Monday, April 2, 2012

Which Countries Have Low Taxes?

According to HP the IMF "Ease of Doing Business Index" is a measure of how neoliberal a country is. The easier it is to do business the more neoliberal a country would presumably be. The IMF prefers low tax rates. So generally speaking it is easier to do business in low tax countries, and so low tax countries would receive a higher ranking in the "Ease of Doing Business Index".

You can get a list of tax rates by country as a % of GDP here. The values were determined by the conservative Heritage Foundation. I've created tables that show African countries as contrasted with 1st world countries, and I've color coded the tax rate. Higher is more intensely green, lower is more intensely yellow.

Compare with the map of rankings for the IMF Index. It's as if the index is measuring the very opposite of what HP suggests. Higher taxes means it's easier to do business. Would you rather do business in the Congo, Chad and Ethiopia or any of your first world nations?


HispanicPundit said...

It's not strictly a low taxes measure. Here is what Wiki writes:
"Paying taxes - Number of taxes paid, hours per year spent preparing tax returns and total tax payable as share of gross profit"

Here is the IMF itself on the issue. The figure includes,

1. Tax Payments
2. Time required to prepare taxes.
3. Total Tax rate of return.

So its more complicated than your simple graph. Also, even if one scores great on this issue, if one say, has horrible property rights, you cant expect much. In other words, that's why its a net measure - it takes several different variables into account (free trade, property rights, etc) and gives you a comprehensive list.

Paul said...

HP - can you elaborate something for me

1. Tax Payments
According to the link you provide it states
Tax payments by businesses are the total number of taxes paid by businesses, including electronic filing. The tax is counted as paid once a year even if payments are more frequent

3. Total tax rate of return
this one says
Total tax rate measures the amount of taxes and mandatory contributions payable by businesses after accounting for allowable deductions and exemptions as a share of commercial profits. Taxes withheld (such as personal income tax) or collected and remitted to tax authorities (such as value added taxes, sales taxes or goods and service taxes) are excluded.

Simplifying things a bit but is not #1 a subset of #3?

Also (and this is hyperbole) we could simplify the tax code very in the following way -

1. Set a progressive taxation rate (similar to personal income tax)
2. No deductions!

Very simple. Would make the time required to prepare taxes very small. Do you think the business community would go for this?

Me - (as a lefty) I am open (still thinking through it) to the idea of doing away with eradicating the business income tax This would also imply no credits and/or deductions. The loss of revenue would be supplanted with higher personal income taxes and eliminating capital gains tax rates, etc. Undoubtedly there are things I am overlooking here. But the goal is to convey a general idea.

Jon said...

Do you think the low value of tax collected as a % of GDP is in any way relevant to neoliberalism?

Because think about neoliberalism vs non-neoliberalism. Who is advocating that the total # of taxes should be high? Like a business should be required to track tax payments on 70 different transactions or accruals? Who is claiming that the time required to prepare taxes should be high?

This is one of the points I'm trying to get you to understand. If the measure in no way distinguishes neoliberal policies from the policies advocated by neoliberalisms opponents, then how can you say that this index measures how neoliberal a country is? Nobody on either side of the debate advocates onerous, time consuming tax preparation.

Total Tax rate of return is a very odd measure. "Total tax rate measures the amount of taxes and mandatory contributions payable by businesses after accounting for allowable deductions and exemptions as a share of commercial profits." Is Milton Friedman only objecting to taxes as a share of commercial profits? Or does he also object to excessive income taxes, sales taxes, and all other taxes?

So suppose I deliver a boat load of fabric to an African sweatshop and I take away t-shirts. What is my profit? If I haven't sold them there is no profit. This is just an inter-company transfer. So whatever tax I pay is going to be high relative to my profit because the profit is not generated in Africa.

Taxes as a share of GDP however is different. I would assume in your view low is more neoliberal, right? So Africa is looking very neoliberal. Time to prepare taxes has nothing to do with neoliberal and non-neoliberal.

HispanicPundit said...

My bottom line is that it is more complicated than simply taxes as a share of GDP.

As I said in a previous post defining laissez-faire, I dont think "low" taxes are necessarily always good. I am certainly against "no" taxes, for example.

Taxes are needed to fund a properly functioning government. Above that level of taxation though, it does start to harm you.

So I would expect that the absolutely lowest taxed countries do the worst: as they are not collecting enough taxes to fund a a properly functioning government.

But at the same time, the most taxed countries do bad as well, as they are bleeding their private sector.

It's the middle sweet spot that the IMF - and neoliberalism, really - is trying to capture.

Jon said...

You did not address what I said.

But just to clarify are you saying you think first world taxation rates (the higher ones) are better than the low African tax rates?

Jon said...

Paul, I wish I had seen your post before I posted mine because I think you said it better, but your post was blocked by spam. A lefty is happy with an extremely progressive income tax and a simple tax structure. So IMF is not measuring how neoliberal a country is with these measures.

On rate though I think I would have to concede that this does coincide with neoliberalism. Say I'm a rich investor and I want to extract natural resources in Africa, but Africa has a very progressive income tax. That's kind of only minor pain. I have to bring in some outside experts, like engineers and technicians, but I can also hire a lot of local labor. I have to pay my technical people a lot because their wages are taxed very progressively. But I barely pay the locals anything, so if they have progressive taxation, so what? So in Chile US mining companies could come in and invest $1 billion. Then in 1 year they could extract $7 billion in valuable copper. The locals get their meager wages, taxed progressively. I get $6 billion and I pay no taxes to the Chilean government. From the perspective of the rich investor, which is the only perspective that matters to the IMF, that's pretty good.

It would be better if wages were also not taxed much. That means more profits for the investor. That's why I think total tax as a % of GDP is better. It gives you the total picture, not a picture within a tiny window. And on that score obviously African countries are ideal from a neoliberal perspective.