Are the present worldwide initiatives a stride towards an era of global tax communism, and away from competition and capitalism?
The present tax landscape seems to be borrowing many principles from communist ideas, this time round, not as to how the economy should be run, but as to how tax systems should be managed. For instance, the underlying idea of the base erosion profits shifting (BEPS) project and common reporting standards (CRS) appears to be that there will be a de facto centralised system of taxation where the tax authorities of the world get together to maximise tax collections and to distribute the tax collected so that each tax authority gets a ‘fair share of tax’.
There is a dire need for many governments in the world to collect more revenue to fund their budget deficits. But is the present approach the right way to go about it, and is the idea of ‘harmful tax competition’ possibly erroneous?
A fundamental belief of capitalism is that competition acts as the ‘invisible hand’ that selects the fittest for survival. Will attempting to eliminate ‘harmful tax competition’ really lead to efficiency and maximisation of tax collections? Or will it instead lead to the development of inefficient tax systems with multiple disputes between tax authorities and taxpayers worldwide as to what is their ‘fair share of taxes’?
What is the true objective of tax policy? To collect as much tax as possible immediately, or to facilitate business growth by eliminating double taxation with the objective of ultimately increasing the profits for taxation?
This in turn leads to further questions: Will the present tax policies in fact lead to fewer businesses and decreased profits available for tax, thereby increasing the intensity of the fight for ‘fair share of taxes’ amongst the survivors? And if there are fewer businesses generating fewer profits, where will the increased tax collections come from?
The present state of the world economy is bad, and looks likely to worsen. Will such tax policies penalise smaller businesses and entrepreneurs out of existence, and freeze the status quo by facilitating survival of the present large multi-national companies who can afford the astronomical compliance costs in an environment of tax uncertainty?
Gigantic MNCs with their gargantuan compliance machinery appear equipped to handle the medusa-like complexity and constantly changing regulation. The increased volume and complexity of regulation may however effectively kill off the smaller competitors. These are the very companies not actively engaged in complicated tax-planning and bear a significant portion of the tax burden. Even if such tax polices do not kill off the smaller competitors, the increased compliance and complexity will inhibit their ability and desire to expand cross-border, due to the increased exposure to double or multiple taxation. Global trade may shrink further, and smaller companies may be wiped out, leaving the markets dominated by large monopolistic giants.
The ideals of communism are admirable: equality and fairness for one and all. The attractiveness of these ideals brought about revolutions, toppled governments and caused whole nations to subscribe to these ideals. But its practical track record and results have been questionable.
There is a need to strike a balance in ensuring a fair system for the rule of law, so that egregious tax evaders do not profit at the expense of other law-abiding taxpayers. Taxes are necessary to run a civilised society smoothly for the good of its citizens. At the same time, business and economic activities should not be paralysed in a complex world environment of anti-tax competition regulation and tax uncertainty, which would cripple business activities and ultimately lead to reduced tax collections.
Contributor : Random thoughts and questions by a law-abiding taxpayer