seen by the British public as profiteering. In response, the government imposed a tax called Excess Profits Duty on companies that were profiting from the war. Initially, this was a 50% tax on any war-time profits in excess of average profits before the war, after allowing for a 6% return on capital. It was such a successful tax that it remained in place until 1921 at various rates of between 40% and, at its peak, 80%.</p>
<p>Today, there are also individual and corporate financial winners, this time from the COVID-19 pandemic. Those families who have been able to live through lockdown by working from home in large houses with gardens are some of the winners. </p>
<p>Companies in sectors such as personal protective equipment manufacturing, home delivery, online entertainment, IT, consultancy services, banks and social media have certainly made excess profits <a href="https://theconversation.com/coronavirus-your-guide-to-winners-and-losers-in-the-business-world-134205">compared to the world prior to COVID-19</a>. Some of these profits could easily be used to fund wages for employees of businesses closed during lockdowns.</p>
<p>There is no shortage of COVID-19-related costs to cover. Excess profits from the crisis should be taxed, as during WWI, for as long as the crisis lasts. Some more recent examples show how this might be possible.</p>
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<img alt="Woman with lots of cardboard delivery boxes." src="https://images.theconversation.com/files/362654/original/file-20201009-13-j31kbp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/362654/original/file-20201009-13-j31kbp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=385&fit=crop&dpr=1 600w, https://images.theconversation.com/files/362654/original/file-20201009-13-j31kbp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=385&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/362654/original/file-20201009-13-j31kbp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=385&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/362654/original/file-20201009-13-j31kbp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=483&fit=crop&dpr=1 754w, https://images.theconversation.com/files/362654/original/file-20201009-13-j31kbp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=483&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/362654/original/file-20201009-13-j31kbp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=483&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Some companies have boomed in lockdown.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/paris-france-jan-13-2018-stack-1100915651">Hadrian / Shutterstock.com</a></span>
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<h2>Windfall tax precedents</h2>
<p>Governments on both sides of the political divide have used these kinds of taxes to plug holes in public spending at times of need in the past. Or simply when profits were deemed too high. Margaret Thatcher, for example, levied a one-off tax on the banks in 1981, <a href="https://www.independent.co.uk/news/windfall-levy-is-governments-last-resort-1602909.html">netting £400m</a>. The government needed the money; it was having difficulty issuing government bonds to fund the holes in the country’s finances. </p>
<p>At a time of high unemployment and inflation, the banks were making substantial profits from high interest rates and were seen as fair game. In the same year, with a booming oil price, Thatcher also squeezed North Sea oil and gas companies for cash by imposing a <a href="https://api.parliament.uk/historic-hansard/commons/1982/apr/26/increase-of-petroleum-revenue-tax-and">supplementary petroleum duty</a> of 20% of gross revenue on each oil field with the first 20,000 barrels duty free, on top of already heavy taxation.</p>
<p>Then, in 1997, as chancellor of the exchequer in the new Labour government, Gordon Brown raised £5.2 billion by imposing a windfall tax on privatised utility companies which, he argued, <a href="https://www.ifs.org.uk/fs/articles/fslucy.pdf">had been sold off much too cheaply</a>. The tax imposed was based on the difference between the (lower) amount received by the government on privatisation and the (higher) amount the government would have received if the substantial profits the privatised utilities actually did make after privatisation had been taken into account. </p>
<p>The most recent windfall tax was imposed in 2010 by Alastair Darling, the then chancellor. It was a tax of 50% on bankers’ bonuses of more than £25,000 – payable by the banks and not the individual bankers. Expected to raise £550 million, <a href="https://www.theguardian.com/business/2010/jan/24/banking-bonuses-executive-pay-tax">it raised £3.4 billion</a> as investment banks failed to reduce bonuses by as much as the government had expected. Bankers were under the spotlight at the time, accused of being responsible for the global financial crisis of 2008. </p>
<p>These examples show creativity, flexibility and opportunism by successive governments in designing taxes to soak up excess profits. Until now, under substantial pressure, the current government has had little time to ponder how to claw back the equivalent high profits from the pandemic. But as unemployment rises and the number of financial losers increase, now is the time to restore the playing field by taxing the financial winners. There are plenty of examples to draw on.</p><img src="https://counter.theconversation.com/content/147790/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Janette Rutterford does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Financial winners in WWI were taxed on their ‘excess profits’ to help pay for the costs of the war on other parts of the economy.Janette Rutterford, Emeritus Professor of Finance and Financial History, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/917102018-03-06T11:39:09Z2018-03-06T11:39:09ZGOP tax law snubs US expats and ‘accidental Americans’<figure><img src="https://images.theconversation.com/files/208528/original/file-20180301-152593-7ifm9y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It may opens doors but follows wherever you go.</span> <span class="attribution"><span class="source">AP Photo/Benny Snyder</span></span></figcaption></figure><p>Since Congress began taxing incomes, American citizens have been unable to escape the reach of Uncle Sam: They must report their income, no matter where they live or where it’s earned. It’s known as a worldwide citizenship-based tax system. </p>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1578272">Most other countries</a>, however, have a residence-based system. That means their citizens are only taxed where they live or where their income is earned. The U.S. income of a British expat living in New York, for example, is off limits to <a href="https://www.gov.uk/government/organisations/hm-treasury">Her Majesty’s Treasury</a>. </p>
<p>The <a href="https://www.congress.gov/bill/115th-congress/house-bill/1">Tax Cuts and Jobs Act</a>, passed in December, <a href="https://www.ft.com/content/4909d804-b9a1-11e7-8c12-5661783e5589">was supposed to change how the U.S. treats Americans abroad</a>. Instead, it only addressed a similar issue faced by American multinational corporations by allowing their foreign subsidiaries to send home certain profits without paying U.S. taxes on them. </p>
<p>Meanwhile, Congress left U.S. citizens living overseas under the old, punitive system even though, as my research shows, it puts them at a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3097931">significant disadvantage</a>.</p>
<p>Fortunately, there’s a chance to fix this. The new law <a href="https://www.bloomberg.com/view/articles/2017-12-28/the-next-step-in-tax-reform-is-tax-repair">included</a> many inadvertent errors and omissions, and lawmakers <a href="https://www.politico.com/story/2018/02/24/tax-law-glitches-gop-423434">are working on legislation</a> to fix them. In my view, switching the individual income tax to a residence-based system should be part of any repair effort. </p>
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<img alt="" src="https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=475&fit=crop&dpr=1 600w, https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=475&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=475&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=597&fit=crop&dpr=1 754w, https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=597&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/209153/original/file-20180306-146694-1xfjkek.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=597&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The 1040 is a familiar sight to Americans, and bulldogs too.</span>
<span class="attribution"><span class="source">AP Photo</span></span>
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<h2>Birth of the income tax</h2>
<p>Since <a href="http://memory.loc.gov/cgi-bin/ampage?collId=llsl&fileName=012/llsl012.db&recNum=504">first taxing individual incomes</a> during the Civil War, the U.S. has targeted its citizens’ income regardless where they live. </p>
<p>By at least 1914, a year after states ratified the <a href="https://constitutioncenter.org/interactive-constitution/amendments/amendment-xvi">16th Amendment</a>, which made the income tax constitutional, <a href="http://query.nytimes.com/mem/archive-free/pdf?res=9A0CEFDE163AE633A25754C0A9659C946596D6CF">Americans abroad were complaining of double taxation</a> and renouncing their citizenship as a result. </p>
<p>While current law offers <a href="https://www.irs.gov/publications/p54#en_US_2017_publink100047498">exclusions</a> and <a href="https://www.irs.gov/publications/p514">credits</a> to prevent double taxation for most Americans, many other provisions are punitive to long-term expats by targeting foreign <a href="https://www.irs.gov/instructions/i8621#idm139845798808528">investments</a>, <a href="https://www.irs.gov/instructions/i5471">businesses</a> and <a href="https://www.irs.gov/businesses/the-taxation-of-foreign-pension-and-annuity-distributions">retirement savings</a>. </p>
<p>The reporting requirements and <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3097931">incompatibility with local tax laws</a> create significant compliance costs for nonresident Americans that often greatly exceed the amount of U.S. tax they owe, which is zero for most expats.</p>
<p>In 2010, the U.S. further complicated their financial lives by enacting the <a href="https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca">Foreign Account Tax Compliance Act</a>, which required banks to report to the IRS on all accounts held by U.S. taxpayers.</p>
<p>The act had two consequences: First, many banks <a href="http://money.cnn.com/2013/09/15/news/banks-americans-lockout/">closed accounts held by U.S. citizens</a> because the <a href="https://www.wsj.com/articles/the-law-that-makes-u-s-expats-toxic-1444330827">banks were scared</a> of the significant penalties for noncompliance. And second, many people learned for the first time that they were subject to U.S. taxation. </p>
<p>This resulted in a <a href="http://intltax.typepad.com/intltax_blog/2018/02/2017-fourth-quarter-published-expatriates-first-annual-decrease-in-five-years.html">spike</a> in the rate of U.S. citizenship renunciations, from under 800 per year before 2010 to over 5,000 in both 2016 and 2017. </p>
<p>The GOP <a href="https://republicansoverseas.com/timeline/gop-includes-anti-fatca-language-2016-platform/">even included</a> a provision to repeal the act in its 2016 election platform, which also supported moving to a residence-based system of taxation for individuals and a territorial system for corporations. </p>
<h2>‘Accidental Americans’</h2>
<p>The main problem with a citizenship-based taxation is that the U.S. is taxing the foreign income of an American or a dual citizen working, living and paying tax in another country, without a dime going through any entity under U.S. jurisdiction. </p>
<p>Currently, the U.S. is the <a href="http://heinonline.org/HOL/Page?handle=hein.journals/scal89&div=11&g_sent=1&casa_token=16xrVaFmaCMAAAAA:915EU3zdgv6S7WoFvstb5OYA2YPUt5_ZksGdRoOIpiT6FsiZ9fN0fNJNGTA9vxxt7KyKy7iV&collection=journals">only country</a> – apart from Eritrea – to do this. </p>
<p>In addition, many of the American nonresidents being taxed are “<a href="https://www.americains-accidentels.fr">Accidental Americans</a>,” who have few or no ties to the United States but are U.S. citizens due to an accident of birth. Accidental Americans exist because <a href="http://heinonline.org/HOL/Page?handle=hein.journals/mjil38&div=12&g_sent=1&casa_token=HWDd4thBHhMAAAAA:EenC6gTNFSxmeulMtlgUW_4frPK3_Idj0zvHY9mXhg--Dj3CbbPpe-Cwg2TyBPMqozosni72&collection=journals">the U.S. grants citizenship broadly</a>, based on both <a href="https://www.law.cornell.edu/constitution/amendmentxiv">place of birth</a> and <a href="https://travel.state.gov/content/travel/en/legal/travel-legal-considerations/us-citizenship/Acquisition-US-Citizenship-Child-Born-Abroad.html">parentage</a>. </p>
<p>They have all the tax responsibilities of U.S. citizenship but often <a href="http://heinonline.org/HOL/Page?handle=hein.journals/mjil38&div=13&g_sent=1&casa_token=&collection=journals">don’t even know it</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=359&fit=crop&dpr=1 600w, https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=359&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=359&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=451&fit=crop&dpr=1 754w, https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=451&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/209156/original/file-20180306-146703-carql6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=451&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">If you’re an American looking for a home in Sydney, count on Uncle Sam tagging along.</span>
<span class="attribution"><span class="source">siwawut/Shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Kate’s situation</h2>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3097931">My own research</a> focuses on tax issues faced by Americans and dual nationals living in Australia. </p>
<p>To illustrate the impact of the U.S. tax system, let’s take the situation of “Kate,” a U.S.-Australia dual citizen living in Sydney. She earns AU$70,000 (US$54,900) per year as a marketing manager at a locally owned company. Fortunately for her, she’s able to exclude this income from U.S. taxation, yet she still must file a 1040 every year and report the AU$20,000 in her local bank account to the <a href="https://www.fincen.gov/resources/filing-information">Financial Crimes Enforcement Network</a> or face a hefty fine. </p>
<p>Most of Kate’s problems emerge when she tries to take part in a variety of other normal aspects of living somewhere for any significant period of time, from saving for retirement to buying a home. And in general, the exclusions and credits intended to prevent double taxation won’t be sufficient.</p>
<p>For example, Australia has one of the <a href="https://www.globalpensionindex.com/country-summaries-2/australia/">best retirement systems in the world</a> available to all residents, with mandatory employer contributions and low taxes. Withdrawals after age 60 are tax-free in Australia. </p>
<p>Unfortunately, Kate will face lots of <a href="http://fixthetaxtreaty.org/problem/superannuation/">complexity</a> and <a href="https://globenewswire.com/news-release/2016/04/04/825555/0/en/Brager-Tax-Law-Group-Finally-Receives-IRS-Documents-under-FOIA-for-Foreign-Retirement-Account.html">uncertainty</a> when it comes to the U.S. treatment of her Australian retirement savings. If she chooses to contribute more to her retirement fund than her employer, the U.S. could tax some of the income accumulating inside her account, even though she has no access to that income. And when she eventually retires, a portion of her withdrawals will also be subject to U.S. taxation. </p>
<p>Let’s say Kate buys a home. She’ll confront the U.S. taxman again if she eventually wants to sell, depending on fluctuations of the exchange rate between the purchase and sale. If the Australian dollar falls, that will mean the mortgage will be smaller in U.S. dollars, triggering a <a href="http://isaacbrocksociety.ca/2015/05/31/congress-knew-about-diaspora-phantom-gains-problem-1986-refused-fix/">taxable gain</a> upon repayment. If the Australian dollar appreciates, it increases the likelihood Kate will have to pay U.S. tax on any gain from the sale itself. (The U.S. excludes only the first $250,000.) Either way, Kate will likely lose. </p>
<p>Kate will face similar complexity and potential tax liability if she <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2321349">simply wants to invest</a> in a local <a href="https://www.irs.gov/instructions/i8621#idm139845801047392">mutual fund</a> or <a href="https://www.irs.gov/instructions/i5471">start a business</a> in Sydney. </p>
<p>Essentially, every transaction that Kate enters into will be seen as a cross-border transaction by the IRS, even though all parties may be Australian citizens resident in Australia.</p>
<h2>Seeking redress</h2>
<p>Kate’s situation is not unique. A survey of U.S. expats <a href="http://www.tandfonline.com/doi/abs/10.1080/1369183X.2017.1409173">shows</a> that about one-third of respondents were actively considering renouncing their U.S. citizenship, with open-ended responses indicating that tax compliance- and bank-related issues were major factors. </p>
<p>These tax and reporting obligations have cost them the <a href="https://www.theguardian.com/money/2014/sep/24/americans-chased-by-irs-give-up-citizenship-after-being-forced-out-of-bank-accounts">ability to bank and invest</a>, the <a href="http://fixthetaxtreaty.org/about/our-stories/shauns-story/">ability to save for retirement</a> and <a href="http://isaacbrocksociety.ca/2015/10/25/how-the-fatca-iga-has-made-u-s-citizenship-a-disability-in-canada-and-highlighted-the-issue-of-law-firm-trust-accounts/">even jobs</a>, when employers and potential business partners are not willing to allow their accounts to be reported to the IRS.</p>
<p>That’s a shame because overseas Americans are important business, trade and cultural representatives for the U.S. </p>
<p>Now that Congress has recognized the problems of worldwide taxation for U.S. corporations, I hope lawmakers take this opportunity to address the unintended consequences of U.S. tax policy toward American citizens living abroad as well. The likelihood of positive action appears to be growing with increased <a href="https://www.c-span.org/video/?c4692161/congressman-holdings-comment-rbt">recognition of this problem</a>.</p><img src="https://counter.theconversation.com/content/91710/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Karen Alpert is a founding member of Fix The Tax Treaty. She renounced her U.S. citizenship in 2016.</span></em></p>Congress changed the tax system to benefit companies with overseas operations but failed to help Americans actually living abroad, who still face punitive taxation.Karen Alpert, Lecturer in Finance, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/888452017-12-18T01:22:07Z2017-12-18T01:22:07ZWhy the Republican tax plan can help put American youths back to work<figure><img src="https://images.theconversation.com/files/199530/original/file-20171216-17854-1y0hwye.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">House Speaker Paul Ryan talks about the GOP tax plan.</span> <span class="attribution"><span class="source">AP Photo/Jacquelyn Martin</span></span></figcaption></figure><p>Republican lawmakers <a href="https://www.nytimes.com/2017/12/15/us/politics/republican-tax-bill.html?_r=0">are set to vote</a> this week on their tax plan after reconciling differences between the Senate and House versions and appear likely to meet their Christmas deadline of turning it into law.</p>
<p>During the ongoing debate over its merits, <a href="http://www.cnn.com/2017/12/13/politics/calculate-americans-taxes-senate-reform-bill/index.html">many have focused</a> on the <a href="http://thehill.com/business-a-lobbying/business-a-lobbying/358542-winners-and-losers-in-the-gop-tax-bill">“winners” and “losers”</a> in terms of who will have to pay more or less in taxes. I believe that is the wrong question. </p>
<p>The one that Americans should be asking is whether the bill will improve labor market opportunities for workers, especially the nation’s youth, whose careers have suffered since the turn of the century. </p>
<p>Here’s why I believe it will.</p>
<h2>A tough recovery for U.S. youth</h2>
<p>For several decades, I <a href="https://www.bls.gov/cps/data.htm">have helped collect data</a> for the Bureau of Labor Statistics’ <a href="https://stats.bls.gov/nls/home.htm">National Longitudinal Surveys</a> on the careers of tens of thousands of workers as well as examining programs aimed at improving the school-to-work transition, especially for disadvantaged youths. </p>
<p>The Great Recession hit young people particularly hard. And they haven’t quite recovered. The share of youth aged 16 to 24 who were working dropped from 59 percent in 2006 to under 43 percent in 2010, the lowest level since at least 1949. Unfortunately, seven years later, this age group’s employment rate is still only about 50 percent. While that number may not seem low given young workers don’t have the same responsibilities as older ones, it’s still well below the norm for much of the 20th century. </p>
<p>Other age groups didn’t suffer nearly as much during the recession and have since recovered most of their losses. The employment rate for “prime-age” adults 25 to 54 years old didn’t decline as much, slipping from about 81 percent in 2006 to a low of under 75 percent in 2011. Currently it’s about 78 percent, better, yet not fully recovered either.</p>
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<p>This loss of opportunity for U.S. youth and their inability to find a job delays the start of their careers, reduces the <a href="http://www.journals.uchicago.edu/doi/pdfplus/10.1086/209960">strong wage growth young workers typically experience</a> in their early work years and postpones family formation. </p>
<p>The returns on <a href="https://www.ssa.gov/retirementpolicy/research/education-earnings.html">every year of work experience</a> increase workers’ wages for their entire careers – at <a href="https://eml.berkeley.edu/%7Ecle/wp/wp62.pdf">about the same rate</a> as a year of additional education – so young people who miss out on employment opportunities will feel these effects for the rest of their lives. </p>
<p>To my mind, solving this challenge of getting these young people back to work is the most important goal of tax policy. And the key to doing that is by encouraging companies to boost investment, thereby spurring more growth and creating more jobs.</p>
<h2>What we can learn from the past</h2>
<p>So back to our main question: Is the tax plan likely to accomplish this?</p>
<p>In my view, its ability to improve the economy lies in one of its most contentious features: the <a href="http://www.cnn.com/2017/12/15/politics/republican-tax-bill/index.html">reduction in the top corporate income tax rate</a>, from 35 percent to 21 percent. </p>
<p>The current rate – <a href="https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52419-internationaltaxratecomp.pdf">among the highest in the world</a> – encourages owners of capital to move, or keep, money overseas to maximize their after-tax income. One example of this is the <a href="https://www.bloomberg.com/graphics/2017-overseas-profits/">hundreds of billions of dollars</a> in profits U.S. companies have left parked offshore in recent years. Another is the recent trend in “<a href="https://www.stlouisfed.org/publications/regional-economist/first_quarter_2017/a-look-at-corporate-inversions-inside-and-out">corporate inversions</a>,” in which U.S. corporations purchase companies overseas to shift their tax liability. The result is less investment in the U.S. and a shift in economic activity overseas.</p>
<p>So what evidence is there that a lower corporate tax rate will actually encourage investment and lead to more jobs? </p>
<p>The support for this proposition comes from two sources: economic theory and the experience in both the U.S. and other countries at different times in history. In classical economic theory, a lower tax rate on capital reduces the cost of capital, making more investments profitable. An <a href="http://www.economicsonline.co.uk/Managing_the_economy/Investment.html">uncontroversial implication</a> of this is higher national income, production and employment.</p>
<p>There are several historical examples that illustrate the impact of raising or lowering corporate taxes on investment and growth. </p>
<p>Starting in 1929, <a href="https://www.irs.gov/pub/irs-soi/02corate.pdf">Congress gradually raised</a> the top corporate rate to 15 percent in 1936 from 11 percent in 1929. <a href="https://minneapolisfed.org/research/wp/wp670.pdf">Some have blamed</a> President Franklin D. Roosevelt’s late 1930s tax increase for <a href="http://dailysignal.com/2010/10/20/hoover-fdr-and-clinton-tax-increases-a-brief-historical-lesson/">stopping the recovery</a> and sending the <a href="https://www.thebalance.com/us-gdp-by-year-3305543">U.S. back into recession</a>.</p>
<p>While there was many factors at work at the time – including the <a href="https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act">Smoot-Hawley Tariff Act</a> that raised duties on hundreds of imports and a <a href="https://press.princeton.edu/titles/746.html">large decline in the money supply</a> – higher taxes and the attendant anti-business climate they created are plausible explanations for <a href="https://fee.org/articles/americas-depression-within-a-depression-193739/">why the Great Depression lasted as long as it did</a>.</p>
<p>A more recent example came in the late ‘80s, when Congress cut the top corporate rate from 46 percent in 1984 to 34 percent in 1992, in two installments. Following these changes investment as a share of GDP <a href="https://fred.stlouisfed.org/series/A006RE1Q156NBEA">grew strongly</a> beginning in the early '90s, as did <a href="https://fred.stlouisfed.org/series/A191RL1Q225SBEA">economic growth</a>. </p>
<h2>What we can learn from other countries</h2>
<p>Ireland, renowned for having a <a href="https://tradingeconomics.com/ireland/corporate-tax-rate">low corporate income tax</a> of just 12.5 percent, also boasts the <a href="https://data.oecd.org/emp/employment-rate.htm">highest level of working-age employment</a> in the developed world, at just shy of 87 percent. The U.S., by contrast, is 16th with 70 percent of its working-age population employed.</p>
<p>Other countries at various points in their history, such as the <a href="https://www.forbes.com/sites/nathanlewis/2017/09/26/britains-path-to-a-19-corporate-tax-rate/#144c3b2f772e">U.K. in the 1970s</a> and <a href="https://taxfoundation.org/economic-growth-corporate-tax-rate/">Canada in the past decade</a>, bolstered their economies at least in part by lowering corporate tax rates. </p>
<p>Another thing to consider is the international reaction to the tax plan. China, for example, <a href="https://www.wsj.com/articles/beijing-develops-plan-to-counter-trump-tax-overhaul-1513012363">is sufficiently concerned</a> that lower U.S. corporate tax rates would be effective in luring business investment that its leaders are considering a range of new policies to prevent a loss of capital. Ireland <a href="https://www.irishtimes.com/business/economy/trump-s-us-tax-reform-a-significant-challenge-for-ireland-1.3310866">also sees the bill</a> as a potential challenge to its strength in luring investment, while Germany is <a href="https://global.handelsblatt.com/finance/joining-the-race-to-the-bottom-835641">contemplating</a> lower business taxes. </p>
<h2>Getting back to work</h2>
<p>While other economists may disagree, lighter taxation and less regulation have arguably generated more growth and prosperity than the opposite, whether we look at the U.S. over time or low-tax countries internationally. And that is what creates enough jobs to ensure young Americans can begin their careers promptly after finishing their education.</p>
<p>A few weeks ago, I was skeptical that the tax bill would pass. That’s because, in my view, all too often the political calculus focuses on whose tax bills will go up or down rather than what the nation needs to secure its long-term prosperity. I figured this would jeopardize the plan’s odds of success. </p>
<p>Our long-term prosperity depends on young people getting educated, finding jobs and accumulating the work experience needed to establish remunerative careers. While we are still some distance from a labor market that offers opportunities for disadvantaged and low-skill workers, I believe the tax bill offers the nation the best chance of restoring opportunity to those who need it most.</p><img src="https://counter.theconversation.com/content/88845/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Randall Olsen receives funding from Bureau of Labor Statistics, Ohio Department of Job and Family Services, Ohio Department of Education and the Organization for Economic Cooperation and Development.</span></em></p>Unlike other age groups, 16- to 24-year-olds haven’t recovered the job losses they suffered during the Great Recession. Spurring investment and growth are key to getting them back to work.Randall Olsen, Director of the Center for Human Resource Research, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/868782017-11-17T17:04:37Z2017-11-17T17:04:37Z‘Hot potato’ shows why workers won’t benefit from Trump’s corporate tax cut<figure><img src="https://images.theconversation.com/files/195236/original/file-20171117-19250-19mgss2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Who will be left holding the potato? </span> <span class="attribution"><span class="source">Nobuhiro Asada/Shutterstock.com</span></span></figcaption></figure><p>Many children have played hot potato, a game in which they pass a spud to other children quickly so they don’t get stuck with it when the music stops. </p>
<p>Taxes are like that potato. No one likes paying them; everyone tries to pass them to others. The game of hot potato sheds some light on the debate over Republican tax cutting plans, particularly when it comes to companies. </p>
<p>The <a href="https://www.nytimes.com/2017/11/16/us/politics/tax-bill-house-vote.html?_r=0">House just passed</a> its tax cut bill. It would give about <a href="https://www.nytimes.com/2017/11/02/us/politics/tax-plan-republicans.html">two-thirds</a> of roughly US$1.5 trillion in net tax cuts over the next decade to businesses, mainly by lowering the corporate income tax rate to 20 percent from 35 percent. That puts a lot of money on the table. About $100 billion in U.S. corporate profits would be retained by companies rather than paid to the government each year. </p>
<p><a href="http://money.cnn.com/2017/06/29/news/economy/corporate-tax-cut-middle-class/index.html">Treasury Secretary Steve Mnuchin has claimed</a> that most of this tax savings would go to workers, in the form of higher wages, in line with the president’s argument that the plan would benefit the middle class. </p>
<p>With the help of hot potatoes, let me explain why he’s wrong. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/195238/original/file-20171117-19259-1jrsiel.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Treasury Secretary Steven Mnuchin holds up a sheet of $1 bills, the first bearing his name, as his wife Louise Linton looks on.</span>
<span class="attribution"><span class="source">AP Photo/Jacquelyn Martin</span></span>
</figcaption>
</figure>
<h2>Why workers won’t gain</h2>
<p>There are two ways a corporate income tax cut can trickle down to workers’ pockets: directly through higher wages or indirectly via lower prices at stores selling the things they buy. </p>
<p>Mnuchin contends that workers currently bear 70 percent of the corporate tax burden – or get stuck with 70 percent of the corporate tax hot potato. So, a tax cut would mean that companies pass much of their tax benefits to their employees by paying them more or by cutting prices and increasing the buying power of current workers. </p>
<p>Yet, based on past tax cuts, <a href="http://www.taxpolicycenter.org/taxvox/who-pays-corporate-income-tax-0">economists have estimated</a> that only 20 percent of the corporate income tax is borne by workers, suggesting that they would get just a small fraction of any corporate tax reduction. </p>
<p>Furthermore, when asked how they’d spend the gains from a tax holiday on the $2.5 trillion that they currently have parked overseas – which is also part of the corporate tax cut plan – <a href="https://www.cnbc.com/2017/07/13/companies-have-big-plans-foroverseas-cash--if-tax-reform-ever-happens.html">most companies indicated</a> they’d pay back debt, repurchase shares or invest in mergers and acquisitions. Wage hikes were not high on the corporate agenda. </p>
<p>Nor have they been part of the corporate agenda for the past several decades. Since the 1970s worker productivity has increased 74 percent, while <a href="http://www.epi.org/productivity-pay-gap/">average wages have risen</a> only 12 percent. There is no reason to believe that tax cuts would all of a sudden generate greater corporate generosity for workers. </p>
<p>As for lower prices, if the U.S. economy were dominated by small businesses, intense competition would force these companies to lower prices rather than give it to shareholders in the form of dividends. Reduced prices for goods would translate into improved living standards for workers the same way that a wage hike would. </p>
<p>But our economy today <a href="https://finance.eller.arizona.edu/sites/finance/files/grullon_11.4.16.pdf">is dominated</a> by large multinational corporations facing little pressure to reduce prices. So, the gains from a corporate tax cut will remain with the owners of the business – shareholders.</p>
<p>Furthermore, corporate CEOs have large incentives to avoid passing the gains from a tax cut to workers: Executive pay is tied to the company’s share price. If they pass the extra money on to shareholders in the form of dividends or stock buybacks, share prices will rise – <a href="https://hbr.org/2014/09/profits-without-prosperity">as will executive pay packages</a>.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"930477112808628226"}"></div></p>
<h2>Paying for tax cuts</h2>
<p>So back to our game. When there’s a tax cut, someone still is stuck with a potato. That is, someone has to pay for it. There are two ways this can be done: increased borrowing or lower government spending. </p>
<p>When economies are near full employment, as the U.S. is today, additional government borrowing will increase borrowing costs or interest rates. So if the U.S. were to borrow more money to finance the tax cuts, the losers would be middle-income households borrowing to start a business, go to college or buy a home. Around 80 percent of Americans are currently in debt, with a <a href="http://www.pewtrusts.org/%7E/media/assets/2015/07/reach-of-debt-report_artfinal.pdf">median debt of $70,000</a>. Homeowners would be big losers because higher mortgage rates would also lower the value of their home (they’d also get hammered by changes to the tax code that would make the <a href="https://theconversation.com/mortgage-interest-deduction-is-a-terrible-way-to-help-middle-class-homeowners-87066">mortgage interest deduction useless</a> for most people). </p>
<p>Whether or not the U.S. borrows more and increases the national debt, some spending cuts would also be required. </p>
<p>These would likely come from Social Security, Medicare and other social programs that benefit average citizens and the poor. That’s because lawmakers <a href="https://www.nationalpriorities.org/budget-basics/federal-budget-101/spending/">won’t find much savings</a> anywhere else, apart from the military budget, which they almost certainly wouldn’t touch.</p>
<p>Already this appears to be in the cards. The Congressional Budget Office warned that if the Republican tax plan adds to the deficit, it <a href="https://www.nytimes.com/2017/11/15/us/politics/republicans-entitlement-programs-deficit.html?_r=0">could set off</a> a 2010 budget rule that would lead to half a trillion in automatic cuts to Medicare over the next decade. And the Senate tax plan calls for repealing the requirement in the ACA that everyone buy insurance, which <a href="https://fivethirtyeight.com/features/taking-on-obamacare-with-tax-reform-may-backfire-for-republicans/">would lead to 13 million Americans</a> losing health insurance – all to save $338 billion over 10 years. </p>
<h2>The big winners</h2>
<p>The consequence of the $1.5 trillion tax cut then would be continuing stagnant wages, cuts in government programs, higher interest rates and rising inequality. Translation: The rich get richer and average Americans get stuck holding some very big potatoes. </p>
<p>Adding further injury, average workers <a href="https://www.npr.org/2017/11/14/562884070/charts-heres-how-gop-s-tax-breaks-would-shift-money-to-rich-poor-americans">wouldn’t benefit</a> very much from the proposed individual income tax cuts either. Only 8.3 percent of those in the House plan would go to taxpayers making $50,000 or less (which about half of all taxpayers). In contrast, millionaires, the richest 0.3 percent of the population, receive more than a fifth of the cuts. </p>
<p>Even worse, unlike for companies, all the tax cuts for the working class <a href="https://www.forbes.com/sites/anthonynitti/2017/11/10/the-house-tax-bill-middle-class-cut-or-big-bait-and-switch/#4af094211d13">disappear after 10 years</a>.</p><img src="https://counter.theconversation.com/content/86878/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Pressman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The House just passed its version of the tax plan, which includes about US$1 trillion in cuts for corporations. The question, who will be left holding the potato?Steven Pressman, Professor of Economics, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/859472017-11-01T10:16:36Z2017-11-01T10:16:36ZWhy tax cuts make us less happy<figure><img src="https://images.theconversation.com/files/192677/original/file-20171031-18689-17oyhxd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Why so grim? Oh, tax cuts.
</span> <span class="attribution"><span class="source">AP Photo/Pablo Martinez Monsivais</span></span></figcaption></figure><p>Republicans recently <a href="https://www.nytimes.com/2017/09/27/us/politics/trump-tax-cut-plan-middle-class-deficit.html">announced</a> their tax plan and are hoping to <a href="https://www.bloomberg.com/news/articles/2017-10-26/senate-gop-wants-to-pass-tax-plan-by-thanksgiving-cornyn-says">turn it into law</a> before Thanksgiving. While details are in flux, it would likely eliminate the estate tax, lower the top marginal rate and slash corporate rates, producing, in sum, what the president has dubbed a “<a href="http://nypost.com/2017/09/29/trump-touts-his-giant-beautiful-massive-tax-cut-plan/">gigantic</a>” tax cut.</p>
<p>Each of these elements, if passed, would make the tax code less progressive and reduce government revenues in ways that ultimately makes it harder to pay for programs and services. Since the purpose of public policy should be to improve citizens’ lives and well-being, the obvious question to consider in evaluating this plan is whether it does that. Or put another way, will the tax plan make most Americans happier?</p>
<p>Research on <a href="http://www.nber.org/reporter/2008number2/blanchflower.html">happiness economics</a> suggests two vantage points to use in considering this question. </p>
<p>The first concerns how progressive a tax system is. Simply put, are societies happier when the wealthy bear a proportionately higher share of taxes? The second is the total level of taxation. That is, whether higher taxes make people more or less happy because the government takes more of their earnings and spends it on services like health care or infrastructure. </p>
<p>Let us consider each in turn.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">While everyone hates filing their taxes, research suggests paying more (if well spent) can make us happier.</span>
<span class="attribution"><span class="source">a katz/Shutterstock.com</span></span>
</figcaption>
</figure>
<h2>The importance of ‘tax morale’</h2>
<p>A <a href="http://journals.sagepub.com/doi/abs/10.1177/0956797611420882">recent article</a> in the peer-reviewed journal Psychological Science suggests that countries with a more progressive tax system are in fact happier than those where tax rates are flatter.</p>
<p>In this piece, three psychologists compare the progressiveness of a nation’s tax system with various measures of happiness. They find clear and unequivocal evidence that progressive taxes “are positively associated with subjective well-being.” In other words, a country’s citizens are happier when the wealthy bear a larger share of the taxes. </p>
<p>This conclusion holds not just when using simple correlations. It also holds under sophisticated statistical analyses that control for other national factors, such as GDP per capita and income inequality, as well as for individual factors like income, gender, age and marital status.</p>
<p>One reason for this is that the link between income and happiness is strongest for the poor and middle class. Nobel Laureates Angus Deaton and Daniel Kahneman demonstrated that happiness increases with income until a certain threshold is reached at which the returns in terms of well-being <a href="http://time.com/money/4070041/angus-deaton-nobel-winner-money-happiness/">progressively diminish</a>. That means that while income lost to taxes harms the poor and middle class – who tend to spend most of what they earn – it does not trouble the affluent – whose satisfaction with life is much less affected by a marginal increase in tax burden.</p>
<p>Another reason might be what scholars call “tax morale.” This refers to the extent to which people accept a moral obligation to pay taxes as their contribution to society. In turn, this implies a belief that a tax system is fair.</p>
<p>Existing research clearly indicates, and <a href="https://www.vox.com/2017/4/14/15297488/tax-poll-rich-pay-more">common sense suggests</a>, that <a href="https://link.springer.com/article/10.1007/s11127-011-9848-1">tax morale is higher the more progressive a system is</a> – that is, a <a href="https://www.washingtonpost.com/news/wonk/wp/2017/03/29/even-republicans-think-the-rich-arent-paying-their-fair-share-in-taxes-but/?utm_term=.6800249d70ed">“fair” system</a> is one in which the rich pay a disproportionate share – and that <a href="http://kie.vse.cz/wp-content/uploads/Lubian-Zarri-2011.pdf">people with greater tax morale are happier</a>. So, logically, if progressive taxation increases tax morale, and tax morale increases happiness, more progressive taxes mean higher levels of happiness.</p>
<p>This is not good news for Americans, however. </p>
<p>The U.S. tax system is <a href="http://journals.sagepub.com/doi/abs/10.1177/0956797611420882">one of the least progressive</a> in the Western world and is <a href="https://www.brookings.edu/blog/up-front/2012/04/13/just-how-progressive-is-the-u-s-tax-code/">considerably less so</a> than it was just a few decades ago.</p>
<p>And this is also bad news for the Republican tax plan – if the GOP and President Donald Trump want to make Americans happier. </p>
<p>The highly respected Tax Policy Center’s <a href="http://www.taxpolicycenter.org/publications/preliminary-analysis-unified-framework">detailed analysis of the plan</a> shows that benefits are heavily skewed toward the wealthiest. The current proposal will benefit the 1 percent handsomely, increasing their incomes by <a href="https://www.forbes.com/sites/anthonynitti/2017/09/29/despite-promises-to-the-contrary-trump-tax-plan-heaps-biggest-benefits-on-the-rich/#36929c7555eb">more than 8 percent</a>. Meanwhile the working and middle classes receive minimal benefits, if any – and they <a href="http://www.businessinsider.com/trump-tax-reform-plan-analysis-study-rich-rates-2017-9">may even see their taxes increase</a>. </p>
<p>While nothing is certain until the ink is dry, their bill most likely will result in a more regressive tax system that likely will make most Americans less happy.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">No one likes paying taxes, including the president.</span>
<span class="attribution"><span class="source">AP Photo/Mary Altaffer</span></span>
</figcaption>
</figure>
<h2>What taxes do</h2>
<p>But what about connection between the total tax burden and the national level of happiness?</p>
<p>Surely no one likes being taxed, but taxation is the mechanism by which society provides a great many things that people do like, such as Medicare, Medicaid and Social Security, not to mention good schools, good roads and safe neighborhoods.</p>
<p>“Big government” programs <a href="https://www.psychologytoday.com/blog/the-economy-happiness/201511/why-is-denmark-the-happiest-country-in-the-world">benefit everyone</a> for the obvious reason that <a href="https://academic.oup.com/sf/article/77/3/1119/2233857/Do-Social-Welfare-Policies-Reduce-Poverty-A-Cross">they reduce poverty</a> and alienation, thus lowering the social problems such as <a href="https://books.google.com/books?id=7RouAgAAQBAJ&dq=crime+rates+welfare+state+messner&source=gbs_navlinks_s">crime</a> and <a href="https://link.springer.com/article/10.1007/s11205-008-9252-5">suicide</a> that these conditions produce. </p>
<p>In turn, it seems obvious that virtually all people, regardless of social class or political ideology, are happier when there is less poverty and less insecurity. <a href="https://www.psychologytoday.com/blog/the-economy-happiness/201511/why-is-denmark-the-happiest-country-in-the-world">Much peer-reviewed academic research</a> has documented just that. </p>
<p>Whether <a href="https://www-cambridge-org.proxy.library.nd.edu/core/journals/perspectives-on-politics/article/assessing-the-welfare-state-the-politics-of-happiness/25B7F407E09233323C46106F2EB75AF4">looking across countries</a> or <a href="http://www.journals.uchicago.edu.proxy.library.nd.edu/doi/abs/10.1017/S0022381610000241">across U.S. states</a>, people – both rich and poor – tend to be happier in places where government provides a greater array of social protections and services. Hence, the closer we approach what Europeans call social democracy – and Americans call New Deal programs – the more people <a href="https://academic-oup-com.proxy.library.nd.edu/sf/article-lookup/doi/10.1093/sf/sou010">tend to find life satisfying</a>.</p>
<p>If taxpayer-funded government programs make people happy, then we should find a link between the level of tax burden and happiness. And in fact, that’s what we find by <a href="http://www.oecd.org/tax/tax-policy/tax-database.htm">examining a wide range of countries</a> in the Western world.</p>
<p>For example, Denmark, generally considered <a href="http://worldhappiness.report/ed/2017">the world’s happiest country</a>, also has the highest tax burden of any of industrial democracy, with about <a href="http://www.oecd.org/tax/tax-policy/tax-database.htm">half of all income</a> going to the tax man in 2014. Conversely, the <a href="http://worldhappiness.report/ed/2017/">least happy</a> are also the least taxed, namely South Korea and Turkey, which pay 25 percent and 15 percent, respectively. Yet, despite their low taxes, <a href="http://worldhappiness.report/ed/2017/">South Korea</a> ranks just 58th in happiness, between Moldova and Romania, while Turkey ranks even lower at 69th, just below Libya.</p>
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<p>We cannot of course generalize from a few examples, nor can we assume that taxation (and the spending taxation allows) are the only causes of happiness. To make strong claims about the nexus between taxation and well-being requires the rigorous and systematic analysis found in the peer-reviewed academic literature.</p>
<p>In “<a href="http://www.cambridge.org/us/academic/subjects/politics-international-relations/political-economy/political-economy-human-happiness-how-voters-choices-determine-quality-life?format=PB#02kj7KOTYZtHu66G.97">The Political Economy of Human Happiness</a>,” one of us (Radcliff) examined individual-level data on 21 countries over three decades and found that people are happier as tax burden increases.</p>
<p>This held even when accounting for other factors known to affect happiness such as income, health, employment status, gender, age, race, education, religion and so on. Similarly, the national or aggregate level of happiness went up or down with the level of taxation (again, controlling for other factors). </p>
<p>The same positive connection between tax burden and happiness was reported in <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1747-1346.2011.00290.x/abstract">a 2011 paper</a>, while <a href="https://academic.oup.com/sf/article/92/4/1241/2235843/Assessing-the-Impact-of-the-Size-and-Scope-of">another article</a> found that life satisfaction varies positively with the total amount of governmental “consumption” of the economy, that is the level of taxation.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=464&fit=crop&dpr=1 600w, https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=464&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=464&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=583&fit=crop&dpr=1 754w, https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=583&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=583&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Supreme Court Justice and Republican Oliver Wendell Holmes argued taxes were necessary to keep society civilized.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Justice_Oliver_Wendell_Holmes_at_desk.jpg">Library of Congress</a></span>
</figcaption>
</figure>
<h2>The price of a ‘civilized society’</h2>
<p>While details of the Republican tax plan could change drastically, it is certain to reflect core Republican values like lowering tax rates and smaller government.</p>
<p>Republicans tend to <a href="https://www.nytimes.com/2015/05/16/business/economy/republican-presidential-candidates-rally-around-flat-tax.html?_r=0">favor a flat tax</a> because they argue it’s fairer. And they want to reduce the tax burden overall because they think people are better off with more money in their pockets and fewer government services. Scholarly research by us and others suggest they are wrong on both counts, at least in so far as human happiness is concerned.</p>
<p>The familiar aphorism, usually attributed to Justice Oliver Wendell Holmes, notes that “<a href="https://en.wikiquote.org/wiki/Oliver_Wendell_Holmes_Jr.">taxes are the price we pay</a> for a civilized society,” a sentiment chiseled into the side of the IRS building. </p>
<p>We believe research into the economics of happiness would take this sentiment one step farther: Taxes are the price we pay for a happy society.</p><img src="https://counter.theconversation.com/content/85947/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Republican tax plan would ultimately make the current system less progressive while reducing the overall burden, two things research shows make countries less happy.Michael Krassa, Chair, Human Dimensions of Environmental Systems and Professor Emeritus of Political Science, University of Illinois at Urbana-ChampaignBenjamin Radcliff, Professor of Political Science, University of Notre DameLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/849032017-10-03T18:44:28Z2017-10-03T18:44:28ZWhy Australia doesn’t need to match the Trump tax cuts<p><a href="https://www.whitehouse.gov/the-press-office/2017/09/29/unified-tax-relief-framework-will-bring-jobs-and-businesses-home">Moves</a> by President Donald Trump to slash the US corporate tax rate to 20% have been met by <a href="http://www.afr.com/news/politics/donald-trumps-tax-cuts-will-strand-aussie-business-scott-morrison-20170927-gyq7of">calls</a> for Australia to do the same, or risk losing investment dollars. </p>
<p>But it is <a href="http://www.sciencedirect.com/science/article/pii/S0047272707001351">not clear</a> that lower corporate taxes result in more investment, employment and growth – especially as corporate taxes have already fallen significantly in the OECD over the past few decades. </p>
<p>If we want to attract more investment there are <a href="http://www.doingbusiness.org/data/exploreeconomies/australia">other areas</a> that Australia should address, such as the large time and cost involved in exporting and importing goods, or improving corporate governance regulations. </p>
<p>It has also been <a href="https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Zero-Corporate-Income-Tax-in-Moldova-Tax-Competition-and-Its-Implications-for-Eastern-Europe-22259">estimated</a> that in OECD countries the rate that maximises revenues from corporate tax is between 26% and 32%. Cutting the corporate tax rate below 26% (and possibly anywhere below 30%) will likely result in smaller government revenues. This would mean either increasing other taxes or cutting expenditure, such as the provision of education, health care and social welfare for the poorer people in the country. </p>
<p>Australia’s corporate tax rate is 30%, <a href="http://stats.oecd.org/index.aspx?DataSetCode=TABLE_II1">the fourth highest</a> among OECD countries – or fifth if state and local taxes are also factored in. At the moment US corporate taxation is the highest of all OECD countries, at 35%. The Trump plan would see this reduced to slightly below the OECD average of 22%. </p>
<h2>Location, location, location</h2>
<p>In a globalised world, countries compete against each other to attract foreign investment. To the extent that profits are taxed in the country of operation, there is something to the idea that multinational firms prefer to locate their operation in low-taxation countries. </p>
<p>This is at least part of the reason why the average corporate tax rate in OECD countries has dropped from around <a href="http://www.sciencedirect.com/science/article/pii/S0047272707001351">50%</a> in the 1980s to 22% now. But now that taxes are much lower, they play a <a href="http://www.sciencedirect.com/science/article/pii/S0047272707001351">significantly less important</a> role in business decision-making.</p>
<p>Businesses do not necessarily relocate to the country where corporate taxes are lowest, but consider a broad set of factors. These include the cost of production and productivity levels in each country.</p>
<p>The cost of production is primarily determined by the cost of labour, meaning that firms tend to <a href="http://www.sciencedirect.com/science/article/pii/S0022199613000925">relocate to countries where wages are lower on average</a>. Regulations also affect the cost of production. For instance, more business-friendly regulations (such as fewer restrictions on working hours and dismissal procedures, or more flexible contracts) and less stringent environmental regulations <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1468-2354.2008.00478.x/full">tend to attract more foreign direct investment</a>. </p>
<p>Of course, this raises the concern that in an attempt to attract foreign capital, countries (particularly emerging and developing countries) might engage in a “race to the bottom” on labour and environmental standards.</p>
<p>Meanwhile, productivity <a href="https://web.northeastern.edu/ruthaguilera/wp-content/uploads/2017/02/41.-Kim-Aguilera-2015-IJMR.pdf">depends</a> on the quality of institutions (absence of corruption, political stability, credible enforcement of property rights and contracts), the government’s <a href="https://link.springer.com/article/10.1007/s11575-015-0271-6">economic policies</a> (adequate infrastructure and a stable macroeconomic framework with low inflation, a stable currency, a sustainable fiscal policy position), and <a href="https://link-springer-com.libraryproxy.griffith.edu.au/content/pdf/10.1007%2Fs11575-015-0271-6.pdf">the size of the country’s market</a> and distance from other major markets. </p>
<p>While it is difficult to rank these factors in order of importance, it is clear that a business will not simply locate to a country with low taxes if that country does not offer, for instance, good infrastructure, a stable political and economic environment, business-friendly regulations, and/or relatively cheap labour.</p>
<p>This is corroborated by <a href="http://www.nber.org/papers/w20753">empirical research</a> showing that lower corporate tax rates do not necessarily boost economic activity. If they do, it is generally <a href="http://www.nber.org.libraryproxy.griffith.edu.au/papers/w18473.pdf">because the initial tax rate is very high</a> (for instance, a capital income tax rate above 60%).</p>
<h2>Doing business in Australia</h2>
<p>Cutting the corporate tax rate to 25% might not therefore be the best way to boost economic activity in Australia. The fact that businesses care about the cost of production and productivity means that there are other policies that can be pursued. </p>
<p>Australia already appears to have several attractive features: a relatively stable macroeconomic environment (at least compared to some other OECD countries); a favourable geographical location (close to some of the largest and fastest-growing markets in the world, with an abundance of natural resources); and a safe political environment (in spite of the recent increase in the frequency of government changes). </p>
<p>There are, however, other areas where policy intervention is desirable. Two in particular are worth a mention.</p>
<p>The first one is industrial policy. Australia needs a more proactive approach to promote and support innovative sectors and industries. </p>
<p>In this respect, the system of incentives and support for innovative entrepreneurs should be extended beyond what is currently included in the <a href="https://www.innovation.gov.au/page/agenda">National Innovation and Science Agenda</a> and, at the same time, made conditional on performance. </p>
<p>In particular, this system should include a broad set of financial incentives (including tax concessions, access to credit, subsidies) combined with a mechanism for performance assessment based on transparent benchmarks. The incentives would be provided to any innovative enterprise (in any sector or industry) as long as the performance benchmarks are met. </p>
<p>The second area of intervention is, broadly speaking, the “ease of doing business”. This is determined by the extent to which business regulations and their enforcement support (or not) the activity of firms in the country.</p>
<p>Drawing on <a href="http://www.doingbusiness.org/rankings">World Bank data</a>, we can see that Australia could improve in two main regulatory areas.</p>
<p>The first is the time and cost associated with exporting and importing goods. While Australian companies inevitably face a certain amount of time and cost due to our geographic remoteness, it is also true that border compliance in Australia takes three to four times longer than in other high-income OECD countries and costs five times more. More efficient border procedures should be implemented to reduce the time and cost of compliance.</p>
<p>The second area is corporate governance, particularly in terms of protecting minority shareholders’ rights. Australia currently ranks 63rd in the world in protecting these rights. Australia should strengthen the regulatory environment to increase corporate transparency, protect shareholders from undue board control and entrenchment, and ensure that shareholders have effective rights and a role in major corporate decisions.</p>
<p>In the end, reducing the corporate tax rate might not be the ideal strategy to achieve sustainable and inclusive long-term economic growth. But there are <a href="http://www.doingbusiness.org/data/exploreeconomies/australia">plenty of other options</a>.</p><img src="https://counter.theconversation.com/content/84903/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its applications in macroeconomics. </span></em></p>Research doesn’t back up calls for more corporate tax cuts. But there are areas for the government to move to spur foreign investment.Fabrizio Carmignani, Professor, Griffith Business School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.