Tuesday, September 29, 2009

Does Taxing the Rich Make Sense?

Life is complicated. A mounting body of evidence indicates that envy of the rich and the impulse to heavily tax them for their success is counter-productive to our desire to help the poor. The following article from Kairos Journal demonstrates the problem well.

The Joys of Cutting Corporate Income Tax

In his spring 2007 budget, the British Chancellor of the Exchequer1 cut the main rate of UK corporation tax (the tax levied on company profits)2 from 30% to 28% and was roundly abused by some for doing so: Brendan Barber, General Secretary of the UK Trades Union Congress, declared that on corporation tax, the chancellor had gotten his priorities wrong: “The public will simply not understand why, when businesses are enjoying record profits, the chancellor found money to cut their tax payments.”3

Many Christians might share Mr. Barber’s views and assume that taxation on company profits is a relatively painless way to raise the money needed to finance government expenditure, but in fact the chancellor could hardly avoid the action he took. Since the early 1990s countries all over the world had been cutting their rates of corporate income tax in a bid to retain or attract footloose international companies. Between 1996 and 2004, for instance, 11 out of the 30 member countries in the Organisation for Economic Co-operation and Development4 reduced their corporate taxation. This included every one of the big G7 economies – every one, that is, except the UK.5

Some of those cuts were dramatic, particularly amongst smaller countries: Ireland progressively reduced her tax from 28% in 1999 to 12.5% in 2003, and Iceland cut her rate from 30% to 18% in 2002 – and both cuts remain today.6 But the smaller nations were not alone. Germany, too, slashed her corporate tax rates,7 and the OECD average dropped from 34.8% in 1998 to 27.7% in 2007. This left the UK’s 30% in the upper range, whereas it used to be comparatively low among its peers.8 As a result of this and other factors,9 22% of British companies voted with their feet and located at least part of their operations overseas,10 with others threatening to follow.11

Unfortunately, the UK has not gone far enough with its cuts. Not only is the new UK rate of 28% once again above the current OECD average, which is still falling (26.7% in 2008),12 she is missing out on the fact that cuts in company taxation can be so beneficial to the economy (by attracting international investment, by reducing corporate tax evasion, and by encouraging entrepreneurship) that they eventually lead to an increase in corporate tax revenue. (American economist Arthur Laffer popularized this insight in the 1980s.) This notion has become reality in Canada, Austria, Belgium, Denmark, Germany, Ireland, the Netherlands, Sweden, and Japan.13

In contrast, Finland and Greece, which raised their corporate tax rate, saw a fall in revenue. Aware of such trends, the UK TaxPayers’ Alliance commissioned research that found what might happen if the UK were to gradually reduce its tax rate to the Irish rate of 12.5% by 2016.14 The results were startling: By 2021, the UK’s GDP would be 8.7% higher, manufacturing employment would be 10.1% higher, and disposable income would be 9% higher than if the tax cut were not made.15

So who exactly suffers if the corporate tax rates stay high? After all, companies are not people. It has to be some combination of investors in the company (who receive lower returns), customers of the firm’s goods (who pay higher prices), or the employees (who receive lower wages). In a mammoth study published in 2008, three scholars from Oxford University’s Centre for Business Taxation reported findings drawn over the period 1996-2003, from 55,082 companies located in nine European countries. They concluded that every dollar of additional corporate income tax reduced wages by 92 cents in the long run.16 So the workforce ends up paying the tax through lower pay. Surely this is not what Secretary Barber and the trade unions want.


1 At the time, Gordon Brown.
2 The exact way in which profits are assessed for taxation purposes can be excruciatingly complicated. The rules applied to depreciation of capital, the treatment of overseas earnings, the treatment of distributed (in the form of dividend payments) as compared to retained profits, the deferral of tax payments, etc., all vary considerably over time and from country to country. Many countries have different rates of corporate income tax for different levels of profit and also for different types of business. For some discussion of this, see the study carried out by the Congressional Budget Office of the Congress of the United States, “Corporate Income Tax Rates: International Comparisons,” Congressional Budget Office Website, November 2005, http://www.cbo.gov/ftpdocs/69xx/doc6902/11-28-CorporateTax.pdf (accessed September 8, 2009).
3 See Mark Milner, “Corporation Tax Cut ‘Could Have Been Bolder,’” Guardian Website, March 21, 2007, http://www.guardian.co.uk/business/2007/mar/21/budget2007.politics2 (accessed September 8, 2009).
4 Which includes Australia, New Zealand, the U.S., Canada, Mexico, Korea, Japan, and Turkey, as well as most European nations.
5 Jane Croft, Andrew Jack, and Maija Palmer, “Tax Cut May Help Keep Business in the UK,” Financial Times Website, March 22, 2007, available from http://www.ft.com/cms/s/0/4d30da3a-d8ad-11db-a759-000b5df10621,dwp_uuid=2f7f9ed0-9b50-11db-aa70-0000779e2340.html?nclick_check=1 (accessed September 8, 2009).
6 These tax cuts contributed to the stellar rates of economic growth that earned Ireland and Iceland the labels “Celtic Tiger” and “Nordic Tiger,” before they were hit by the Credit Crunch. For these figures, see the annual surveys of corporate income tax rates around the world by the international accountancy firm KPMG. For example, see “KPMG’s Corporate and Indirect Tax Rate Survey 2008,” KPMG Website, http://www.kpmg.com/SiteCollectionDocuments/Corporate-and-Indirect-Tax-Rate-Survey-2008v2.pdf (accessed September 8, 2009).
7 Germany cut corporate income tax from 52.3% in 1999 to 38.36% in 2001 and, after a slight increase for several years, to 29.51% in 2008. See ibid.
8 Ibid.
9 On wider measures of competitiveness, Britain has fallen (as of 2009) to 21st in the Institute of Management and Development’s index of world competitiveness; see “The World Competitiveness Scoreboard 2009,” IMD Website, http://www.imd.ch/research/publications/wcy/upload/scoreboard.pdf (accessed September 8, 2009).
10 Also, 17% of firms said they were considering location overseas for the first time. See “Chancellor Must Insist on Tighter Grip on Spending to Half Slide in Tax Competitiveness,” CBI Website, March 5, 2007, http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/8d05ddf1699699d380257292004cff3b?OpenDocument (accessed September 8, 2009).
11 In 2006, Lloyd’s of London insurer Hiscox announced that they would relocate to Bermuda to avoid high corporate tax rates and excessive regulation; Shire Pharmaceuticals, a large FTSE-100 company is relocating to Ireland for tax purposes; and United Business Media and WPP, one of the world’s largest advertising groups, are also planning to leave for Ireland. See Matthew Elliott, Matthew Sinclair and Corin Taylor, “How Cutting Corporation Tax Would Boost Revenue,” Conservative Way Forward Website, 2008, http://www.conwayfor.org/Files/MediaFiles/CWF%20corporation%20tax%20paper%20FINAL%20lowres.pdf (accessed September 8, 2009).
12 “KPMG’s Corporate and Indirect Tax Rate Survey 2008.” The world average is lower, at 25.9%.
13 France and the Czech Republic, which also increased their corporate tax rates, also saw corporate tax revenues fall but then rise when they subsequently cut rates. See Elliott, Sinclair, and Taylor.
14 This was carried out by the Centre for Economics and Business Research using a dynamic economic model. See “The Dynamic Impact of the 2007 Budget and a Comparison with the Impact of Gradually Introducing an Irish Level of Corporation Tax,” TaxPayers’ Alliance Website, April 2007, http://tpa.typepad.com/research/files/dynamic_model_of_uk_economy_budget_2007_irish_ct_rate_simulation_results.pdf (accessed September 8, 2009).
15 “New TPA/CEBR Dynamic Model of the UK Economy,” TaxPayers’ Alliance Website, April 16, 2007, http://tpa.typepad.com/research/files/press_release_new_tpacebr_dynamic_model_of_uk_economy.pdf (accessed September 8, 2009).
16 Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini, “The Direct Incidence of Corporate Income Tax on Wages,” University of Oxford Website, http://users.ox.ac.uk/~mast1732/RePEc/pdf/WP0707.pdf (accessed September 8, 2009).

Kairos Journal


Matt said...


Any chance you'd be interested in joining me for the Acton Institute symposium, "Is Capitalism Worth Saving?" in Grand Rapids, the morning of Oct. 30th?


ChosenRebel said...

Yes, actually, tell me more.

Anonymous said...

How do you square capitalism with the teachings of Christ?
Capitalism is premised on the acquisition of wealth.
Didn't Christ teach that we should look after the poor?
Didn't Christ teach that to truly follow him the wealthy and comfortable would need to give all of their riches to the poor?

It seems to me that the Christian position on Capitalism should be the opposite of saving it.

ChosenRebel said...

First, captitalism and the teachings of Christ are not "necessarily" in conflict. No where in the teachings of Christ will you find any disdain for profit.

Second, yes, Christ taught that we should "look after the poor". More than that, I think our treatment of and care for the poor is a measure of our walk with Christ.

Third, no, Jesus did not say that for all wealthy men/women to truly follow him, they had to give everything away to the poor. There was one "rich young ruler" that Jesus told to sell alll that he had, give it to the poor and come and follow him. (luke 18:18ff) That is true. But if you look at the context, Jesus point is not to make this the badge of what it means to follow him so much as it is to show the rich ruler that he is not as righteous as he thinks himself to be. That in fact, he is a covetous man and that he loves his stuff more than he loves the truth and Jesus.

Finally, the point of the conference is not to "save capitalism" but to give it a thorough and critical eye to see if it is worth saving. I think this is an example of your predetermined view of what you think evangelical Christians beleive causing you to be negative apriori.

Matt said...

Here's the link: http://www.acton.org/events/capitalism_worth_saving.php.

Registration is free.