The disappearing taxpayer.
The Economist May 31st 1997
“The art of taxation”? advised Louis XIV’s treasurer, Jean-Baptiste Colbert, “consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” His observation remains true, except for one big change. Unlike geese, people in the 17th century didn’t know how to fly. Now they can.
In the coming decades electronic commerce - combined with the growing ease with which firms can shift their operations from one part of the world to another – will make it ever easier for people to flee countries where taxes are high, or to evade tax altogether by doing their business in cyberspace. The hole this will leave behind is already worrying many governments. Some argue that it is “unfair” for others to lure their firms away by levying lower taxes, and are pushing for the harmonization of taxes. Another new idea is to impose a tax on electronic transactions. But although governments everywhere will have to start thinking – and soon – about how to raise taxes in the newly weightless global economy, both remedies are flawed.
Those who advocate harmonization say that the alternative is a “race to the bottom”, as governments sacrifice social spending on the altar of competitiveness. A recent proposal from a panel of economists to make up for the tax losses caused by electronic commerce by introducing a “bit tax” on flows of electronic information is similarly defective. It is hard to see how a single country or even a group might impose such a tax without simply forcing on-line transactions offshore. But in so far as it succeeded, such a tax might just hamper the adoption of information technology, depriving people and businesses of its great productivity benefits.
So if neither of these ideas is any good, why not do nothing? It is true that the full impact of electronic commerce and globalization on governments’ taxation powers is still someway off. The fact that tax levels vary from 60% of GDP in Sweden to 32% in America suggests that even in a globalizing economy governments are still able to make distinctive fiscal choices. However, every so often a big Swedish company - Ericsson most recently - threatens to decamp because egregious income taxes make it difficult to recruit skilled employees. America’s corporate taxes have withered to insignificance because of the mobility of firms. At present these are merely straws in the wind, and hardly new ones, but there is no doubt which way the wind is blowing.
One day globalization and electronic commerce could make a sizeable dent in a country’s total tax revenues. And these forces have already made a big impact on the way the burden of taxes falls on a population. This is what rules our the option of inaction.
Not all firms, workers and products are equally mobile. Enterpreneurs, scientists, tennis players and film stars may be able to uproot themselves in search of lower taxes, but the average worker is still unlikely to become a tax refugee. Although this may reassure governments, it implies that governments will eventually have to cut taxes on the most mobile factors of production, notably skilled workers, while taxes on less mobile unskilled workers will have to rise. Over the past decade or so taxes on capital have already fallen sharply while those on labour have risen. In future it will be harder to tax firms or high-earners at high rates because they are the most mobile. The implication is that unskilled labour will have to bear a greater burden.
If they are to mitigate this change while maintaining their tax revenues, governments need to speed up tax reforms that are needed anyway to improve economic efficiency. In most countries at present, exemptions and loopholes distort the allocation of resources. Broadening the tax base by scrapping exemptions such as mortgage interest relief and zero rates of VAT on certain goods and services would allow a much lower rate of tax and therefore reduce the incentive for both tax evasion and migration. Less complex reporting requirements would reduce another incentive to hide from the taxman.
A second needed change is to shift the tax base from income towards consumption and property, which is both immobile and hard to hide. Even consumption is becoming more mobile. But a consumption tax would both remove the present disincentive to save and help to collect taxes from tax dodgers. Even those whose income comes from invisible Internet sales have to spend it. Having changed so much else in the world economy, globalization and information technology will inevitably undermine the way governments raise taxes. Reforming the tax system to plug the hole is going to be hard. Not reforming it would be even worse.
The tap runs dry. The forces of globalization and new technology threaten to weaken the power of governments to tax their citizens. Can governments plug the leak?
TWENTY-SIX tax collectors were killed in Russia last year and 74 were injured in the course of their work; six were kidnapped, 41 had their homes burnt down. Elsewhere in the world, being a taxman is merely an unpopular, rather than a dangerous, profession. But everywhere, people are finding it easier to escape paying taxes. They will be helped by two big changes: the gradual integration of economies and the growth of electronic commerce.
The first is more important at the moment. As the world becomes more integrated, and as capital and labour can move more freely from high-tax countries to low-tax ones, a nation's room to set tax rates higher than elsewhere is being constrained. At the same time, the expansion of business conducted over the Internet will make it harder to track and hence tax transactions.
In early May, for example, several large Swedish companies, including Ericsson, a telecommunications giant, said that they were considering moving out of the country because of high taxes. They were not complaining about high rates of corporation tax, which Sweden was forced to trim long ago. This time, companies were complaining about high personal income taxes, which make it difficult to recruit highly skilled employees. Including local taxes, Sweden's top marginal rate of income tax is almost 60%, and (worse still) becomes payable at an income of SKr209,200 ($28,000). In contrast, America's top federal tax rate of 40% does not bite until over $260,000. No wonder many talented scientists and engineers have been leaving Sweden.
This is just one example of how individuals and firms have greater choice today about where to work, where to locale production, where to shop and where to save and invest. This article analyses the various pressures upon governments' capacity to raise revenue, considers how serious those pressures might become, and ends by looking at how governments could respond.
Modern tax systems were developed after the Second World War when cross-border movements in goods, capital and labour were relatively small. Now, firms and people are more mobile - and can exploit tax differences between countries. This is the heart of the problem that governments face.
Globalization is a tax problem for three reasons. First, firms have more freedom over where locate. Activities that require only a screen, a telephone and a modem can be located anywhere. This will make it harder for a country to tax businesses much more heavily than its competitors. Corporate tax rates still vary wide.
Second, globalization makes it hard to decide where a company should pay tax, regardless of where it is based. Multinational firms design their product in one country, manufacture in another, and sell in a third. So globalization hampers the taxman’s ability to check the accuracy of profits reported by firms. Of course, this is far from new, but the scale of the problem is growing. In 1970 a typical large American company earned 10-20% of its income from abroad. Now many earn at least half their profits outside the United States. The third reason why globalization is a problem is that, as Swedish firms discovered, it nibbles away at the edges of taxes on individuals. It is harder to tax personal income because skilled professional workers are more mobile than they were two decades ago. Even if they do not become tax exiles, many earn a growing slice of their income from overseas, for consultancy work, for instance. Such income is relatively easy to hide from the taxman. Taxing personal savings also becomes harder when these can be zapped from one side of the globe to the other.
In the future, therefore, globalization - and, eventually, the Internet mау drain governments' tax revenues either by making evasion easier or by encouraging economic activity to shift to lower-tax countries
Translate the underlined words (p.p. 18-19).
What taxes does an average firm pay?
Popular ways to avoid taxation.
What unites the texts? Which points are better illustrated in the second text?
Compose questions to every paragraph of the texts, turn it into an interview.
Why do you think the information on Russian tax-collectors is put into initial story position in the text?