And once again into the breach with Ritchie

Looking at this argument of his again:

Two illustrations of the fact that tax competition does not work have come to my attention this week. The first arose in evidence given by Chris Sanger of Ernst & Young to the House of Lords on Monday earlier in the session during which I also gave evidence. He said that in his firm’s experience tax was the sixth or seventh most important consideration in decisions made by companies on international location. I do need to get one to five from him.

More important is a new paper by Tidiane Kinda for the IMF, the abstract of which says:

Using manufacturing and services firm-level data for 30 sub-Saharan African (SSA) countries, this paper shows that taxation is not a significant driver for the location of foreign firms in SSA, while other investment climate factors, such as infrastructure, human capital, and institutions, are. By analyzing disaggregate FDI data, the paper establishes that, while there is considerable contrast in behavior between vertical FDI (foreign firms producing for export) and horizontal FDI (foreign firms producing for local markets), taxation is not a key determinant for either type of FDI. Horizontal FDI is attracted to areas with higher trade regulations, highlighting interest in protected markets. Furthermore, horizontal FDI is affected more by financing and human capital constraints, and less by infrastructure and institutional constraints, than is vertical FDI.

In other words, tax competition does not work.

Now note that that is about investment in sub-Saharan Africa. You know, the place where Ritchie and the TJN and associates have been screaming for years that big business dodges all the taxes that it can. To the tune of hundreds of billions a year they claim. This happens because investment is routed through places like Mauritius (just as an example).

Hmm, OK.

Then look again at this paper by an associate of Ritchie’s. Delight in the to and fro between he n’ me over it and here’s the conclusion:

So I sent an email to Professor Clausing.

“I read that as stating that precisely because many multinational firms
are “tax dodging” therefore the incidence of the corporate income tax
is not upon the workers in the form of lower wages.

I can see the logic here. If Google sells all its EU advertising from
Ireland, as it does, then the corporate income tax rates across Europe
will not affect its decisions to invest in Europe. For however many it
hires or employs, it knows that it will be paying tax in Ireland on
the revenues and or profits of such hires.

The same would be true of the various arrangements of Microsoft,
Facebook, Amazon, Apple and so on.

In wider terms, it is precisely the jurisdiction shopping that such
companies undertake that explains the lack of evidence of an impact
upon labour of the corporate income tax.

I just wanted to check that that is the implication that you are
making in this part of your conclusion?”

Her response?

“Thank you for your email. Yes, that is the implication.”

So we have an interesting set up here.

1) Big business, as Ritchie, the TJN etc claim, does indeed dodge all sorts of taxes through the use of offshore. Thus we’re not going to see the effects of tax rates on investment decisions because people are dodging the effects of taxes by using offshore. We cannot therefore use the claim that there’s no effect of taxation on investment decisions if we’re also making the claim that everyone is dodging taxes. Because dodged taxes don’t affect investment decisions.

2) We could, as Ritchie and the TJN claim, agree that tax decisions don’t affect investment decisions. But if we do that we cannot claim that big business is dodging taxes. Because taxes don’t affect investment decisions, do they?

What we cannot do is claim both, that business uses, extensively, offshore to dodge taxes and also claim that taxes have no effect upon investment decisions. They’ve got to give up one or other of these assertions.

For as Professor Clausing points out, the fact that we cannot see the effect of tax upon investment is precisely because companies are dodging the taxes by using offshore.

It’s cognitive dissonance time again.

5 thoughts on “And once again into the breach with Ritchie”

  1. I don’t follow. Can’t one claim that because firms can always dodge taxes, tax rates don’t affect investment / location decisions?

  2. Yes, the logic could go:

    1) In theory, the tax here is higher than it is there
    2) In practice, we won’t pay either of them
    3) So tax is neither here nor there

    But Murphy does seem to disagree with Sanger in the first bit (“I do need to get one to five from him” seems to be casting aspersions on their existence) but agree with Kinda in the second. So he disagrees with Sanger, who agrees with Kinda, who he agrees with…

    No need to look at the Clausing discussion, the contradiction is alredy there. Unless Murphy is genuinely interested in the genuine reasons one to five, of course (I know I am…).

  3. Luis

    I think the idea is that RM thinks that firms should be made to pay taxes in SSA, but wants to use the results of the historical empirical research to assert that forcing people to pay taxes would not change their investment decisions. This is illogical if the past research is based on the idea that the historic headline corporate taxes were not paid.

  4. Isn’t drawing conclusions from behaviour in SSA and applying them to behaviour in the wider world kinda, y’know, dumb?

    If I was investing in SSA then I would definitely place things like infrastructure and quality of workforce and availability of markets and government stability above tax. That’s because there significant variation amongst countries in those things.

    If I was investing in Western Europe then I might decide that all of those things are broadly equal, and so my tax regime moves up my list of considerations.

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