tax competition: lower taxes means less poverty

Tax competition:

lower taxes means less poverty

Richard Teather

Bournemouth University

Tax competition

“Tax competition brings great benefits, to all society and not just to those who directly take advantage of it”

The Benefits of Tax Competition

Tax competition

the use by governments

of low effective tax rates

to attract

capital or business activity

Benefits of tax competition

taxes = wealth

Benefits of tax competition

taxes = wealth

• encourages entrepreneurship• encourages savings & investment• encourages work

Benefits of tax competition

taxes = wealth

• “Growth in government stunts general economic growth.” (Federal Reserve)

• Tax increases “result in a net efficiency loss to the whole economy” (IMF)

Benefits of tax competition

75 20

VAT (12)

Tax (25)

38.

Tax 13NI 4VAT 7

44

Benefits of tax competition

taxes = wealth

• efficient global capital markets

Efficient global capital markets

Benefits of tax competition

taxes = wealth

• encourages entrepreneurship• encourages savings & investment• encourages work• efficient global capital markets

Benefits of tax competition

GDP per capita (1999 $)

-

5,000

10,000

15,000

20,000

25,000

1950 1975 2000

UK

Hong Kong

Who benefits?

• the rich get richer ?

• multinationals avoid tax ?

Who benefits?

$100 tax

$75

Who benefits?

Cayman finance industry generates:

• 55% of Cayman’s GDP

• 40% of all government revenues

• 30,000 business visitors

• 36% of employment - 12,500 jobs

Who benefits?Spending vs population

0

100

200

300

400

500

- 25,000 50,000 75,000 100,000 125,000

Population

Go

ve

rnm

en

t s

pe

nd

ing

2

00

8 U

S$

m

Cayman

Low tax characteristics

Offshore finance centres vary:

• No taxes on income

• Low taxes on income

• High taxes but exemptions

• High taxes but specific treatments

Alternative taxes

Different sectors:

• Vanilla banking

• Private wealth management

• Fund management

• Insurance

• Hedge funds

Alternative taxes

Income taxes:

• Prevent most offshore finance

• Highly competitive world

• Mobile customer base

• Exemptions difficult to justify

• Reduces confidence

Alternative taxes

Payroll taxes:

• Reduces employment

• Directly harms workers

• Discourages high-value operations

• Reduced to back-office function

• Increased ‘brass plate’ operations

Alternative taxes

VAT:

• Highly complex

• Can’t deal with financial services

• Still harms finance industry

• Discourages flexibility

• Unnecessary in small economy

VAT

VAT

VATAgriculture 0.4%Mining 1.2%Manufacture 1.1%Construction 5.4%Power & water 3.2%Retail 9.2%Tourism 3.7%Transport 6.8%Finance 53.5%Real estate 20.7%Government 6.6%Education 2.4%Health 2.7%

Cayman GDP

VATAgriculture 0.4%Mining 1.2%Manufacture 1.1%Construction 5.4%Power & water 3.2%Retail 9.2%Tourism 3.7%Transport 6.8%Finance 53.5%Real estate 20.7%Government 6.6%Education 2.4%Health 2.7%

Cayman GDP

Alternative taxes

Different sectors:

• Vanilla banking

• Private wealth management

• Fund management

• Insurance

• Hedge funds

The future

• Tax competition is mutually beneficial• embrace it

• Lower taxes:• increase domestic economy• attract international capital• main benefit goes to workers

Tax competition:

lower taxes and more growth

Richard Teather

Bournemouth University