Financial Times Editorial Comment: Level the field for tax competition

Financial Times Editorial Comment: Level the field for tax competition
Copyright The Financial Times Limited 2009
Published: May 5 2009 19:33 | Last updated: May 5 2009 19:33
http://www.ft.com/cms/s/0/4541e17e-399b-11de-b82d-00144feabdc0.html


In moving to close some of the loopholes in the porous US tax code, President Barack Obama has taken on mightier forces than a retreating Republican party. Multinational companies, which will see their foreign earnings taxed more heavily, have dispatched a battalion of lobbyists to fight the plan. Mr Obama should not let this deter him: the proposals are a step in the right direction. They do little, however, to address the fundamental challenges of international taxation.

Few object to the part of the plan that cracks down on illegal tax evasion. More controversially, the administration wants to close off certain currently legal techniques for tax avoidance by targeting the law’s differing treatment of foreign-source and domestic earnings.

Opponents object that the US corporate tax rate is already among the highest in the world. This is correct; if US businesses effectively paid the nominal rate, the burden would indeed be excessive. But they do not. As with income tax, the corporate tax code’s complexity seriously whittles down the tax base, and with it both the burden on business and the revenue to the US Treasury.

The skewed US tax rules are already unfair and inefficient. With gaping deficits as far as the eye can see, they are also becoming unaffordable. Mr Obama’s proposals will make the tax system a bit more neutral; objections are no more than pleas for special treatment. Such pleas undermine legitimate arguments for a lower corporate tax rate – which are only strengthened by admitting that the tax, at whatever level, must apply equally to all.

Offering low taxes to attract business activity is healthy competition – as is offering good public services or a high quality of life, all of which force governments to lay the groundwork for economic growth. But luring business is quite different from attracting a company’s nameplate to capture its taxes (as is allegedly the case of the Cayman Islands building that houses 18,857 companies cited by Mr Obama).

This distinction is lacking in the president’s rhetoric, which conflates fixing the tax code and protectionist demands for domestic investment. His proposals ignore the larger policy question: how can national jurisdictions achieve fair and efficient taxation in a global economy?

Today’s patchwork of national tax rules and bilateral treaties is a drag on business and public treasuries alike. Countries must agree to divide the global tax base according to where actual economic activity takes place – and welcome competition for a larger share of that activity. Mr Obama’s tax battle, if he is serious, has barely begun.