Download Presentation - The Cambridge Trust for New Thinking in Economics

Global capital markets, direct
taxation and the redistribution of
income
Valpy FitzGerald, Oxford University
First draft of paper presented to the conference
“Economic Policies of the New Thinking in
Economics” at St Catherine’s College, Cambridge
14 April 2011
Presentation content
Rather than go through whole paper, I will focus
on four (hopefully interesting) points:
1.
2.
3.
4.
Relevance of direct tax issues to New Economics
Theoretical weakness in the orthodox model
Level and trends of capital taxes
Global tax collection, information exchange and
the potential redefinition of development ‘aid’
1a. Relevance of capital tax issues to New
Economics
In the field of theory these include
• Chance to break grip of intertemporal
optimisation model with complete foresight or
insurance by representative household/agent
• Reintegrating distributional (political economy)
criteria macroeconomics; and public institutions
to cope with uncertainty
• Reinstating investment, public as well as private,
human as well as fixed (rather than saving) as the
driver of growth/development
1b. Relevance of capital tax issues to New
Economics
In the field of policy they include
• underpinning social democracy in capitalist
economies by keeping lower income groups at
acceptable distance from median
• effective regulation of international capital flows
for fiscal purposes => externalities for prudential
regulation and policing of illegal activities
• a sustainable replacement for non-humanitarian
international development cooperation based on
tax cooperation rather than “charity”
2a Orthodox Tax Theory
• Development of original Ramsey (1927) optimal
‘elasticities’ tax model by Mirrlees, Lucas etc
‘proves’ capital taxes should be low/zero in
closed economy
• Very strong assumptions about high elasticity of
capital supply (saving) to net return; and low
elastricity of labour to real wages (except at top
of course!)
• Argument strengthened in 1990s by globalisation:
OECD policy shift from mobile (capital income,
corporations and top earnings) towards immobile
(consumption and real estate) tax bases.
2b Problems with orthodox theory
• Lack of any intra-generational distributional criteria
(inter-generational through social discount rate,
despite Ramsey)
• Wrong on capital markets (smoothing); human
capital as asset (Aghion & Howitt); inter-generational
tax impact (Buhlig & Yanagawa); and infrastructure
• Incorrect to separate fiscal income from expenditure
(governments credit constrained) so capital tax can
be positive for investment/growth (see Appendix)
3a. Capital/labour tax burdens have changed in
UK; but capital tax base has fallen too (tax
avoidance)
UK Implicit Tax Burdens (% of relevant income base; source
OECD 2006)
1965
24
Labour
income
Capital
32
income
Corporate
30
income
Consumption 12
1975
31
1985
30
1995
29
55
50
34
115(!)
74
64
10
14
15
3b Current EU pattern fairly stable; though
very low corptax base (6% of GDP?)
3c International political economy of
secrecy
• High cost of secrecy on ownership of income and assets:
– global accounting systems of international firms
(“transfer pricing”)
– unregistered assets of households (“tax evasion”)
• Different tax rates are not the main problem (covered by
taxation treaties) but do promote damaging competition
for FDI and complicate revenue sharing.
• Interest in secrecy from a powerful lobby of those
– Avoiding regulation
– Maximising wealth
– Engaging in crime
3d Inter-governmental coordination
failure
• The familiar problems of all intergovernmental
cooperation (free riders, sovereignty, asymmetric
bargaining etc); compounded by speed of finance.
• Serious technical issues (data handling, legality of
access, beneficial owners etc) where most (but not
all) developing countries are well behind.
• But developing offshore financial centres
(“offshore”) not the only opaque jurisdictions,
nor the largest traders in financial services -OECD
(“onshore”) centres are.
4a Recent steps to improve
cooperation
• UN International Tax Committee efforts to
improve information exchange are limited; but
do emphasise mutual debt collection
• OECD and the EC increasing cooperation;
taking first steps towards automatic
information exchange and witholding taxes
• But these measures do not include developing
countries – even those of G20.
4b The problem
• Profits easily be shifted internationally due to
disconnected tax/accounting jurisdictions.
• Foreign corporations reduce domestic tax
liability as part of global “tax planning”
• Domestic wealth holders hold large
undeclared assets overseas
• Large loss of potential tax revenue and lack of
transparency
4c The solution
• Tax cooperation between all jurisdictions
should support the emerging global financial
architecture – not just within the OECD
• International tax models should be equitable
between levels of development; through
DTTS and full information exchange
• Development cooperation should be
redefined as a fiscal relationship involving
tax revenue sharing and budgetary support
4d Systems for information exchange
rather than tax harmonisation
• Key issue: give developing country tax authorities
information on residents’ assets abroad plus
country-by-country accounts of MNCs
• In essence, this would involve building on the
OECD system, adding lessons from the US and EC
systems, and extending it southwards.
• Tax harmonisation to prevent a “race to the
bottom” is best pursued regionally; but sharing of
revenue should be redistributive north-south
4e Regulating revenue sharing instead
of “aid”
• Full accounting of taxable income and assets
between two countries; plus a DTT; is in effect a
revenue sharing system due to deductables.
• Revenue sharing is the basis of ‘aid’ within states
to poorer regions; with performance indicators
and incentives for local resource mobilisation
• Tax revenue sharing would generate far more
than ODA; though reallocation needed for LDCs.
Above all, aid would no longer be charity.
THANK YOU
3. A simple “AK” model of profits tax in
an open economy
• The assumption of an overall expenditure
constraint is in fact very restrictive; as
increasing one tax just reduces another.
• More realistic to assume that extra revenue
allows extra expenditure, and that his can
increase productivity in an AK model
• But we retain the full freedom of capital
movement in response to post-tax profit
differentials (i.e. high “Ramsay” elasticity)
What is the optimal rate of taxation on
profits in a small open economy?
Y  A.L K  J 
(1)
return on capital, r, is
(2)
Y
r
K
Equilibrium set by domestic corporation tax rate (t), and
international rate of return (r*), and the international
corporation tax rate (t*):
(3)
r (1  t )  r * (1  t*)
With “J” exogenous, then 𝝏𝒀 𝝏𝒕 < 0; and thus 𝒕 = 𝟎 is best
     (1  t )   
Y   AL J 
 

 r * (1  t*)  
(6)
1
1 
But once we allow for “t” funding “J” then 𝝏𝒀 𝝏𝒕 is
ambiguous and in fact a solution 𝒕 = 𝑻 > 0 is optimal
(9)

Y  aL   r * (1  t*) t  (1  t ) 

T 
(10)

1
1  
.

 
which depends on relative marginal productivity of
public/private capital stock.
Figure 1: Composition of the Tax/GDP Ratio in
SSA, 1980–2005 (IMF 2009)
Figure 2: CIT Rates and Nonresource CIT Revenues
in SSA, 1980–2005 (IMF 2009)