EDITORIAL – Tax rates, tax revenues and ‘tax competition’

No yawning, and no turning the page. Today’s editorial subject may be a bit on the “dry” side (unfortunately, we’re not discussing Brut Champagne), but it makes for important reading.

The topic – corporate tax rates – affects every resident in the Cayman Islands … even though, officially, we have no corporate tax rate.

Let’s explain:

In some circles, such as those populated by bureaucrats, Eurocrats and other governmental elites, there persists a ruling doctrine that the very existence of Cayman and other low-tax jurisdictions creates a “race to the bottom,” forcing high-tax countries to lower their corporate tax rates to remain competitive, thus depriving governments of revenue they otherwise would collect. The notion of “unfair tax competition” is one of the reliable rationales that foreign entities employ to justify measures that infringe upon the economic sovereignty of, as a rule, relatively smaller and less powerful jurisdictions – for example, the U.K.’s mandate of public registries of beneficial ownership, the EU’s demands for “economic substance” standards, and the Netherlands’ outright blacklisting of countries who have corporate tax rates of less than 9 percent.

The only problem with this mythology … well, not the only problem, but a major one … is that it happens to be untrue.

Now, we do not regard as an ally the Organisation for Economic Co-operation and Development, which is kissing cousin to Cayman’s current “Number One Bully” the EU, but the OECD recently released a report that belies the idea that lower tax rates yield lower revenues, or vice versa. Quite the opposite. According to the OECD report, as corporate tax rates have declined around the globe, corporate tax revenues have increased, both as a percentage of total tax revenues and as a share of individual countries’ gross domestic products.

Over the past 18 years, statutory corporate tax rates have dropped significantly – from an average of 28.6 percent in 2000 to 21.4 percent in 2018. Since 2000, 76 of the 94 countries included in the OECD report had lowered their rate of corporate tax.

Over the same time period, governments are collecting more in corporate income tax than before – from an average of 12 percent of total tax revenues in 2000 to 13.3 percent in 2016. As a share of gross domestic product, corporate tax revenues crept higher, from 2.7 percent in 2000 to an even 3 percent in 2016.

We are not surprised by the results of the study, nor would anyone be who is familiar with the work of economist Arthur Laffer, whose famed “Laffer Curve” model illustrates that excessive taxation stifles private sector production and decreases tax collections.

Setting aside asseverations of starry-eyed ideologies, there is a simple and rational reason why large nations, particularly EU member countries, would want to break Cayman’s piggy bank: They desperately need the money.

Many EU economies are being smothered under the weight of overly generous social programs and commitments to constituents – promises that please crowds in the short term but in the long (and not-so-long) term are unaffordable. After looting the pockets of their own taxpayers (and borrowing themselves into near-oblivion), the bureaucratic bullies start eyeing the wallets and purses of the smaller kids on the global playground.

Small jurisdictions such as Cayman face incredible challenges when competing for business with large developed nations. Relatively speaking, Cayman is long on sun, sand and sea … but short on infrastructure, population, social institutions, natural resources, geographic convenience, etc.

In this battle of David vs. Goliaths, one of the most powerful pieces of ammunition in Cayman’s sling is our ability to determine our own tax policies and to offer competitive tax rates to international companies. Is it any wonder that this is the advantage that Europe has focused on destroying?

We hope that Cayman’s delegation, led by Premier Alden McLaughlin and Financial Services Minister Tara Rivers, keep the above in mind as they engage in yet another round of discussions with Europe on requirements for “economic substance” of Cayman companies.

As the saying goes, a journey of 1,000 miles begins with a single step. But taking step after step in the wrong direction can take travelers twice as far from their destination.

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