On so-called “tax competition”

Tax wars, in pictures

Someone has just posted an article about the need for multinational companies to protect their reputations from investigation of their tax affairs.  The gist of the article is that MNCs need to step up their public relations effort to communicate their tax affairs more effectively. So we can all look forward to more corporate spin as they try to explain away their dodgy deals in Luxembourg.

But one line in particular caught this blogger’s eye and perfectly exemplifies why so many tax accountants, tax lawyers, corporate spin doctors, uncle Tom Cobley and all, are so wrong about tax avoidance.  The line reads:

“Tax has long been an area in which companies — especially multinationals — can gain competitive advantage.”

This blogger studied the microeconomic theory of the firm for several years.  Prior to that he worked for one of Europe’s largest manufacturing / food processing companies with plant and distribution networks spread across many countries.

Neither in theory nor in practice should companies be seeking a “competitive advantage” through tax avoidance, or tax breaks, or tax holidays, or milking all manner of subsidies and incentives gulled out of politicians.  Tax, as we have said many times, is a lower order of consideration in investment decisions than factors such a good transport infrastructure, trained and productive workers, access to markets, law and order, and the availability of production inputs, including energy.  After all, if there’s a profit to be made, investors are likely to invest regardless of sweeteners provided by governments.

The theory of market competition is based on the notion that companies compete against one another by innovating to improve on production efficiency, product and service quality, and on price.  The constant pressure of competition should yield optimal allocation of resources.  What we all know, or should know, however, is that most markets are far from perfect, and tax avoidance by Transnational Corporations (TNCs) renders them still less perfect, since few locally-based companies will or even can shift their profits to Jersey or Luxembourg.  If multinational s can squeeze out their locally-based competitors through being better at tax avoidance, this reduces consumer choice and increases the monopolistic rents that TNCs can obtain from already uncompetitive market conditions, since they don’t contribute to the provision of the infrastructure and services that all markets rely on.

When companies “compete” on taxes the whole market dynamic changes: instead of promoting innovation, better services and lower prices, the advantage goes to those companies that can secure the best tax breaks or the largest amount of subsidy.

Theories of comparative advantage are turned on their head as armies of CEOs, tax advisers, lobbyists and corporate location agents, scour the corridors of political power seeking tax loopholes, subsidies and whatever tricks are available to not pay tax and free-ride of public services and resources.

This is increasingly the way of the world: things have got so out of hand that these days one might call these corporate welfare chasers “Davos Man.”

Far from promoting efficient resource-use, so-called ‘tax competition’ – a phenomenon which is far more accurately described as ‘tax wars‘ – actually achieves the exact opposite; it rewards the rent-seekers and free-riders.

In every respect, this type of “competition” causes market failure which acts against public interest.

Few things are more dangerous than a Big Lie repeated time and time again.  This is why we must now urgently tackle head on the nonsense peddled by people like Joe Dalton, the author of this particular article for EY, the tax avoidance advisory business formerly known as Ernst & Young).  The entire notion of “tax competition” is a Big Lie, whether at the microeconomic level of the firm, or at the political level of the race-to-the-bottom between countries.

Henceforth, TJN will be making tackling tax wars a high priority.  Meanwhile we invite Joe Dalton or any of his colleagues to explain what benefits flow to societies from companies – especially multinationals – obtaining a “competitive advantage” through tax avoidance.

And while waiting for Joe to get back to us, take a look at this short article about the myth of ‘tax competitiveness’ of nations.