The Tax Justice Network (TJN) has been running a campaign against tax havens for some while now. But it takes the view that the tax system just needs to be tightened up - a bit more regulation and exchange, and all will be well. It is unwilling to accept that there is anything fundamentally wrong with the tax system itself. I posted this comment on their blog site...
The problem with the tax system is that it is essentially a structure of perverse incentives. Successful, honest and legal, above the board activity, and thrift, are punished, whilst idleness, fecklessness, and dishonest and illegal activity, are rewarded. That is the nature of the tax system.
The effect is that the GNP is about 12% less than it would otherwise be due to the deadweight effect of taxes - that is wealth which would have been created were it not for the tax system.
Governments know this and mitigate with ad hoc concessions. These make the system ever more complex and incomprehensible, but they also create loopholes. The fat cats are best placed to pay for the professional advice to search out the loopholes and exploit them.
There is not and cannot be such a thing as an international tax system. To prevent tax avoidance at that level would require collaboration in the implementation of draconian and authoritarian measures.
It is up to national tax jurisdictions to safeguard their own revenue through proper design of their tax systems, bearing in mind the fundamental point that people and capital are mobile, whilst companies can exist in many locations simultaneously and can shift their cash flows around internally to exploit differences in tax in different jurisdictions.
I received this in response...
Nonsense. Read more here, or here, or here,
My response was.
Those texts do not answer the fundamental critique that tax as we have it today is a structure of perverse incentives - that if you work honestly and successfully, the fruits of your labour are confiscated.
Nor do they address the deadweight cost of the system, the arms race generated by introducing loopholes or the fact that is would take draconian measures of control to plug the leaks.
Taking the points from the first of the links, you mention the four "Rs".
The first “R” is Revenue. Taxes raise money to pay for health, roads and education, or for more indirect things like good regulation and administration.
The tax system is incapable of raising anywhere near the amount of revenue needed for these purposes. It also ties up vast sums of money in welfare payments to alleviate the problems of poverty caused by the system itself.
The second “R” is Redistribution: taxation can help reduce poverty and inequality, and spread the benefits of development more widely. Different taxes have different effects.
Too true. Under our so-called progressive tax system based on the taxation of gross pay, for someone on the minimum wage, gross labour costs to the employer are 75% over and above the net purchasing power of the wage. This puts employers under inordinate pressure to reduce their total labour bill, and so they employ as few people as possible and often less than they need and would do if gross labour costs were more closely aligned to net wages. This is especially so in the care and public services sectors.
Who suffers? Young and low-skill workers, leading ultimately to the three-generation unemployed family. The tax system as we know it really is an engine for keeping the poor down. It creates, sustains and reinforces inequality.
The third “R” is Repricing. Taxes (and subsidies) can be used to change people’s behaviour: taxing tobacco, pollution or carbon-based energy, for example, is accepted by many people as a way to curb potentially harmful activities, particularly “externalities” that represent failures in free markets or other forms of social organisation.
Yes! This gets to the core of the issue. All taxes affect behaviour. Taxes on windows led to bricked-up windows. And it is precisely why taxes on labour lead to idleness. Taxes should not be tolerated without regard to their effects on people's actions. And people should pay the cost of externalities, both costs incurred and benefits received. Thus, it would be reasonable to levy taxes on packaging both to cover the cost of disposal and to signal to the customer that there is such a cost.
The biggest externality relates to the costs and benefits enjoyed by landowners, as reflected in the rental value of land, which ought to be collected as public revenue but in practice are ignored.
The fourth “R” is Representation. Historians are familiar with this function, but many of us have forgotten it. American colonists who were being taxed under British colonial rule famously demanded “no taxation without representation.” This is not just an oddity of history, however, but a much more general rule: citizens who are taxed tend to demand accountability and representation in exchange from their rulers. People want to influence how their hard-earned money is spent; as a result, taxation helps keep governments on their toes. As a result of this bargaining between rulers and their subjects, taxation strengthens and protects channels of political representation.
Where is the evidence for this? Sixty years of PAYE income tax does not seem to have done much for British democracy. We are still stuck with being run by an incompetent and mildly corrupt political class who offer substantially the same flawed policies - cyclic boom-busts, persistent high unemployment and an intractable housing problem - with the odd war to divert attention and spice things up. We haven'ẗ even managed to get rid of the evil "first past the post" electoral system.
The economic burden of income taxes falls on employers and the idea that individuals pay this tax is a consequence of the "gross pay" delusion. How can there be a healthy connection between taxation and representation when the whole thing is based on a deception?
Tax competition is generally harmful, for several reasons. It short-circuits democratic (or other) domestic or local processes by which governments set their tax policies. It results in the tax burden within countries being shifted away from corporate taxation in particular and towards other forms of tax whose burden falls disproportionately on the poor and the middle classes.
Tax competition is only harmful if those who lose in the competition fail to get the message. People want, quite reasonably, to keep as much as possible of what they legitimately earn. If taxes on labour and production are low, this will be attractive.
But competition between countries is not just about keeping taxes on earnings as low as possible. Economic activity demands good infrastructure in the broadest possible sense. The quality of this infrastructure will also be reflected in land values, which will either be pocketed by landowers or can be used as the public revenue base to pay for the supporting infrastructure.
In a situation of tax competition, rotten and dysfunctional tax systems like Britain's will be weeded out and, if the government is smart enough to get the message, replaced by better ones.
Bring it on.
The problem with the tax system is that it is essentially a structure of perverse incentives. Successful, honest and legal, above the board activity, and thrift, are punished, whilst idleness, fecklessness, and dishonest and illegal activity, are rewarded. That is the nature of the tax system.
The effect is that the GNP is about 12% less than it would otherwise be due to the deadweight effect of taxes - that is wealth which would have been created were it not for the tax system.
Governments know this and mitigate with ad hoc concessions. These make the system ever more complex and incomprehensible, but they also create loopholes. The fat cats are best placed to pay for the professional advice to search out the loopholes and exploit them.
There is not and cannot be such a thing as an international tax system. To prevent tax avoidance at that level would require collaboration in the implementation of draconian and authoritarian measures.
It is up to national tax jurisdictions to safeguard their own revenue through proper design of their tax systems, bearing in mind the fundamental point that people and capital are mobile, whilst companies can exist in many locations simultaneously and can shift their cash flows around internally to exploit differences in tax in different jurisdictions.
I received this in response...
Nonsense. Read more here, or here, or here,
My response was.
Those texts do not answer the fundamental critique that tax as we have it today is a structure of perverse incentives - that if you work honestly and successfully, the fruits of your labour are confiscated.
Nor do they address the deadweight cost of the system, the arms race generated by introducing loopholes or the fact that is would take draconian measures of control to plug the leaks.
Taking the points from the first of the links, you mention the four "Rs".
The first “R” is Revenue. Taxes raise money to pay for health, roads and education, or for more indirect things like good regulation and administration.
The tax system is incapable of raising anywhere near the amount of revenue needed for these purposes. It also ties up vast sums of money in welfare payments to alleviate the problems of poverty caused by the system itself.
The second “R” is Redistribution: taxation can help reduce poverty and inequality, and spread the benefits of development more widely. Different taxes have different effects.
Too true. Under our so-called progressive tax system based on the taxation of gross pay, for someone on the minimum wage, gross labour costs to the employer are 75% over and above the net purchasing power of the wage. This puts employers under inordinate pressure to reduce their total labour bill, and so they employ as few people as possible and often less than they need and would do if gross labour costs were more closely aligned to net wages. This is especially so in the care and public services sectors.
Who suffers? Young and low-skill workers, leading ultimately to the three-generation unemployed family. The tax system as we know it really is an engine for keeping the poor down. It creates, sustains and reinforces inequality.
The third “R” is Repricing. Taxes (and subsidies) can be used to change people’s behaviour: taxing tobacco, pollution or carbon-based energy, for example, is accepted by many people as a way to curb potentially harmful activities, particularly “externalities” that represent failures in free markets or other forms of social organisation.
Yes! This gets to the core of the issue. All taxes affect behaviour. Taxes on windows led to bricked-up windows. And it is precisely why taxes on labour lead to idleness. Taxes should not be tolerated without regard to their effects on people's actions. And people should pay the cost of externalities, both costs incurred and benefits received. Thus, it would be reasonable to levy taxes on packaging both to cover the cost of disposal and to signal to the customer that there is such a cost.
The biggest externality relates to the costs and benefits enjoyed by landowners, as reflected in the rental value of land, which ought to be collected as public revenue but in practice are ignored.
The fourth “R” is Representation. Historians are familiar with this function, but many of us have forgotten it. American colonists who were being taxed under British colonial rule famously demanded “no taxation without representation.” This is not just an oddity of history, however, but a much more general rule: citizens who are taxed tend to demand accountability and representation in exchange from their rulers. People want to influence how their hard-earned money is spent; as a result, taxation helps keep governments on their toes. As a result of this bargaining between rulers and their subjects, taxation strengthens and protects channels of political representation.
Where is the evidence for this? Sixty years of PAYE income tax does not seem to have done much for British democracy. We are still stuck with being run by an incompetent and mildly corrupt political class who offer substantially the same flawed policies - cyclic boom-busts, persistent high unemployment and an intractable housing problem - with the odd war to divert attention and spice things up. We haven'ẗ even managed to get rid of the evil "first past the post" electoral system.
The economic burden of income taxes falls on employers and the idea that individuals pay this tax is a consequence of the "gross pay" delusion. How can there be a healthy connection between taxation and representation when the whole thing is based on a deception?
Tax competition is generally harmful, for several reasons. It short-circuits democratic (or other) domestic or local processes by which governments set their tax policies. It results in the tax burden within countries being shifted away from corporate taxation in particular and towards other forms of tax whose burden falls disproportionately on the poor and the middle classes.
Tax competition is only harmful if those who lose in the competition fail to get the message. People want, quite reasonably, to keep as much as possible of what they legitimately earn. If taxes on labour and production are low, this will be attractive.
But competition between countries is not just about keeping taxes on earnings as low as possible. Economic activity demands good infrastructure in the broadest possible sense. The quality of this infrastructure will also be reflected in land values, which will either be pocketed by landowers or can be used as the public revenue base to pay for the supporting infrastructure.
In a situation of tax competition, rotten and dysfunctional tax systems like Britain's will be weeded out and, if the government is smart enough to get the message, replaced by better ones.
Bring it on.
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