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The Executive School of the University of St.Gallen

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Prof. Winfried Ruigrok

Prof. Winfried Ruigrok

Dean

Dean of the Executive School of Management, Technology and Law and Director of the Research Institute for International Management at the University of St.Gallen (HSG) […]

When in Trouble, Blame the Foreigners

Switzerland, the Netherlands and Luxemburg are increasingly criticised for their liberal tax regimes. Five reasons why we have not seen the last of this debate yet:

First, governments and international institutions have little choice but to push harder. Due to the financial crisis tax revenues are going down in most countries. Governments have to look for ways to keep up tax revenues.

Second, government demands may be supported by intellectual calls for international equity. It may be argued that tax regimes allowing firms to extract taxes from one country and shift them to another one undermine civil society in the countries missing out on such tax revenues.

Third, populism helps.  What is easier than demanding that foreign governments revise their tax regimes? When in trouble, blame the foreigners.

Fourth, there is an equally powerful intellectual argument in favour of low taxes. Relaxed tax regimes help governments remain efficient. The government effectively has a monopoly on tax collection. If unchecked, it may grow into a bloated bureaucracy. Just look at some of the EU countries facing trouble today.

Fifth, and finally, small countries have few options. Countries with more relaxed (corporate) tax regimes tend to have small and open economies. They (have to) compensate their lack of political bargaining power in large institutions such as the EU by being more flexible and liberal. They know that when push comes to shove the big countries will not listen to them anyway.

  • http://twitter.com/Efficienarta Efficienarta

    My sense is that when companies honour their fiduciary
    duties and minimise their effective tax rate, their improved profitability will
    generate benefits that debates such as this tend to be silent on ……… improved profits
    will either spur further investment (?facilitating the growth governments want?), improve returns for shareholders or perhaps support higher compensation. In the latter two cases the tax on the
    income can be at a higher rate in some jurisdictions then the corporate tax the
    governments concerned are losing.