Myths, Lobbies Block International Tax Cooperation
By Anis Chowdhury and Jomo
Kwame Sundaram (*)
SYDNEY and KUALA LUMPUR, Jun 29 2021 (IPS) – Too many have
swallowed the myth that lowering corporate income tax (CIT) is necessary to
attract foreign direct investment (FDI) for growth. Although contradicted by
their own research, this lie has long been promoted by influential
international economic institutions.
1980s’ economics ‘counter-revolution’ impacted the ‘Washington
Consensus’ of the
US federal government and the two Washington-based Bretton Woods institutions
(BWIs) – the International Monetary Fund (IMF) and the World Bank.
Thus, the rise of ‘supply side’ economics in the US – advocating lower direct
taxes on income and wealth – influenced the world. Without evidence, IMF
researchers justified its policy advice thus: “The complete abolition
of CIT would be the most direct application of the theoretical result that
small open economies should not tax capital income.”
Noting that capital is highly mobile, and can more easily
evade taxes than labour, IMF
economists even recommended that “small countries should not levy
source-based taxes on capital income”. Meanwhile, the Bank’s highly
influential, but dubious Doing Business Report has recommended tax
incentives without evidence.
To get BWI approval, developing country governments have
undertaken tax reforms, reducing progressive direct taxation. Instead, they
have favoured more regressive indirect taxes, such as the value-added tax
(VAT), sometimes dubbed the goods and services tax.
World Bank research and surveys have long found that tax incentives
do not really attract FDI inflows. A Bank report found no strong evidence that tax incentives
attracted non-resource ‘greenfield’ or additional new FDI.
It also found “tax incentives impose significant costs on
the countries using them”, including fiscal losses, rent-seeking, tax evasion,
administrative costs, economic distortions and “retaliation against new or more
generous incentives” by competitors.
An earlier Bank brief noted “tax incentives are not the most
influential factor for multinationals in selecting investment locations. More
important are factors such as basic infrastructure, political stability, and
the cost and availability of labor”.
It also argued that tax incentives do not compensate well “for negative factors in a country’s investment climate”.
Meanwhile, the “race to the bottom…may end up in a bidding war, favoring
multinational firms at the expense of the state and the welfare of its
Researchers have unearthed no strong evidence that tax
incentives are beneficial. While some incentives may attract FDI, they crowd
out other investments; hence, overall investment and growth do not improve.
report noted, “Tax incentives generally rank low in investment climate
surveys in low-income countries, …investment would have been undertaken even
without them. And their fiscal cost can be high, reducing opportunities for
much-needed public spending…, or requiring higher taxes on other activities.”
Even Organisation for Economic Cooperation and Development (OECD) research confirmed BWI findings that tax incentives
hardly attracted FDI. The Economist also found a weak relationship between tax
rates and business investment as well as growth rates.
A UK government report cast more doubt: “effectively attracting
FDI needs public spending, so narrowing the tax base works with tax incentives
for low-income countries could be contra-productive”.
Race to bottom hurts
IMF findings confirm that ‘beggar-thy-neighbour’
tax competition worsened avoidable revenue losses. Such ill-advised
efforts to attract investment inevitably accelerated CIT rates’ ‘race to the
BWI advice to governments has undoubtedly lowered CIT rates.
But despite lower CIT rates, transnational corporations (TNCs) still minimise paying tax, e.g., by shifting profits to tax
havens and exploiting loopholes.
CIT rate averages for high-income countries (HICs) have dropped twenty percentage points since 1980, falling from
38% in 1990 to 23% in 2018. Meanwhile, they fell from 40% to 25% in
middle-income countries, and from over 45% to 30% in low-income countries
Cut-throat competition has especially hurt developing
countries, which rely much more on CIT than developed economies. IMF
research found a one-point average CIT rate cut in other countries reduces
a developing country’s CIT revenue by two-thirds of a point.
Such tax cuts induce other concessions, further eroding the
base for corporate taxation. Thus, tax revenue is doubly lost by both rate and
base cuts. Fund staff estimated revenue loss at 1.3% of GDP in
developing countries, due to base erosion and rate reductions – much worse than
in developed countries.
A third of global revenue loss – US$167-200bn – is from low and middle-income countries
(LMICs), costing them 1.0-1.5% of national income. With better tax
administrations and larger formal sectors, HICs can replace such losses more
easily than LMICs with generally weaker tax systems and larger informal
The IMF and others now agree that an international minimum CIT
rate can stop this race to the bottom and TNC profit shifting. The group
of seven largest rich countries (G7) recently agreed to a minimum 15% rate, rejecting US
Treasury Secretary Janet Yellen’s proposed 21%. Even The Economist agrees the G7 proposal favours rich
Earlier, the Independent Commission for the Reform of
International Corporate Taxation (ICRICT) had recommended a 25% minimum and fairer revenue
distribution to developing countries.
Finance ministers from Indonesia, Mexico, South Africa and
Germany joined Yellen in welcoming the recent G7 agreement for a minimum global CIT
rate, while expressing confidence “that the rate can ultimately be pushed
higher than 15 percent”.
An influential piece has claimed ‘A Global Minimum Corporate Tax Is a Bad
Idea’, again citing the myth that low taxes will attract FDI. Invoking
new Cold War fears, it claimed China and Russia would also gain an unfair
advantage in luring “even more” FDI.
Trump-appointed Bank President David Malpass
opposes the agreement, claiming it would undermine poor countries’ ability to
attract investment despite Bank research showing otherwise. Pro-Trump
governments in Hungary and Poland also object to the G7 deal. Developing
countries cannot allow such tax-cutters to speak for them.
Developing country members of the G20 must insist on a
higher minimum and fairer revenue distribution at its forthcoming finance
ministers meeting. If the G7 refuses to start with anything more than 15%, an
agreed rate increase schedule of an additional one percent annually would get
to 25% in a decade.
International tax rules are currently set by rich countries through the OECD. Developing
countries participate at a disadvantage. Instead of allowing it to control the
process, they must urgently insist on an inclusive, balanced and fair multilateral process for international tax cooperation.
(*) Anis Chowdhury was born in
Chittagong, Bangladesh. He was schooled at the Government M.E. School;
Chittagong Collegiate School; and Chittagong Government College. Anis obtained
Honours and Masters degrees in Economics from Jahangirnagar University
(Bangladesh) in 1976 and 1978 respectively, and M.A (1980) and Ph.D. (1983)
degrees from the University of Manitoba (Canada). Jomo Kwame Sundaram, a former economics
professor, was United Nations Assistant Secretary-General for Economic
Development, and received the Wassily Leontief Prize for Advancing the
Frontiers of Economic Thought.