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The G8 meetings this week at Lough Erne in Northern Ireland had a theme of "Tax Evasion and Transparency." This theme may have been chosen because "Enchantment under the Stars," or "A Night to Remember" were taken by the local high school prom committee.
And I joke not to lampoon this august body – far from it. It's only that the efforts of a group of people – none of whom put on a necktie – who help shepherd the world's largest economies ought to be focusing on economic growth, such as that which we haven't really experienced in the West for quite some time now.
Instead, the world is given the Lough Erne Declaration, which calls for a "robust" international framework to ensure fair tax collection and rational tax regimes. That the United States should be mentioned in the same breath as "fair tax collection" or "rational tax regime" is ludicrous enough.
A System at Cross Purposes
Corporations have a legal duty to return as much profit as they can to their shareholders. To that end, they endlessly seek out favorable tax structures; some legal, some not. In the case of American business, this usually entails keeping as much cash as possible offshore to avoid the distinctly American habit of taxing overseas income twice – once over here and once over there.
There's a real incentive to hide that money from government, simply because tax regulations are far too complex, enforcement is sporadic and, at times, punitive and selective.
All this is not to say that tax evasion isn't a real problem, because it is. Recent investigations have uncovered thousands of instances of massive tax evasion, linking offshored money to some fairly unsavory names.
But launching an entirely new global bureaucracy, the cost of which is a complete X-factor at this point, to chase corporate accountants seems to be missing the point. The G-8 agreement even hints at preventing companies from moving earnings across borders. That sure would boost global growth…not.
There are quite a few rational, measured steps to attempt before we kill the patient to treat the disease.
In 23 Percentage Points, a Huge Range of Possibilities
One such measure might be a more straightforward tax code. The corporate tax rate is currently an ungovernable wild beast.
On paper, according to the Los Angeles Times, it's 35% – the highest nominal corporate tax rate in the developed world.
In reality, says The Wall Street Journal, thanks to wired-in breaks, hard-driving lawyers, and in some cases, outright cheating, the effective tax rate is something like 12.1%, the lowest level since before World War II. 12% puts the United States on a par with the Republic of Ireland – a country with vastly fewer citizens, a vastly smaller government, and vastly different needs.
The disconnect is obvious: 35% is too high, 12% is perhaps too low. Within those 23 percentage points lies a whole galaxy of possibility for reasoned compromise and problem solving. Why not peg the corporate tax rate at 25%, plug the leaks in the tax code, and call it a day?
That's an oversimplification, but there is a sensible figure out there in those 23 percentage points. There are examples to look to. Iceland's effective corporate tax rate is 20%.
Economic growth is resuming in the once-battered island country. Iceland also has admirably flexible regulations where it counts – another kettle of fish, but something to consider.
Lough Erne Won't Even Come Close
The solution isn't going to be to look at a foreign country, monkey see, monkey do. It's not that simple. But we do have examples of success and failure to consider when thinking about our tax regime. It is not without the realm of possibility to carefully consider growth targets and revenue requirements and balance them against corporate profits and competitiveness.
Onerous taxation need not stifle growth. And "overhauling the tax code" doesn't mean slapping on another 9,387,467 pages onto the rulebook. The Lough Erne Declaration doesn't even come close to tackling the real problem.
- The Los Angeles Times:
Corporate Tax Rate Overhaul May Be Part Of A Fiscal Cliff Deal