Showing posts with label Corporate Inversion. Show all posts
Showing posts with label Corporate Inversion. Show all posts
Tuesday, July 07, 2009
LOWER CORPORATE TAX RATE IN ONTARIO
Chris Edwards, an economist at the Cato Institute, reports that Tim Horton's (Canada's "Starbucks") is moving its headquarters to Ontario, as the provincial policymakers are cutting the federal-provincial corporate tax rate down to 25 percent (link). That is 15 percentage points lower than the federal corporate tax rate in the U.S.
Friday, November 21, 2008
SAVE TAXPAYERS BY DROPPING THE BAILOUT
Wednesday, June 04, 2008
CUTTING THE CORPORATE TAX BURDEN
Greg Mankiw (link) recently wrote an article (link) published in The New York Times (link) discussing the possibility of a cut in the corporate tax rate as recently proposed by the economic advisers of John McCain. While John McCain has some doubtful and economically questionable proposals, such as the extension of gas-tax holidays, his economic advisers recently proposed a cut in the federal corporate tax rate from 35 percent to 25 percent. While the suggested proposal has been harshly criticized by economists such as Brad DeLong (link), the proposal deserves an open discussion about the consequences of the corporate tax rate.
The most frequent mistake that has been grasped repeatedly by the mainstream media and intellectual elites is that corporate tax is actually paid by the corporation itself. Despite the soundness of the argument, it is false. Corporations are likely to be tax-collectors than taxpayers. Why? For example, if you own equities and securities, than corporations shift the burden to consumers, hired labor and stockholders. An increase in the corporate tax rate potentially reduces capital investment. In turn, a corporation levies the burden by cutting total costs of labor and services. Consequentially, corporate equities and stocks are hampered by a higher relative weight on potential returns. Also, a significant amount of empirical research, including Randolph's 2006 study (Congressional Budget Office), has confirmed that the major share (70 percent) of the corporate tax burden is beared by the labor force. Researchers at Oxford University (Arulampalan, Devereux, Maffini) examined the effect of the corporate tax in 50,000 European companies in nine European countries. They found that, in the long run, a $1 increase in the tax bill reduces the real wage at the median by 92 cents.
The opposition to the cut in corporate tax rate often includes arguments such as the loss of tax revenue and the reduction of real wages. However, none of these arguments is based on empirical observations. In the short run, there are numerous static assumptions claiming that the revenue may fall precisely. However, the reduction in corporate tax burden would result in a stronger and less volatile stock market. In turn, that would boost capital investment respectively which would lead to higher productivity growth. A basic consequence of productivity increase is the increase in real wages and a drop in consumer prices. True, part of rhe revenue loss may be covered by an increase in other taxes such as gasoline taxes. But have there been any confident estimates showing that the revenue may really decline?
An additional and truly important measure to decrease the corporate tax burden is lowering government expenditure, both in absolute in relative terms. According to experience, the net effect of lower government spending is an increase in the growth of real productivity as well as stronger stock market that would boost investment and reduce volatility of the stock market itself. Also, lower government spending would result in higher output growth as well as it would have significantly positive welfare effects on prices, wages and employment.
The most frequent mistake that has been grasped repeatedly by the mainstream media and intellectual elites is that corporate tax is actually paid by the corporation itself. Despite the soundness of the argument, it is false. Corporations are likely to be tax-collectors than taxpayers. Why? For example, if you own equities and securities, than corporations shift the burden to consumers, hired labor and stockholders. An increase in the corporate tax rate potentially reduces capital investment. In turn, a corporation levies the burden by cutting total costs of labor and services. Consequentially, corporate equities and stocks are hampered by a higher relative weight on potential returns. Also, a significant amount of empirical research, including Randolph's 2006 study (Congressional Budget Office), has confirmed that the major share (70 percent) of the corporate tax burden is beared by the labor force. Researchers at Oxford University (Arulampalan, Devereux, Maffini) examined the effect of the corporate tax in 50,000 European companies in nine European countries. They found that, in the long run, a $1 increase in the tax bill reduces the real wage at the median by 92 cents.
The opposition to the cut in corporate tax rate often includes arguments such as the loss of tax revenue and the reduction of real wages. However, none of these arguments is based on empirical observations. In the short run, there are numerous static assumptions claiming that the revenue may fall precisely. However, the reduction in corporate tax burden would result in a stronger and less volatile stock market. In turn, that would boost capital investment respectively which would lead to higher productivity growth. A basic consequence of productivity increase is the increase in real wages and a drop in consumer prices. True, part of rhe revenue loss may be covered by an increase in other taxes such as gasoline taxes. But have there been any confident estimates showing that the revenue may really decline?
An additional and truly important measure to decrease the corporate tax burden is lowering government expenditure, both in absolute in relative terms. According to experience, the net effect of lower government spending is an increase in the growth of real productivity as well as stronger stock market that would boost investment and reduce volatility of the stock market itself. Also, lower government spending would result in higher output growth as well as it would have significantly positive welfare effects on prices, wages and employment.
Sunday, September 30, 2007
THE PUNITIVE EFFECTS OF PUNITIVE CORPORATE TAX CODE
There is innumerable evidence showing that high corporate tax burden is eroding competitiveness and results in a poor track on investment, growth and job creation. As every economist agrees upon, there is hardly any upward change in output without a rigorous pro-growth economic policy and supply-side feedback.
Instead of the so called aggregate demand, the output growth has been shown to be driven by the long-run engines of growth such as saving, investment, entrepreneurship, innovation and labor supply known as human capital or productive behavior.
The stimulation of output growth through the infusion of expansionary public and fiscal spending has several negative effects such as inflationary pressures, unless the output gap is negative.
Despite thousands of pages of a negative impact of high corporate tax burden on growth and labor market, the politicians obviously haven't yet learned a simple "elementary-school" lesson called the Laffer curve, stating that high tax rate on corporate income has a double negative feedback.
First, the punitive tax rate enables a the outburst of complexity leading to costly evasion and comparably associated administrative cost, such as the education incentive for under-productive jobs that entail a minimum or zero-contribution rate to output growth and instead, hamper growth potentials of firms, forcing them to face higher proportion of additional labor cost that otherwise has enviable and nevertheless attractive alternative investment choice.
And second, the course of economic and tax policy has shown that high tax rates correlate with tax revenue loss (because of high taxes), leading to continually high and unrestrained public spending and external fiscal indebtedness.
As a recent example from Ontario straightly demonstrates, when the output performance is shifting the economy from manufacturing to a reliance on knowledge-intensive services, the labor demand is oriented towards highly productive human capital. One of such areas is the financial sector.
As the economy structurally transforms, the role of financial service sector plays continually nevertheless important role that is essential in boosting the sector's contribution to output growth.
Last year, the sector generated 7.8 per cent of Ontario's total gross domestic product or $36 billion. For Toronto, it contributed an estimated 14.3 per cent or $15 billion of the city's economy.
Source: Statistics Canada
On the other side, Ontario currently stands at a punitive corporate tax code that is eroding macro and micro-competitiveness. In spite of 14 percent capital tax rate, Federal rate of capital taxation is onerous and one of the highest in the world, undermining the output growth respectively.
The evidence of capital tax as a job-killing one is very to understand. Imagine that you're a corporate manager in Toronto facing a punitive corporate tax code and considering the switch to investment-friendlier territory:
""... if Alberta, for example, completely abolished its corporate taxes, you know it's going to be not too long before a lot of financial services and other kinds of companies may well say `Well look, for the sake of what could be hundreds of millions of dollars in tax, might we have to consider moving our head offices'?" (link)
Stronger investment environment that supports growth could hardly be recognized as that if high tax burden, red-tape, compliance regulation and administrative barriers reduce competitive potentials of the territorial economy to create jobs, increase productivity and output.
Read also:
Parties pressed for growth, Toronto Star, September 15 2007 (link)
Instead of the so called aggregate demand, the output growth has been shown to be driven by the long-run engines of growth such as saving, investment, entrepreneurship, innovation and labor supply known as human capital or productive behavior.
The stimulation of output growth through the infusion of expansionary public and fiscal spending has several negative effects such as inflationary pressures, unless the output gap is negative.
Despite thousands of pages of a negative impact of high corporate tax burden on growth and labor market, the politicians obviously haven't yet learned a simple "elementary-school" lesson called the Laffer curve, stating that high tax rate on corporate income has a double negative feedback.
First, the punitive tax rate enables a the outburst of complexity leading to costly evasion and comparably associated administrative cost, such as the education incentive for under-productive jobs that entail a minimum or zero-contribution rate to output growth and instead, hamper growth potentials of firms, forcing them to face higher proportion of additional labor cost that otherwise has enviable and nevertheless attractive alternative investment choice.
And second, the course of economic and tax policy has shown that high tax rates correlate with tax revenue loss (because of high taxes), leading to continually high and unrestrained public spending and external fiscal indebtedness.
As a recent example from Ontario straightly demonstrates, when the output performance is shifting the economy from manufacturing to a reliance on knowledge-intensive services, the labor demand is oriented towards highly productive human capital. One of such areas is the financial sector.
As the economy structurally transforms, the role of financial service sector plays continually nevertheless important role that is essential in boosting the sector's contribution to output growth.
Last year, the sector generated 7.8 per cent of Ontario's total gross domestic product or $36 billion. For Toronto, it contributed an estimated 14.3 per cent or $15 billion of the city's economy.
Table No.1: Real and Nominal GDP Growth in Canada by Province, 2003-2005
Source: Statistics CanadaOn the other side, Ontario currently stands at a punitive corporate tax code that is eroding macro and micro-competitiveness. In spite of 14 percent capital tax rate, Federal rate of capital taxation is onerous and one of the highest in the world, undermining the output growth respectively.
The evidence of capital tax as a job-killing one is very to understand. Imagine that you're a corporate manager in Toronto facing a punitive corporate tax code and considering the switch to investment-friendlier territory:
""... if Alberta, for example, completely abolished its corporate taxes, you know it's going to be not too long before a lot of financial services and other kinds of companies may well say `Well look, for the sake of what could be hundreds of millions of dollars in tax, might we have to consider moving our head offices'?" (link)
Stronger investment environment that supports growth could hardly be recognized as that if high tax burden, red-tape, compliance regulation and administrative barriers reduce competitive potentials of the territorial economy to create jobs, increase productivity and output.
Read also:
Parties pressed for growth, Toronto Star, September 15 2007 (link)
Friday, September 28, 2007
DOING BUSINESS: REVIEW AND PERSPECTIVE
The 2008 Doing Business project solidly provided a valuable tool in ranking the economies with respect to the ease of doing business. The quality of the business environment is, by any means, one of the essential supporting components of growth and value creation. Put simply, the greater the flexibility of the business environment and the ease of doing business, the greater the opportunities for the firm to target markets and growth while the foremost advantage of a dynamic business environment is the minimization of external risk, notably macroeconomic risk and the risk emerged from external vulnerabilities such as the failure of the public administration to provide sound entrepreneurial framework and business conditions. In spite of vital importance of dynamic entrepreneurial framework, small-scale economies are, by empirical investigation, affected by the extent of quality of the business environment far more than the economies of large scale according to the share in global economy they possess. That’s why; the first-class quality of the business environment is essential to long-term creation of venture capital and jobs as well as to output growth.
First, let’s take a look at the microeconomic aspect of rating the quality of business environment. Suppose there is a consulting firm with a certain amount of investment from venture-capital fund with an idea to target and invest in emerging markets whether by direct market entry or by indirect market access, i.e. through intermediaries. Firm’s executive board mutually decides to hire local human capital; local labor to reduce the potential risk of firm’s perception of asymmetric information about the local business environment in conducting consulting services to local firms or branches of global firms. Assume that the decision processing is as in usual firm’s entry. The barriers to doing business, in turn, crucially impact firm’s decision for investment location accountably regarding the size and attractiveness of market niches. Suppose the firm is decided to target emerging markets in Central and
Depending on the impact of firm’s strategic decisions regarding the performance of output and supply, the firm would, by rational means, choose the environment with the least regulatory complexity and administrative burden such as the quickness of starting a business, time costs of getting required licenses, the flexibility of labor market, the security of property rights, access to credit information, transparency of transactions, self-dealing liability, shareholders’ suing ability for misconduct and hence, tax compliance and time cost of paying taxes, the costs associated with international trade, contract enforcement, and the legal protection of the deprived party in exchange in case of payment dispute or payment delay and the extent of procedural backlash in case of closing the business.
Thursday, September 06, 2007
POLITICAL ENTREPRENEURSHIP AND CORRUPTION
Writing for Wall Street Journal, Burt Folsom compares the entrepreneurship in two countries; the U.S. and Mexico.
The discussion in the article is focused on Carlos Slim who supossedly surpassed Bill Gates as the world's richest person. As the article demonstrates, the spread of political entrepreneurship coexists with weak contract security and insecure protection of private property rights. In comparison to market entrepreneurship, political entrepreneurship is costly to growth and does not embrace risk-taking, quality maximization and price minimization as strategic terms. Here is an interesting story:
"Enter Carlos Slim. His father, Julian Slim Haddad, a Lebanese immigrant, made his money as a merchant during the chaos leading up to the Constitution of 1917. Carlos Slim greatly expanded the family fortune by working closely and cleverly with government officials. (In fairness to Mr. Slim, there may not be another avenue to great wealth in a massively interventionist economy.) His major opportunity came when President Carlos Salinas de Gortari decided to privatize some inefficient industries. Mr. Slim bought Telmex, the nation’s phone company, in 1990 in a controversial auction which was decidedly less than transparent. With that purchase came a six-year monopoly guaranteed by the government. Although Mr. Slim was supposed to relinquish the monopoly in 1997, he used a variety of legal and political tools to maintain it, for example filing injunctions in court to block orders from the regulator to provide competitors fair access to his network. According to OECD figures, Mexican consumers and businesses still pay above market telephone rates. Fewer than one-fourth of Mexican homes have telephones. With a near monopoly of fixed-line telephones and data access (the Internet), Mr. Slim has reaped windfall profits which, wisely invested, have propelled him to immense wealth. Meanwhile, Mr. Slim’s newer ventures—his construction company and his oil services company—rely on government contracts for their major business. Recently President Felipe Calderon met with Mr. Slim and urged him to accept greater competition."
Source: Burt Folsom, Slim Pickings, Wall Street Journal, August 29, 2007 (link)
The discussion in the article is focused on Carlos Slim who supossedly surpassed Bill Gates as the world's richest person. As the article demonstrates, the spread of political entrepreneurship coexists with weak contract security and insecure protection of private property rights. In comparison to market entrepreneurship, political entrepreneurship is costly to growth and does not embrace risk-taking, quality maximization and price minimization as strategic terms. Here is an interesting story:
"Enter Carlos Slim. His father, Julian Slim Haddad, a Lebanese immigrant, made his money as a merchant during the chaos leading up to the Constitution of 1917. Carlos Slim greatly expanded the family fortune by working closely and cleverly with government officials. (In fairness to Mr. Slim, there may not be another avenue to great wealth in a massively interventionist economy.) His major opportunity came when President Carlos Salinas de Gortari decided to privatize some inefficient industries. Mr. Slim bought Telmex, the nation’s phone company, in 1990 in a controversial auction which was decidedly less than transparent. With that purchase came a six-year monopoly guaranteed by the government. Although Mr. Slim was supposed to relinquish the monopoly in 1997, he used a variety of legal and political tools to maintain it, for example filing injunctions in court to block orders from the regulator to provide competitors fair access to his network. According to OECD figures, Mexican consumers and businesses still pay above market telephone rates. Fewer than one-fourth of Mexican homes have telephones. With a near monopoly of fixed-line telephones and data access (the Internet), Mr. Slim has reaped windfall profits which, wisely invested, have propelled him to immense wealth. Meanwhile, Mr. Slim’s newer ventures—his construction company and his oil services company—rely on government contracts for their major business. Recently President Felipe Calderon met with Mr. Slim and urged him to accept greater competition."
Source: Burt Folsom, Slim Pickings, Wall Street Journal, August 29, 2007 (link)
Thursday, August 30, 2007
THE COST OF TAX HARMONIZATION
The Irish Independent reports about the Charlie McCreevy's resistance to tax harmonization revenue proposals enforced by the European Commission.
The real aggregate tax burden in the EU is very high, both in historical and contemporary perspective. Back in 1980s, German policymakers instituted a 60 percent corporate tax rate. In Sweden, the top individual income tax rate exceeded 90 percent in the early 1980s. After new member state joined the EU, the picture of European economic performance is rather lingering, marred by low output growth, high structural unemployment and high tax rates penalizing the productive behavior.
However, within the EU, there're few examples where competitive pro-growth economic and tax policy significantly helped to boost the economic performance resulted in sound parameters, such as income per capita and wealth created per head. For instance, Ireland set the corporate tax rate at 12,5 percent and has seen a significant inflow of foreign direct investment. Nevertheless, Ireland is now the second wealthiest country in Europe, after Luxembourg according to the GDP per capita. Ireland's tax-to-GDP ratio is 30,8 percent compared to EU27's 37,4 percent. Fiscal sovereignity, the basis that brought the clash of punitive tax rates on corporate and individual income, is the very fundamental source of international tax competition opposed to tax harmonization, where statutory tax rates are set on a cross-national basis.
The fact that the aggregate tax burden of the European economy would increase sharply if tax harmonization efforts were implemented is not the only threat in this respect. Sluggish growth, diminished economic performance of European economies and higher tax rates on productive behavior are certainly among the forefront implications of tax harmonization.
First, high tax burden and output increases are negatively correlated, which means that higher taxes penalize each additional unit of gross domestic product.
Second, the statement of EU's taxation commisioner Lazslo Kovacs that the aim of tax harmonization is to simplify tax collection and make it less costly, is false and does not hold the real arguments. In fact, the cross-national organization of revenue service would deepen the budgetary spending and make it temporary since hiring labor to match the demands of the European Commission regarding tax harmonization pressures would result in public-guaranteed wages outlayed without with almost no effects of gains of productivity.
And third, the proposal of the European Commission that tax collection is ought to be conducted on a Europe-wide basis is a flawed suggestion erasing the real impact of fiscal sovereignity regarding the enforcement of competitive tax rates on labor and capital income and further eliminating the fruits of tax competition associated with individual liberty and the question of privacy.
See also:
Martin Feldstein: Economic Problems of Ireland in Europe, NBER Working Paper No. 8264, May 2001 (link)
The real aggregate tax burden in the EU is very high, both in historical and contemporary perspective. Back in 1980s, German policymakers instituted a 60 percent corporate tax rate. In Sweden, the top individual income tax rate exceeded 90 percent in the early 1980s. After new member state joined the EU, the picture of European economic performance is rather lingering, marred by low output growth, high structural unemployment and high tax rates penalizing the productive behavior.
However, within the EU, there're few examples where competitive pro-growth economic and tax policy significantly helped to boost the economic performance resulted in sound parameters, such as income per capita and wealth created per head. For instance, Ireland set the corporate tax rate at 12,5 percent and has seen a significant inflow of foreign direct investment. Nevertheless, Ireland is now the second wealthiest country in Europe, after Luxembourg according to the GDP per capita. Ireland's tax-to-GDP ratio is 30,8 percent compared to EU27's 37,4 percent. Fiscal sovereignity, the basis that brought the clash of punitive tax rates on corporate and individual income, is the very fundamental source of international tax competition opposed to tax harmonization, where statutory tax rates are set on a cross-national basis.
The fact that the aggregate tax burden of the European economy would increase sharply if tax harmonization efforts were implemented is not the only threat in this respect. Sluggish growth, diminished economic performance of European economies and higher tax rates on productive behavior are certainly among the forefront implications of tax harmonization.
First, high tax burden and output increases are negatively correlated, which means that higher taxes penalize each additional unit of gross domestic product.
Second, the statement of EU's taxation commisioner Lazslo Kovacs that the aim of tax harmonization is to simplify tax collection and make it less costly, is false and does not hold the real arguments. In fact, the cross-national organization of revenue service would deepen the budgetary spending and make it temporary since hiring labor to match the demands of the European Commission regarding tax harmonization pressures would result in public-guaranteed wages outlayed without with almost no effects of gains of productivity.
And third, the proposal of the European Commission that tax collection is ought to be conducted on a Europe-wide basis is a flawed suggestion erasing the real impact of fiscal sovereignity regarding the enforcement of competitive tax rates on labor and capital income and further eliminating the fruits of tax competition associated with individual liberty and the question of privacy.
See also:
Martin Feldstein: Economic Problems of Ireland in Europe, NBER Working Paper No. 8264, May 2001 (link)
Thursday, August 23, 2007
MULTINATIONALS, TAXES AND COMPETITIVENESS
Here is a report from Financial Times:
"Multinational companies with US subsidiaries could face huge new tax bills under a law passing through the US Congress. The new measure, known as the Doggett law after the Texas Democrat who proposed it, aims to prevent international companies avoiding US tax when they transfer funds from the US to parent groups via countries with favourable tax treaties, such as the UK and the Netherlands. At present, companies with headquarters in countries that have no US tax treaty, such as Taiwan and Singapore, can avoid a 30 per cent tax on funds transferred from US subsidiaries by setting up a unit in countries with favourable treaties. Congressional Democrats say the legislation is focused on “tax haven hideaways”."
Source: US tax bill set to hit multinationals, Financial Times, August 19 2007 (link)
A new tax hike on multinationals introduced by the U.S. Congressman could seriously hurt job creation and force multinationals to leave the U.S. despite some of the particular competitive advantages of the business environment in the U.S. such as sound access to venture capital. The performance of multinational companies in areas such as value-added and venture formation crucially depends on tax rates hiking capital gains, corporate income and savings. In fact, net direct investment and capital inflows into low-tax and offshore jurisdictions reflect the attractiveness of particular locations to invest and transfer investment funds into the most favorable place with regard to corporate strategies undertaken by multinational companies.
Penalities levied on setting up business units in jurisdictions with non-punitive tax regime, would certainly force capital and investment managers to avoid taxes through unfavorable results such as less job creation as a measure to fight resisting cost pressures caused by the introducing particular tax bills on companies seeking to maximize growth and output in jurisdictions with lower statutory rates on corporate income and private equity.
Nevertheless, taxation of private equity has distorting effects on decision-making where and how to allocate investment resources in particular to maximize the output and return on equity. In fact, there is a numerous evidence that outsourcing benefits outward company performance and provides opportunities to investors and offshore/onshore service supply. Obviously politicians do not know that multinational companies frequently run several business units and that particular domestic markets do not neccessarily offer suitable or attractive access to particular capital and investment funds and that restricting access to international markets could result in a lack-luster performance of multinationals and consequently, in the loss of gains from competitiveness and access to provide liqudity and additional funds to fuel growth and perform the business strategy.
"Multinational companies with US subsidiaries could face huge new tax bills under a law passing through the US Congress. The new measure, known as the Doggett law after the Texas Democrat who proposed it, aims to prevent international companies avoiding US tax when they transfer funds from the US to parent groups via countries with favourable tax treaties, such as the UK and the Netherlands. At present, companies with headquarters in countries that have no US tax treaty, such as Taiwan and Singapore, can avoid a 30 per cent tax on funds transferred from US subsidiaries by setting up a unit in countries with favourable treaties. Congressional Democrats say the legislation is focused on “tax haven hideaways”."
Source: US tax bill set to hit multinationals, Financial Times, August 19 2007 (link)
A new tax hike on multinationals introduced by the U.S. Congressman could seriously hurt job creation and force multinationals to leave the U.S. despite some of the particular competitive advantages of the business environment in the U.S. such as sound access to venture capital. The performance of multinational companies in areas such as value-added and venture formation crucially depends on tax rates hiking capital gains, corporate income and savings. In fact, net direct investment and capital inflows into low-tax and offshore jurisdictions reflect the attractiveness of particular locations to invest and transfer investment funds into the most favorable place with regard to corporate strategies undertaken by multinational companies.
Penalities levied on setting up business units in jurisdictions with non-punitive tax regime, would certainly force capital and investment managers to avoid taxes through unfavorable results such as less job creation as a measure to fight resisting cost pressures caused by the introducing particular tax bills on companies seeking to maximize growth and output in jurisdictions with lower statutory rates on corporate income and private equity.
Nevertheless, taxation of private equity has distorting effects on decision-making where and how to allocate investment resources in particular to maximize the output and return on equity. In fact, there is a numerous evidence that outsourcing benefits outward company performance and provides opportunities to investors and offshore/onshore service supply. Obviously politicians do not know that multinational companies frequently run several business units and that particular domestic markets do not neccessarily offer suitable or attractive access to particular capital and investment funds and that restricting access to international markets could result in a lack-luster performance of multinationals and consequently, in the loss of gains from competitiveness and access to provide liqudity and additional funds to fuel growth and perform the business strategy.
Subscribe to:
Posts (Atom)