Nick Shaxson ■ Beware the siren song of “tax certainty”
Back in July the G20 club of powerful countries issued a communiqué in which they enthused about “the benefits of tax certainty to promote investment and trade,” and they mandated the OECD and the IMF “to continue working on the issues of pro-growth tax policies and tax certainty.”
It’s taken as a given that something called ‘tax certainty’ is a wholesome thing. Here’s the Association of Chartered Certified Accountants (ACCA) giving it the old motherhood-and-apple-pie:
“Certainty, along with simplicity and stability, is one of the cornerstones of a good tax system: but why is it important? How can policymakers encourage certainty?”
It’s one of those ideas, like “a competitive tax system,” or “evidence-based policy,” or even “pro-growth tax policies,” whose very names make them hard to argue against. Even ‘tax simplicity’ is problematic. And then there’s stuff like dynamic scoring, where it isn’t the name but the concept itself which seems so appealing (read this to get a flavour of the bamboozlement involved.)
But one has to ask a few questions about all of these nice-sounding concepts. For example: which evidence are you going to
cherry-pick use to support your policy. Who will benefit from a so-called ‘competitive’ tax system, and who loses? A ‘pro-growth’ tax system has very often meant ‘shift the tax burden away from multinational corporations and the wealthy and onto relatively poorer sections of society’ – which, as the world is slowly discovering, may well turn out to be the opposite of a pro-growth approach.
And people who hanker for a ‘simple’ tax system don’t necessarily have their fellow citizens’ best interests at heart. Complexity for complexity’s sake is obviously a terrible idea, but tax is complicated in large measure because many people and their advisers constantly try to find loopholes and ways around the system: new defences constantly have to be put in place to try and thwart them. This makes complexity inevitable. Tax is politics: arguing for a simpler tax system is a bit like arguing for a simpler political system. Or, as someone once put it, tax is like brain surgery: it should be simplified — but only up to a point.
So just what is this thing called ‘tax certainty?’ Well, in general terms it’s a one-way ratchet.
Here’s a light-hearted but effective piece in The New Republic:
“Corporations need certainty, and the government should provide that certainty through tax policy. But if certainty were truly our priority, wouldn’t the preferred action be … not to reform taxes? What could be more predictable and certain than perpetuation of the status quo?
. . .
In fact, when corporate types say they need “tax certainty” what they really mean is they want “lower taxes.”
That’s because there’s a tax-cut ratchet effect built in to the ‘tax certainty’ meme. Corporations will shriek blue murder about the need for ‘certainty’ whenever there’s a threat to increase taxes on them. But how many times have you, dear reader, heard a corporate lobbyist complain about a lack of ‘certainty’ when there’s been a corporate tax cut? When there’s a shortfall in revenue due to a corporate tax cut, and poorer folk have to make up the difference, how often do you hear them wielding ‘tax certainty’ as an argument?
There’s something structural about this too. The OECD, the club of rich countries, is currently putting together the “Base Erosion and Profit Shifting (BEPS)” project, to tackle corporate tax cheating. We haven’t heard as much anger as one might expect from large multinationals about this project (update: though see the first comment under this blog). One of the reasons for this, it seems to us, is that there is an alternative system for tackling multinationals – unitary tax with formula apportionment – which could, if appropriately designed, create much greater certainty about taxing corporations. The OECD has for years been pathologically opposed to this system, which would imply a dramatic break from the now-unworkable system the OECD has been building up and finessing over the decades. The OECD’s system, based on the ‘separate entity principle’ and ‘arm’s length method’ (see here for the full details of those things) generates tremendous tax uncertainty, because it has proved so easy for corporations to game the system. If they really were interested in ‘certainty’, they would embrace the unitary alternative.
In fact, for people living on the breadline, or small businesses just keeping their heads above water, tax certainty is arguably a much more important thing: sudden higher taxes could have serious consequences – whereas for many large multinationals with huge cash piles that they aren’t investing, it probably doesn’t make much difference, except to gold-plate the bosses’ executive remuneration packages.
It’s a little bit like the refrain, heard with almost no opposition for years, that corporate actors must never (never, you hear?) suffer the evils of dreaded “double taxation.” (That is, when for example one country taxes a slice of income, and then another country taxes part of that same slice of income.) Until tax justice actors came along and called them out on it, nobody was making too much noise about double non-taxation – which is what the corporations have been getting.
So, in short, beware the siren song of ‘tax certainty.’