Western governments are still over-regulating companies; their economies will pay the price
Louis XIV’s finance minister, Jean-Baptiste Colbert, believed that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
It isn’t just taxation that has rich-world companies hissing these days, but rhetoric and regulation as well.
At a time when the rich world is struggling to generate economic growth, you might imagine that its politicians would be competing to attract good companies and stimulate them to create jobs, innovative products and revenue.
Yet politicians across the West too often behave as though business is the enemy.
In the wake of the credit crunch, the finance sector was an understandable target. But politicians have recently sought their scapegoats more widely, from energy companies to technology giants, and the charges have broadened from tax avoidance to being the begetters of inequality.
And this rhetoric is being followed up by action — especially when it comes to taxes and red tape.
The latter is still being spun in ever more elaborate ways. A World Economic Forum survey of 148 countries finds many European countries near the bottom (Spain 125th, France 130th, Italy 146th), and the United States dropping down the charts. The costs of some big laws, notably the Affordable Care Act, are well documented. But the trickle down of lesser-known rules does more harm. For instance, the European Union is considering requiring nearly all companies to appoint a data-protection officer to safeguard customers’ details. The cost would be monumental.
Despite the howls about tax avoidance, the tax take on corporate profits in developed countries has barely changed in 30 years. And the profits tax makes up less than half of governments’ total revenue from the corporate sector; payroll taxes, property taxes, sales taxes and environmental levies all contribute as well.
No painless taxes
High corporate taxes are not a painless way to raise money. Companies pass their tax bills on in the form of higher prices, lower wages, or lower dividends for shareholders, such as pension funds. Nor do high marginal tax rates necessarily translate into a high tax take; in 2012, Ireland, with its 12.5 percent rate, received a higher proportion of GDP in profits taxes than France, whose rate is 33 percent.
The higher the rate, the more likely a company is to find a way of not paying it, or lobbying for an exception.
High tax rates and complex regulations create an arms race in which companies lobby politicians for the best deals and the most successful businesses may not be the ones with the best products but the ones with the best political connections.
The exemptions in U.S. tax codes run into the trillions. The effect adds to voter cynicism — which in turn feeds the demand for higher taxes and company-bashing.
Too many Western countries are stuck in this spiral. The solutions have been argued often: lower tax rates and far fewer exemptions; a tax system that focuses on individuals not companies; regulations with sunset clauses so they expire.
But the debate also requires a change of attitude, especially on behalf of the politicians. There are plenty of areas — from developing a well-educated workforce to warding off cyberattacks — where business and government need each other, and should cooperate.
And, these days, business will not stay around to be bashed.
The fast-growing markets are in the emerging world, as are many of the rising corporate giants. Few French bosses — let alone Chinese ones — would start a multinational business from scratch in Paris.
Big companies do not leave overnight; they gradually transfer ideas and jobs to friendlier environments. These days the corporate geese that are plucked too much won’t just hiss: They will fly away.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.