The zero percent argument means a richer Bangladesh

A group of businessmen have called for the taxes on the profits of business in Bangladesh to be lowered -- well, yes, they would, wouldn’t they? But however useful being a cynic is in evaluating people, they do in fact have a point here. At a similar meeting at the International Chamber of Commerce, Bangladesh, tells us as that a group of businessmen called for more investment in the country in order to boost growth. For it is true that more investment leads to more growth. Yet profits are the money people get back from making investments. Finally, if we tax something, we get less of it. So, we want more investment, why not tax the return to investment a little less in order to make the country richer? All of which ties into an important point about the taxation of companies and their profits. It’s not the company which pays the tax. It cannot be, any tax means that the wallet of some person gets lighter. A company is not a human being -- no, a legal person, which a company is, is not the same thing at all -- therefore the company doesn’t pay the tax. The study of who does pay it is called tax incidence. And we’ve known since the 1890s, when Ernst Seligman first pointed it out, that it is a combination of the investors in the company being taxed and all the workers in the country applying the tax who really pay. This was updated in the 1960s by Arnold Harberger and is a generally agreed basic of economics these days. The only people who argue against the idea are of political campaigners. The economists do still argue about the exact proportions of who pays what. Estimates for the US put it at 70% investors, 30% workers, other equally reasonable ones at 70% the workers. However, we do know what it is which influences the split. It’s how mobile capital itself is in and out of a country and how large is the economy -- or how small -- relative to the global economy? The smaller then more the workers, more mobile capital, then more of the workers are paying it. The mechanism isn’t difficult to understand either. Imagine that we are, you and me, and just for a delicious moment, rich capitalists. We can invest in a number of different places around the world. All of those different possibilities give us an average likely return. Now add in that some of those places charge a profits tax, some don’t. The average return from those that tax us is now lower than from those that don’t, right? So, we invest, because we’re capitalists we’re greedy of course, where the returns are higher. And we do much less where the returns are taxed to make them lower. Which is why the workers pay some of that tax. For adding capital to labour is what makes labour more productive. And the average level of wages in a country is determined by the average productivity of labour in that country. So, we tax profits, there’s less investment, productivity -- wages therefore are, lower. And this affects small economies much more than large. Simply because that effect of the taxation upon the profit rate as compared to the global average is going to be larger -- that global average is made up of all of the individual national ones after all. And it’s going to be greater when we’re talking about foreign investment quite clearly. Because foreign capital is, by definition, 100% mobile, it can go anywhere. Even the lowest estimates for the US have the workers paying 30% of corporation tax in the world’s largest economy, that of the US. And there’s some work by Joe Stiglitz to suggest that in a small economy like Bangladesh that it could be over 100%. Yes, that the loss of wages from the absence of investment is larger than the profits tax collected. The ICC,B is entirely correct to call for more investment as that is indeed what makes the country richer. More factories, more machines for people to work with, this increases production and thus incomes. And the other group of businessmen may well be just talking their own book in calling for lower profits taxes. But the 40-45% charged in Bangladesh most likely is reducing the amount invested. And that reduction from what could be invested with lower taxes is what reduces Bangladeshi wages. There’s a good economic argument that for a country like Bangladesh the corporation, or profits, tax rate should be zero. That’s not going to work as a political argument of course, but it’s still a good economic one. The country would be richer by not bothering to try to tax profits at all. In the absence of it being politically possible -- can you imagine the outcry if this was actually done? -- then the next best thing is to reduce the rates claiming that we’ve just got to be charging a similar rate to other people like us. Most Asian countries are charging about 25%, Modi’s India is bringing the rate down to that over a few years too. These are the people Bangladesh has to compete with for foreign investment. Even if people won’t buy the zero percent argument, having to compete with the others around still means that a much lower rate makes sense.  Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.