Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It
by Chris Edwards & Daniel J. Mitchell
(Cato Institute 2008, 256 pages)
As 2009 begins, economic liberalism is under great strain from its various opponents. Be it in the form of guarantees for bank deposits, fiscal pump priming policies or subsidies to failing firms, most countries appear to be taking a step back on the road towards freedom in the economic sphere.
In uncertain times like this, it is helpful to recall some of the central conversations of liberals in previous times. Consider the 1950s as an example. As recalled by James M. Buchanan, the economist Warren Nutter at that time urged fellow classical liberals to "save the books". Friedrich Hayek would broaden this concept by saying that liberals should "save the ideas".
Both of these sentiments are surely relevant today. However, one could practically broaden them out by actually "writing the books with the ideas to be saved". It is on this basis that Cato Institute economists Chris Edwards and Daniel J. Mitchell well and truly deliver with their book Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It.
As explained by Edwards and Mitchell, tax competition is one of the welfare enhancing biproducts of modern globalisation. As a consequence of drawing down barriers to capital, migration and trade since the 1970s, governments have since found themselves in a position where they must cut taxes on income, investment and wealth to attract these valuable resources.
The results of the global tax revolution have been outstanding so far. The average top individual income tax rate across the OECD has fallen from 68 per cent in 1980 to 42 per cent by 2007. Corporate income taxes have fallen from above 40 per cent in the mid 1980s to 28 per cent by 2007. The tax treatment of foreign investors has been less punitive, as competition has driven down withholding taxes on cross border investments.
The book chronicles how low tax policies become transmitted across countries. During the 1970s, the British political icon Margaret Thatcher discussed how high tax rates were a "symbol of socialism" that needed to be swept away. After gaining office she reduced a number of taxes, including the corporate tax rate from its 1982 rate of 52 per cent to 35 per cent by 1986. Ronald Reagan took up a similar policy stance as part of his broader "supply side revolution".
Other countries were forced to follow suit if they wanted to retain their capital and people. However, some countries have tended to drag the chain more than others. In 1985 Australia had cut the top personal income tax rate from 60 per cent to 49 per cent, and in 1990 down to 47 per cent. However, fast forward to 2007, and authors show that Australia's top personal income tax rate is still at a painful 46.5 per cent.
When we look around the world today, we see just how much Australia has fallen behind on the tax reduction agenda. Our record is exposed fully when compared to the emergence of the "flat tax club" of nations. Flat taxes are single rate income taxes with fewer deductions, exemptions and credits. They reduce distortions in the treatment of savings and investments, help prevent tax evasion, eliminate special deals and preferences in the taxation system, and are consistent with the all important "equal treatment of equals" concept of justice. In 2008, 25 jurisdictions, including central and eastern European countries, have adopted single rate individual income taxes.
Global Tax Revolution clearly outlines the economic and fiscal benefits of tax competition between countries. On the economic front, the authors state that "if tax competition can reduce high marginal tax rates on labor and capital, it can create large gains to a nation's economy". Based on the evidence outlined in the book, there is little question that tax competition has created such gains. In terms of the fiscal effects of tax competition, "governments would likely be larger today if tax competition had not challenged their fiscal monopolies".
An important aspect of Global Tax Revolution is that it broadens the scope of analysis to consider the social and moral case for tax competition. This is something that has been largely overlooked by both sides of the debate so far. Edwards and Mitchell explain that "low tax jurisdictions, or tax havens, are a safe refuge for oppressed people seeking to protect their assets". For example, financially persecuted groups, such as Jews in the Middle East, Chinese in Malaysia or Indonesia or Indians in east Africa, can protect their precious savings in countries with lower taxes. More generally, tax competition can spur economic growth that enables people to buy better food, clothing, shelter and health care for themselves and loved ones.
Despite these benefits, there are powerful countervailing political forces that are working to nullify tax competition across the globe. The OECD has actively campaigned against low tax jurisdictions, and has called for countries to exchange information about taxpayer activities across borders. It has previously threatened tax havens and other low tax countries with denial of market access and other forms of financial protectionism if they did not agree to weaken their tax and privacy laws.
The governing bodies of the European Union have regularly called for international tax harmonisation while the United Nations has sought to expand its power by levying global taxes variously on airline tickets, currency transactions, the internet and the income of emigrants. While these remote bureaucracies have been fairly unsuccessful in their efforts to date, it is in the interests of all taxpayers in Australia and abroad to resist moves to create an international tax cartel.
Overall, countries are making good progress on tax liberalisation, but more must be done to relieve taxation burdens on citizens and business. Australia has become a tax reform laggard in a fast moving world. Its top personal and corporate income tax rates are the tenth highest in the world, and its capital gains tax rate is the sixth highest. Our major Asian neighbours, including flat rate taxing Hong Kong, are pulling ahead of us in the tax competitiveness stakes.
With the Federal Treasury undertaking a review of the Australian tax system, Ken Henry and his review staff would do very well to read Global Tax Competition and draw on its lessons for the sake of an internationally competitive tax system for Australia. If they do, all Australians can look forward to a country that embraces growth and enterprise through low taxes.
A highly readable book written in a direct style suitable for academics, policymakers and the general public alike, Global Tax Competition contains the worthy ideas that ought to be saved when it comes to the economics of tax competition. This is one of the best ways that economic liberalism can move forward.
The Flat Tax Club: Income Tax Rates, 2008
| Jurisdiction | Year individual flat tax adopted | Individual flat tax rate | Corporate tax rate |
| Jersey | 1940 | 20.0% | 20.0% |
| Hong Kong | 1947 | 15.0% | 16.5% |
| Guernsey | 1960 | 20.0% | 20.0% |
| Jamaica | 1986 | 24.0% | 33.3% |
| Estonia | 1994 | 21.0% | 21.0% |
| Lithuania | 1994 | 24.0% | 15.0% |
| Latvia | 1995 | 25.0% | 15.0% |
| Russia | 2001 | 13.0% | 24.0% |
| Slovakia | 2004 | 19.0% | 19.0% |
| Ukraine | 2004 | 15.0% | 25.0% |
| Iraq | 2004 | 15.0% | 15.0% |
| Romania | 2005 | 16.0% | 16.0% |
| Georgia | 2005 | 12,0% | 15.0% |
| Kyrgyzstan | 2006 | 10.0% | 10.0% |
| Pridnestrovie | 2006 | 10.0% | 10.0% |
| Trinidad | 2006 | 25.0% | 25.0% |
| Iceland | 2007 | 35.7% | 18.0% |
| Kazakhstan | 2007 | 10.0% | 30.0% |
| Mongolia | 2007 | 10.0% | 25.0% |
| Macedonia | 2007 | 10.0% | 10.0% |
| Montenegro | 2007 | 15.0% | 9.0% |
| Albania | 2007 | 10.0% | 10.0% |
| Mauritius | 2007 | 15.0% | 15.0% |
| Czech Republic | 2008 | 15.0% | 21.0% |
| Bulgaria | 2008 | 10.0% | 10.0% |
Source: Chris Edwards & Daniel J. Mitchell, Global Flat Tax Revolution: The Rise of Tax Competition and the Battle to Defend it
Note: Estonia's corporate tax rate for retained earnings is zero.
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