Taxing America

This week's Economist highlights concerns around the level of tax contribution by Corporate America and offers some sensible alternatives.

The increasing complexity of tax codes around the world and the growth in reliefs, breaks and incentives over the last forty years has been truly staggering as illustrated by the Economist chart:

 

 

The article points out that over 90% of Americans use professional advice or sophisticated tax software to help them comply, and spend over 6 billion hours a year completing tax filings.

The situation in the UK has been no different, the Tolleys tax guide to the UK tax code has doubled in size since 1997, it would take the fastest speaker in the world 5 days to read out the 11,520 pages, according to the Taxpayers Alliance.

So what is the solution to all this complexity and cost which opens up loopholes to exploit?

The Economist believes that if all the breaks and reliefs were swept away tax rates in America could fall by 44% from present levels and still raise the same revenues.

Actually it could raise more as there is a strong correlation between tax compliance and rates and few understand the link between corporation tax and wages, as high corporation tax generally depresses labour costs, that is wages and salaries.

In 2007, Desai, Foley, and Hines concluded:

“The results consistently indicate that corporate taxes depress both real wages and returns to capital, with most of the burden of corporate taxes borne by labor. The baseline estimate for the share of the burden borne by labor is 57 percent, and estimates vary between 45 and 75 percent, depending on the sample period and specification.”

Jersey has a low flat tax economy and has weathered the global slowdown better than most, with tax receipts holding up remarkably well, largely because the tax system is less susceptible to fluctuations in corporate profitability. Corporate taxes are low, wages are high, leading to a wide, broad tax base that is more dependable. As a result public services are well funded, quality is high, and the welfare safety net is generous.

Tax the wealth creators as little as you need to, keep taxes low, simple and flat, encourage enterprise through the process, and bingo, you have a dependable tax base, healthy tax receipts, and the means to look after the young, the poor and the disadvantaged.

Nurture business and you nurture society.

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