Opinion Editorial | |
| Monday, July 10, 2000 | |
Should Low Tax Countries Be Punished? |
The controversy over taxing Internet sales is exposing the wide differences in tax rates among the states. Sales tax rates range from zero in five states (Alaska, Delaware, Montana, New Hampshire and Oregon) to a high of 7 percent in Mississippi and Rhode Island. Income tax rates vary between zero in 7 states (2 others tax only interest and dividends) and 12 percent in North Dakota. Corporate tax rates go from zero in South Dakota to a high of 12 percent in Iowa.
As the Internet makes it easier to buy goods and services or do many kinds of business anywhere in the United States, increasing pressure is being put on states to make their tax systems more business-friendly. But rather than reform their tax systems, the high-tax states are trying to subvert the economic advantages of the low-tax states. For example, they are pushing for a federal law that would require businesses located in states without sales taxes to collect taxes on sales to consumers in states with sales taxes, even if the business has no physical presence in that state.
A similar situation exists internationally. High tax nations, such as those in Europe, are becoming increasingly worried about their ability to tax in an Internet world. In recent days, they have enlisted the Paris-based Organization for Economic Cooperation and Development in their efforts. The OECD has now issued a study of "harmful tax practices" that condemns nations with low taxes for being "tax havens" that encourage money laundering and tax competition. Those nations failing to bring their tax systems into line with international norms may be subject to sanctions of various kinds.
The OECD report focuses mainly on very small countries with little industry other than tourism. These include many countries in the Caribbean such as Barbados, the Bahamas, the British Virgin Islands, Grenada, Panama and others. Such nations actively court businesses, encouraging them to locate their headquarters there, in order to take advantage of their low or nonexistent income taxes. For example, two years ago, clothing maker Fruit of the Loom shifted its base from Chicago to the Cayman Islands, a move it estimated would save almost $100 million in taxes each year. More recently, a number of American insurance companies relocated to Bermuda in order to save millions of dollars per year in U.S. taxes.
This attack on tax havens by the OECD, which is comprised of the world's largest industrial nations, is really just the opening wedge of an attack on any nation that has low taxes. The proof of this is inclusion of the Channel Islands (Jersey, Guernsey, Alderney and Sark) and the Isle of Man on the list. Unlike some of the caribbean nations, these places have always maintained low taxes for the benefit of their citizens, and not as a gimmick to attract corporate headquarters or hot money. For historical reasons, these islands have long maintained independent tax systems, even though they are part of the United Kingdom.
For 60 years, the Channel Islands have been laboratories for the flat tax. They maintain a flat 20 percent tax rate on income, with no capital gains or estate taxes -- a system initially established during the Nazi occupation. As a consequence, the islands have prospered -- an embarrassing reminder to nearby England and France that high taxes are not necessary for prosperity. Interestingly, when the islands need extra revenue, they do not raise tax rates, but lower them. This stimulates economic activity and raises revenue. Efforts to cut the tax rate permanently to 15 percent have been opposed on the grounds that the government would take in too much revenue.
Even more telling are the regular attacks on Ireland by EU officials, irritated by that nation's low taxes, which have led to an explosion of growth in Ireland in recent years. At 24 percent, Ireland has the lowest corporate tax in the EU. Germany's tax rate is more than twice as high and the median corporate tax rate for the EU is 35 percent. As a consequence, foreign companies wishing to establish operations in the EU, to take advantage of the abolition of trade barriers, frequently choose Ireland as their location.
The fact is that the Internet and globalization of national economies are not actually reducing government revenue. The states are swimming in tax revenue and there is not a shred of hard evidence that taxes lost on Internet sales are more than a drop in a very large bucket. So too is the revenue loss from so-called tax havens.
However, while the revenue loss is small to nonexistent, the Internet and globalization do force changes in tax structures. Taxes on things that are hard to tax, like capital, are falling, while those on things that easier to tax (or harder to evade), like wages, are rising. This is one reason why a majority of people in almost every country now complain that their taxes are too high. The next step is to reduce the overall burden of taxation. That is a better way to deal with taxpayer discontent than punishing nations and states for having low taxes.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 10, 2000.
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