At a recent workshop in Dodowa, Ghana, Tax Justice advocates and experts expressed worry over the situation where the tax burden in Africa is weighed heavily on workers while multinationals are handed tax incentives.
In the opinion of the tax justice advocates, the trend portrays an injustice in taxation. They also drew attention to many instances where national experiences and researches have pointed to the fact that tax incentives are only a microcosm of the factors that drive FDIs.
The trend has been that from Accra through Ouagadougou, Niamey, and Nouakchott to Lagos and Yaounde, the tax burden on workers has been steadily rising whereas that of multinationals has been decreasing.
They still haven\’t grasped the importance of tax incidence. Companies don\’t pay tax, people do.
In open economies the majority (if not the vast majority) of taxes upon capital are bourne by the workers.
If you\’re simply not willing to face up to this basic truth about taxation then you\’ve absolutely no business at all trying to change the taxation systems of an entire continent.
This isn\’t just a snark at Ritchie and his mates: they\’re actually so wrong in their analysis that they are going to make things worse, not better.
Not to worry.
Those African countries offering tax incentives completely understand what they are doing and why they must do it. I doubt Murphy will put a dent in their mindset, largely because the Africans grasp the fact that multinational corporations are not an unmixed evil. They actually understand that lack of infrastructure and low productivity rates must be offset by a low cost of labor and low taxes. Murphy will go to his grave not grasping that rather elementary bit of economic truth.
Besides, multinationals are Murphy’s Dr. Moriarty. Isn’t it fun watching him thrash around about them?
yes ….. except in the case of multinationals, whose customers and shareholders may be located overseas, then giving them at tax break does not equate to giving your own people a tax break, especially if conditions in the labour market are such that it doesn’t translate into high wages for workers (that is, the tax incidence margins are on prices and profits)
There’s a big literature on the consequences of offering tax incentives to multinationals does for poor countries. Bribes no doubt change hands.
This said, as far as I know, most taxes in poor countries come from customs, imports and exports, and income tax and VAT taxation is weak. Most development economists want to see more VAT and more income taxation – so that’s more “tax burden” on the workers.
(The argument is political, by the way; more taxation, it is hoped, will lead to greater political accountability. You may scoff at that idea if you live in a rich country, but things look different in a country with bugger all taxation and rubbish government services. )
N.B. Mr Peasant is right: there are sensible reasons for offering tax incentives to multinationals – infrastructure, technology transfer etc.
oh – I hadn’t noticed your claim that taxes are mostly born by workers in open economies – my bad. Right, well I don’t really understand that, can you provide reference or explain it?
There’s a difference between the incidence of economy-wide taxation in an open economy, and giving multinationals preferable tax rates, relative to domestic companies. I’d have thought Tax Justice was on about the latter. I don’t see how cutting taxes paid by multinationals means higher wages for workers.
Tim adds: See item 4 on “Other Practical Results”
http://en.wikipedia.org/wiki/Tax_incidence
right …. well it doesn’t say whether that works via price or wages, nor whether we’re talking about differential taxes relative to other firms in the economy.
If the multinational produces a good that is not consumed in the country of production, what matters is the wage. I’d have thought the wage that a multinational has to pay to recruit – let’s assume it’s unskilled labour, for simplicity – is set against unskilled wages elsewhere in the economy. If you give a multinational a tax break, relative to domestic firms, I don’t see that it’s going to raise the wage. If you set the multinational’s taxation equal to that of domestic firms, of course the multinational may relocate, but if it doesn’t relocate, it’s not going to cut the wage, which is already pinned down by workers’ outside options.
I’m ready to be corrected, but one line on a wikipedia page isn’t going to do it.
Tim adds: Work at it from the other end. In an open economy capital will (on average and risk adjusted) earn the global return to capital. If in one country you tax that return to capital then you will have lowered the return below the world level. Thus you will get less capital coming in because the earnings on offer are lower.
Step 2: What is it that raises the workers’ wages? Rises in productivity. What is it that raises productivity? The addition of capital to labour.
Step 3. We’ve reduced the capital flowing into the economy by raising taxes upon capital. Thus the workers’ wages will be lower than they would have been without the capital taxation.
QED.
There’s some talking at cross purposes here –
I’m fully with you on the role of capital and technology in determining wages, and in a world of imperfect capital markets (and other imperfections), giving tax breaks to multinationals might be a perfectly sensible way of attracting both – although assuming imperfect capital markets may change some of your reasoning, above. With perfect capital markets, you’d just cut the tax rate and domestic firms would accumulate capital – no need for special treatment for multinationals.
What you write says nothing about differential rates of taxation offered to multinational versus domestic firms. Lower taxes offered to multinationals may attract more capital, but why would these capital intensive multinationals raise wages above what they need to recruit workers, which determined by the domestic labour market? Firms don’t automatically set wages equal to the marginal product of capital, if there is a supply of workers willing to work for less.
OK, if you attract enough of these multinationals, they may start having to raise wages to recruit, but how many African countries have tight labour markets like that?
Tim adds: Right. Now go and read this paper: http://www.econ.yale.edu/ddp/ddp00/ddp0006.pdf
Multinationals are indeed a new, entrepreneurial technology of the type described. The vast majority of the benefits (in an older version of this paper, 97%) go to the consumers of the technology, not the entrepreneurs who produce it.
man, I love the comment edit thing LC has – I mean, MPL not MPK, above.
but Tim, in the context of this debate, the “consumers of the technology” that you say multinationals represent, that Nordhaus is on about, are located in the rich countries, and we’re talking about what tax breaks to multinationals do for the host country, aren’t we? That means the important thing is the wages paid by multinationals in poor countries. If the multinational’s output is being sold (in meaningful volumes) in the host country, everything changes, but I’ve explicitly said I wasn’t talking about that case.
Look, I’m not arguing that ending preferential tax treatment offered in many poor countries to multinationals can have no adverse consequences. Multinationls may be worth attracting for technology transfer (social, not just physical technology) and, as I said, if you attract enough of them, you might start pulling up wages across the economy. Yes, there are long-run, dynamic arguments for wanting to attract multinationals.
However, in that case of tax breaks to multinationals, relative to domestic firms, the normal tax incidence arguments (it’ll lead to lower prices or higher wages) don’t necessarily apply. Specifically, when it comes to the “companies don’t pay tax, people do” argument – the people needn’t be the people in the host country.
Luis
in other words it’s complicated…so the “one size fits everything” rectitude of TJN is bound to cause more harm than do good.