Tax Competition,Tax Havens and Developing Countries

week 7

Tax is the most sustainable form of income for a country. It provides the necessary finance to develop areas such as health and education. In this way the people of a country, in paying tax,contribute to the development of essential services and to the society itself. Ideally people would contribute in an equally proportional manner or at least in a way that doesn’t see the less well-off  bear an unfair amount of total tax. Today however a numer of problems exist which complicate the matter and mean that equality is not a possibility. Two of these problems include tax competition and tax havens.

Tax competition sees countries competing with one another to attract foreign investmest. This involves putting tax incentives in place that would be of sufficient benefit to the corporation that they woul choose to set up in that country as opposed to another one. Ireland’s low corporation tax rate of 12.5% is an example of tax competition.The average corporate tax rate for OECD members has fallen from 37.6 per cent in 1996 to 28.3 per cent in 2006, according to KPMG.

To the person in a developed country, tax competiton can be harmful as it results in tax burden being diverted from the corporate field to  other forms of tax placed on society with the lower and middle classes being disproportinately taxed. The greatest problem however from the point of view of global sustainability is that the poorer, developing countries find it much more difficult to deal with tax competition. This results in a lower revenue for the governments of these countries and greater dependence on foreign aid. Zambia is a prime example.Between 1992 and 2004, the total contribution from the copper industry to the Zambian treasury fell from over $200 million to just $8 million-even though copper prices had increased by more than 25%, while copper production remained relatively stable.

Tax havens are also a major problem for global development. Tax havens are regions ( “offshore”) in the world where one pays virtually no tax, offering certain wealthy client the opportunity to get around the rules and allows them to take advantage of the onshore benefits of tax (education, health), even though they do not contribute at all. In this way, the people who have the most to give, give nothing, while the lower and middle class shoulder the extra burden. Offshore finance is not restricted to small remote islands. Large cities such as London, New York and countries like Switzerland and Singapore offer the secrecy needed by these wealthy individuals or corporations. This is a major problem for developing countries because it allows corrupt rulers to abuse their country’s assets by stripping them and relocating them to these financial centres. This means that the country loses revenue, becoming more dependent on foreign aid, all-the-while their dictator (as is often the case) gains considerable wealth.Research recently conducted has shown that sub-Saharan Africa is a net creditor to the rest of the world in terms of external assets, which  exceed their external liabilities. The assets however, are in private hands, while the liabilities are the public debts of African governments and their people.

Tax is the most sustainable form of income to developing countries where the goal is surely to replace forign aid with tax based revenue. Action on tax has the potential to provide far greater gains to poorer countries than could ever be achieved by aid. But what good is this when they cannot compete.



One response to this post.

  1. Posted by Sheila on March 25, 2011 at 3:02 pm

    Nice work, Louis.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: