Sunday, April 08, 2007

The poor will pay more of the tax

Countries compete with each other to attract foreign capital investment by lowering tax on companies. 20 years ago the UK used to be a leader in these low taxes with a 30% tax rate when others reached 50%. In the recent budget this was reduced to 28%, but the competition is strong – the Cayman Islands and Switzerland are very much lower. With high tax rates there is some fairness in taxing companies over wage and salary earners, since companies are owned by wealthier people.

But as businesses locate to countries with low tax rates (wherever they actually make their profits) the tax burden for the countries they have deserted needs to come increasingly from income tax and consumption taxes. Thus the poorer residents who have no spare wealth for low-taxed company investment to offset these other taxes, will be increasingly paying more of the total tax.

To hear an informative radio discussion on this topic by John Christensen, Krysztof Bobinski and Michael Devereux go to the BBC World Service website and click on World Business Review for 4am GMT 7th April. What was missing in the discussion was a way forward to combat this problem of suddenly disappearing sources of tax, that would also be fairer. The book The Free Lunch - Fairness with Freedom has details of a tax on land values which would not only be unavoidable and produce a steady stream of tax income, but also be fairer since it would take some of the gains that go to those with land wealth which are currently tax free. Poor wage earners who only rent their homes would be exempt.


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