TOPIC GUIDE: Tax Incentives
"It is wrong for countries to offer tax incentives to attract investment"
PUBLISHED: 29 Jan 2016
AUTHOR: Adam Rawcliffe
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INTRODUCTION
On the 23rd November American pharmaceutical giant Pfizer announced a deal to buy Irish Botox maker Allergan in a deal worth $160 million, one of the largest corporate mergers in history [Ref: Reuters]. Pfizer became the latest of a number of tax ‘inversion’ deals, where a larger company purchases a smaller company in order to relocate its headquarters to a new domicile with a lower corporate tax rate - a practice which has also involved American companies such as Burger King, Liberty Global and Medtronic [Ref: New Yorker]. Despite the fact that Pfizer were acting within the law, the deal was greeted with derision by the media, who saw the Pfizer-Allergan merger as an example of yet another corporation exploiting tax loop holes in order to maximise profits [Ref: Guardian]. The scandal ties in to a much larger debate surrounding the efficacy of countries offering competitive tax arrangements in order to attract foreign direct investment; a policy most famously used by countries such as Ireland, Luxembourg and the UK, as well as crown dependencies and overseas territories such as the British Virgin Islands [Ref: Telegraph]. Opinion is split as to whether tax incentives are wrong both ethically and practically. With opponents arguing that corporations which seek to pay less tax are avoiding their responsibility to contribute to the societies in which they operate, creating an unfair, unethical system which simply does not work. This view is contested by supporters though, who suggest that tax incentives are just a logical component of a globalised free market; and claim that big business is often portrayed unfairly, when in reality it benefits society more than it harms it. Broadly speaking then, what are the ethics of tax incentives – are they a help, or a hindrance?
DEBATE IN CONTEXT
This section provides a summary of the key issues in the debate, set in the context of recent discussions and the competing positions that have been adopted.
Are tax incentives ethical?
Defined as: “Deduction, exclusion, or exemption from tax liability, offered as an enticement to engage in a specified activity (such as investment in capital goods) for a certain period” [Ref: Business Dictionary], tax incentives polarize opinion around the world. Critics argue that corporations take advantage of competitive tax rates internationally in order to make more money for their shareholders, whilst still maintaining operations in the country that they are leaving [Ref: Guardian]. The Guardian newspaper makes the point that while individuals “rarely move in response to tax changes - flighty financial capital does move” to find the most favourable tax arrangements [Ref: Guardian]. If ‘Taxes are the price we pay for a civilised society’, it could be argued that avoiding paying an appropriate amount, undermines tax as a moral responsibility [Ref: WikiQuote]. Within this context, many are now of the opinion that tax incentives are fundamentally unfair and unethical, because they mean that countries end up, “depleting the contributions of major corporations and leaving citizens to pick up the tab” [Ref: Guardian]. In addition, it is claimed that tax competition gives big corporations an unfair advantage over smaller, local companies, because they can use complex offshore tax models to increase revenues, which often leads to the smaller companies going out of business because they cannot compete [Ref: Guardian]. That said, on the other hand, tax competition is largely supported by classical economic theory. In 1956 Charles Tiebout argued that in a globalised world, it would be logical for people to move to countries with the most efficiently run public services for the least amount of tax possible [Ref: Journal of Political Economy]. And on a practical level advocates say tax competition is far from unethical, and is actually evidence of the free market at work; paying less tax allows multinationals to pass savings on to customers, pay higher wages to employees and ultimately invest more in to the societies in which they operate [Ref: New American]. For example, Pfizer CEO Ian Read, claimed that the Allergen merger will give his company greater ability to invest in America and provide more money for its research and development department [Ref: PR Week].
Do tax incentives work?
American business magnate Warren Buffett once remarked that: “I have worked with investors for 60 years and I have yet to see anyone… shy away from a sensible investment because of the tax rate on a potential gain” [Ref: Guardian], which calls into question the need for tax incentives at all. This is because: “Above all, investors want good roads, a healthy and educated workforce, and the rule of law. All of which mean tax.” [Ref: Guardian] However, despite these misgivings, there are many who maintain that tax incentives do work. They argue that rather than scapegoating big business, governmental bodies should focus on simplifying and lowering tax rates. This is vital due to the fact that economically prosperous countries must be attractive to foreign investors who look for competitive conditions with simple rules and minimal red tape [Ref: City A.M.]. And as columnist Alex Newman states, “the benefits of tax competition, low taxes, and economic freedom are clear — liberty, prosperity, higher wages, more investment, more jobs, more growth, and a better society.” [Ref: New American] Advocates also point to success stories. Ireland exceeded tax revenue performance targets in 2015 by €800 million, 80% of such can be attributed to money raised from corporation tax, with many crediting this to moves by a large American multinational to book certain profits in its Irish division that were previously booked offshore [Ref: Irish Times]. And politically, supporters of tax incentives note that national governments must be free to set their own rates as a matter of sovereignty, and suggest that if governments and organisations such as the EU had their way, taxes would always be set at the highest rates, which would drive business away [Ref: City A.M.].
Tax incentives and the developing world
Favourable tax incentives have become common place in the developing world in recent years, sparking debate about whether it benefits or hinders economic growth in these countries. A damning report published by a group of NGOs claimed that in 2012 tax incentives for six firms, amounted to 59% of Sierra Leone’s government budget [Ref: Guardian]. It concludes by stating that “tax breaks for investors have done little to help the country’s poorest people, draining resources needed for critical public services.” [Ref: Guardian] Together with this, tax incentives ranked 11th out of 12 location factors in a United Nations Industrial Development Organization survey of 7000 firms in 19 African countries. And Investor Motivation surveys in Tanzania, Rwanda, Uganda and Burundi, showed that over 90% of investors would still have invested even if tax incentives were not provided [Ref: OECD]. However, others are more sanguine, and say that without global tax competition, business would have no incentive to invest in new, perhaps poorer countries, and economic development would be stifled as a result [Ref: Wall Street Journal]. They point to Kenya, which has projected economic growth of between 6-7% over the coming year, whilst offering exemption from corporation tax to companies new to the country [Ref: Mail & Guardian Africa]. So what are the pros and cons of tax incentives? Is it “always harmful” [Ref: Guardian] for countries to offer tax incentives to attract investment – and who gains and who loses in such arrangements?
ESSENTIAL READING
It is crucial for debaters to have read the articles in this section, which provide essential information and arguments for and against the debate motion. Students will be expected to have additional evidence and examples derived from independent research, but they can expect to be criticised if they lack a basic familiarity with the issues raised in the essential reading.
FOR
Amazon Scammed America’s Hurting Cities
Alex Shephard The New Republic 12 November 2018
Why Apple’s low-tax deal is no blueprint for Brexit Britain
Fintan O'Toole The Guardian 4 September 2016
Another big corporation is flagrantly dodging tax. This must be outlawed
Simon Jenkins Guardian 24 November 2015
Protecting the tax base: why it’s important to block tax inversions
Jared Bernstein Washington Post 19 November 2015
Tax competition - a threat to economic life as we know it
Peter Dietsch Open University Press 14 October 2015
Tax evasion: the main cause of global poverty
Bella Mosselmans Huffington Post 28 February 2014
My journey into the tax justice movement
Dereje Alemayehu Huffington Post 13 June 2013
Heard that countries should ‘compete’ on tax? Wrong
Ellie Mae O’Hagan & Nicholas Shaxson Guardian 18 April 2013
AGAINST
IEA announces Richard Koch Breakthrough Prize Winner
IEA 6 April 2017
Oliver Riley Adam Smith Institute 3 March 2017
Pfizer-Allergan: If corporate taxes cause inversions maybe we should change taxes
Tim Worstall Forbes 26 November 2015
Globalist assault on tax competition rouses opposition
Alex Newman New American 13 July 2015
Tax Competition is good for Europe: Don’t let Jean-Claude Juncker muddy the waters
Syed Kamali City AM 22 January 2015
How to stop the inversion perversion
Economist 26 July 2014
Does tax avoidance really do evil?
Tim Black Spiked 20 May 2013
IN DEPTH
The New York Hustle of Amazon’s Second Headquarters
Anand Giridharadas The New Yorker 17 November 2018
The challenges for developing countries in international tax justice
Martin Hearson LSE Research Online 2017
James Suroweicki New Yorker 11 January 2016
The stateless company plays a risky game
John Gapper Financial Times 6 January 2016
The Pfizer-Allergan Merger is a Disgrace
John Cassidy The New Yorker 23 November 2015
What’s wrong with tax avoidance?
Mark Rowney New Statesman 20 April 2015
Multinational corporations, stateless income and tax havens
Sinclair Davidson ACCA 27 March 2014
KEY TERMS
Definitions of key concepts that are crucial for understanding the topic. Students should be familiar with these terms and the different ways in which they are used and interpreted and should be prepared to explain their significance.
BACKGROUNDERS
Useful websites and materials that provide a good starting point for research.
From Seattle to Luxembourg: how tax schemes shaped Amazon
David Pegg The Guardian 25 April 2018
Peer Pressure: Tax competition and developing economies
Michael Keen World Bank 11 July 2017
A stable Executive and corporation tax control is a good start for 2016
Angela McGowan et al Belfast Gazette 8 December 2015
American Big business faces the G20 in a fight for $2.1tn in unpaid tax
Simon Bowers Guardian 29 November 2015
The Pfizer-Allergan merger is a disgrace
John Cassidy New Yorker 23 November 2015
Protecting the tax base: why it’s important to block tax inversions
Jared Bernstein Washington Post 19 November 2015
Tax surge from multinationals ‘not a one-off’
Irish Times 4 November 2015
Inequality will continue until corporations stop avoiding tax
Gabriel Zucman The Guardian 11 October 2015
Infrastructure projects, tax incentives present sweet opportunities in East Africa’s largest economy
Johann Bernard Mail & Guardian Africa 11 September 2015
What’s wrong with tax avoidance?
Mark Rowney New Statesman 20 April 2015
Havens like Luxembourg turn ‘tax competition’ into a global race to the bottom
Richard Brooks Guardian 5 November 2014
Claire Melamed Aeon 24 September 2014
Where in the world can you pay the least tax?
Nic Cicutti The Telegraph 19 July 2014
Tax evasion: the main cause of global poverty
Bella Mosselmans Huffington Post 28 February 2014
Google, Amazon, Starbucks: The rise of tax shaming
Vanessa Barford & Gerry Holt BBC News Magazine 21 May 2013
New European data: when tax competition Is weakened, politicians respond by increasing tax rates
Daniel J Mitchell Cato Institute 2 May 2013
Avoiding tax may be legal, but can it ever be ethical?
Phillipa Foster Back Guardian 23 April 2013
Tax competition and the myth of the ‘race to the bottom’
Vera Troeger Chatham House 4 February 2013
Tax incentives and exemptions not necessary to attract investment
Yolande Vamusse Institute of Development Studies 20 December 2012
As companies seek tax deals, governments pay high price
Louise Story New York Times 1 December 2012
G20 leaders call for clampdown on multinational tax avoidance
Times 6 November 2012
Influencing factors for foreign direct investment: Ireland’s low corporate tax rate
Niamh Sheerin Huffington Post 7 November 2011
Tax havens at the heart of the EU
David Franks Telegraph 17 November 2010
A pure theory of local expenditures
Charles M. Tiebout JSTOR October 1956
ORGANISATIONS
Links to organisations, campaign groups and official bodies who are referenced within the Topic Guide or which will be of use in providing additional research information.
IN THE NEWS
Relevant recent news stories from a variety of sources, which ensure students have an up to date awareness of the state of the debate.
EU announces plan to scrap member state veto on tax policy
Jon Stone The Independent 15 January 2019
Amazon halved corporation tax bill despite UK profits tripling
Mark Sweney The Guardian 3 August 2018
Faced with US tax cuts, France, Germany hasten harmonisation
Reuters 3 March 2018
Paradise Papers revealed ‘commoditisation’ of tax avoidance
Gareth Hutchens Guardian 15 January 2018
Ikea could face €1bn in back taxes as EU probes sweetheart deal
Leo Cendrowicz Independent 18 December 2017
Budget 2017: the truth about corporate tax cuts
The Week 21 November 2017
Billions in tax breaks offered to Amazon for second headquarters
Jeffrey Dastin Reuters 19 October 2017
OECD countries in bout of corporate tax competition
Vanessa Houlder Financial Times 13 September 2017
France and Germany planning assault on Ireland’s corporation tax
Gavin McLoughin Irish Times 8 August 2017
The problem with corporation tax
Kamal Ahmed BBC News 10 May 2017
Riddle of UK’s rising corporation tax receipts
Gavin Jackson and Vanessa Houlder Financial Times 26 April 2017
Hilary Clinton targets corporate inversion with new ‘exit tax’ plan
Guardian 7 December 2015
Pfizer to buy Allergan in $160 billion deal
Reuters 24 November 2015
Here’s how much Pfizer could save in taxes after Allergen merger
Time Magazine 23 November 2015
Pfizer CEO Ian Read says Allergan deal will result in more US investment
PR Week 23 November 2015
How the Northern Powerhouse could boost SMEs
City AM 9 November 2015
Tax Justice Network Financial secrecy index
Financial Secrecy Index 2 November 2015
EU committee pushing to remove tax competition
Accountancy Age 28 October 2015
Big businesses should agree to renounce aggressive tax planning, says HMRC
Guardian 23 July 2015
French economy minister: The UK can’t succeed outside the EU
New Statesman 18 November 2014
Sierra Leone tax breaks put foreign investment ahead of poor, say NGOs
Guardian 15 April 2014
AUDIO/VISUAL
Pfizer finally gets what it wants: lower taxes
Wall Street Journal 24 November 2015
Moral Maze BBC Radio 4 8 November 2014
Taxing our way to a fairer society?
Battle of Ideas 20 December 2012
Moral Maze BBC Radio 4 24 March 2012
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