Is the West taxing itself out of business?

It’s not a coincidence that most successful Western corporations were founded last century. Then it was still possible to build up a highly profitable company in the West. Nowadays however, that’s easier said than done. Western tax authorities, led by Sweden followed by America, are tightening any loopholes there are.

Multinational corporations have already made arrangements to pay as little as possible to the taxman in the West. So they will not be much, if at all, affected by this. However the vast majority of companies are small and medium sized. And for them it isn't always possible to do what the big players do.

In the developing world however, companies can still do what used to be done here which gives them the upper hand. Cannot understand how tax authorities have been allowed, actually instructed, by politicians to hand out all the aces to competitors overseas? You have to play with the cards you have and with the odds stacked against them, Western companies have their hands tied.

Private sector companies generate the main part of taxes and fees that pay for government and the public sector. Hence cannot understand how Western governments can implement taxation laws that slowly but surely make Western corporations unable to compete on the global market? Where is the money going to come from to fund Western authorities? Obviously the problem is that politicians main priority is to be re-elected. They hence take opportunistic decisions to gain short term benefits. But how about keeping the West competitive in the long run? A lot of famous Western brands, such as Volvo, Rolls Royce and Range Rover, have already been sold to the developing world.

Where is the money going to come from to keep the West wealthy when companies are being taxed out of business? Tax authorities in the West are getting more and more militant and EU and US politicians are cooperating to make sure they squeeze as much taxes as possible out of companies. The justice system in Sweden is hence so twisted you are actually better of murdering someone than committing severe economic crimes since your jail sentence will be shorter.

The jobless recovery illustrates the tax problem very well. Many jobs lost will not be replaced, more likely outsourced or moved overseas. Most manufacturing has already moved to the developing world, not because companies wanted to move, but had to in order to be competitive. Fair enough since most Americans and Europeans are not keen on such jobs anyway. Catch is that all countries have a population of everything from brilliant to stupid people. What are Westerners with a low IQ going to do in the future? Non-skilled jobs are in the developing world but how many labourers in the West are prepared to start working in, say, a factory in China? Or Africa for that matter, because some experts believe manufacturing will start moving there since they provide cheaper labour than Asia.

Multinational corporations have already made arrangements to pay as little as possible to the taxman in the West. So they will not be much, if at all, affected by this. However the vast majority of companies are small and medium sized. And for them it isn’t always possible to do what the big players do. So weather they like it or not, they have to start thinking about moving their company head quarters to other parts of the world. Or, like IKEA, transfer ownership to a trust abroad.

Unfortunately politicians are not the do-gooders they ideally should be. Politics is a profession. And like the corporate world they are looking for short term gains. That companies do is one thing, but surely US and European politicians should have the long term welfare of their own countries at heart? Throughout history empires come and go. And the US and European empires are no exceptions. We all know that China, India and Saudi Arabia/the Gulf will take over. But what I cannot understand is why Western politicians are actually speeding up the end of their empires? Wouldn’t it be better to try to remain the leading powers for as long as possible by keeping the good cards? Apparently not since the West seems to be undermining its strenght from within without taking into account what this will do to future generations.

(photo: 427 – flickr)

13 thoughts on “Is the West taxing itself out of business?

  1. Catarina,
    Your concern is justified. But there is a ray of hope for the West. The hope is the voice of young people like you; the new generation of politically conscious, economically literate, and business savvy opinion-makers, who are becoming increasingly disenchanted with the status quo, and are going to challenge the entrenched political class to either address their concerns or get out of the way, and let them bring about the desired change.

    Taxation is one of such issues that needs politicians’ attention, if they want to be reelected. As you rightly said, politicians’ first priority is to be reelected. Their own self-interest, and ultimate political survival, takes precedent over the national interests, if at all national interests are considered. So, to be reelected politicians will have to listen to the opinion-leaders like you.

    We know taxes transfers investment and spending decisions from private citizens to politicians. If politicians’ priority is their own self-interest, and not the national interest then such transfer of national wealth, and the economic decision-making associated with it, to politicians, is bad news for the nation.

    We also know that corporations do not pay taxes, people do. Any increase in corporate taxation is ultimately passed on the consumers, reflected either in the price, the quality, or availability of the product or service. The people end up footing the bill, in any case.

    As I am sure, you are aware, there are grass-roots movements spreading across the United States, protesting the “big government” and high taxation. These protest meetings referred to as the “Tea Parties”, take their inspiration from the famous “Boston Tea Party”, a spontaneous revolt of ordinary citizens against high taxes.

    If this trend continues such protest movements against economically stifling taxation will continue to spread across the countries of the West, making politicians wake up and listen to the people and change course to avoid being tossed out.

    I am sure such a change of political will, resulting in the right “national” economic policies will help preserve the competitiveness and profitability of businesses in the West. I see a ray of hope. I am optimistic.

    Zafar

    1. Hope you are right Zafar, but I'm not sure about that.

      In the past it was easy for someone setting up a company in say, Sweden to have another company in Switzerland and juggle money around the world the way multinationals do. That however is impossible nowadays since the tax authorities will catch you. Someone setting up a company in the developing world however can still do that. So Western companies are not able to compete anymore. And no grassroots movement in the world is going to change that, unfortunately. Western governments desparately need the tax revenues and it's hence extremely difficult for small Western companies to be competitive on the global market. And the side effect is that jobs and prosperity are moving to the developing world.

      1. Catarina,
        You are right. This aggressive taxation is becoming a serious problem for many growing businesses. That is why there is a backlash in the United States against such aggressive tax collection. Now, capitalizing on people's frustration even some members of Congress are jumping on the popular band wagon.

        I am only hoping this movement would produce some positive results. But that remains to be seen.

        Let's hope for the best, in the meantime.

        Zafar

        1. Glad we agree. And I hope the backlash in the US has positive results in this respect. And spreads to Europe.

          In Europe, above all in Sweden, the tax authorities are worse than the IRS.

          Sweden only has 9m inhabitants so they spend a lot of time chasing all business owners world-wide to make sure they are declaring every penny. This year they are targetting 50,000 small companies such as shops and restaurants to make sure they are not receivng any cash and not declaring it.

          If I set up a company and do consulting work with Saudi and the Gulf it would just be a question of how long it would take before they would calculate that I am witholding X amount of money from taxation, suspecting that I had a bank account in one of the Gulf countries. Since they don't have insight into those countries, like they have in Switzerland, Channel Islands and so forth, I would not be able to prove I don't have an account there. Resulting in me having to pay no matter how much money they demand.

          Conclusion – a Westerner with a brilliant idea should set up a company in a developing country, or Switzerland (unless they will follow in EU/US footsteps with banking secrecy gone?). Then the company has the possibility of developing into a huge success, even a multinational company. If on the other hand the company is set up and developed in the West, it may never be more than a small company that supports the owner with family. May even get raided by the tax authorities, if it is in Sweden.

  2. In my view we have two fundamental problems:
    1. People expect the governments to support them – an expectation that politicians pander to in order to gain votes (some families in the UK, for example, haven't worked in 3 generations because social welfare payments are so generous).
    2. Governments listen to the lobbyists/pressure groups on taxation, so raising taxes where there is less pressure brought to bear.

    This is why taxation for the bulk of people/businesses is so high – governments buying votes through looking after the lazy and not getting sufficient income through giving tax breaks to large businesses and special interest groups.

  3. I believe the best way forward is a low flat tax rate coupled with strict limits on things like unemployment payments. I heard today of one Scottish council, for example, that has somehow introduced a system where, after 8 weeks of unemployment benefits people are forced to engage in community services work to continue drawing the benefits – sweeping roads, etc. This has dramatically reduced the level of unemployment benefits paid as people find other, more lucrative work (I suppose some move to more lenient areas, too).

    Flat tax simply means that everyone pays the same percentage – no matter how big the corporation. Tax collection is made a great deal easier (and cheaper) and the resulting simplicity boosts overall receipts as there are no loopholes. As a result, flat tax systems mean lower tax rates as everyone is contributing.

    1. Flat tax could be one way, Guy.

      Unemployment benefits cannot be reduced in today's world since there simply aren't enough jobs for the unemployed. What needs to be done is to make setting up a company of their own a more lucrative prospect. In countries ln Sweden however, the first thing you have to do is start paying tentative taxes. Before knowing how high your revenues are going to be. No wonder as many companies are going bancrupt as are started.

  4. I don’t hold any strong political views but I do hold many humanistic ones. Jobs create not only a way for individuals to earn a living but also provide a sense of purpose and worth. Jobs are necessary and therefore it is important to support the businesses that provide those jobs.

    However I don’t see taxation as the main problem. I see the problem as one of greed.

    Companies are under huge pressure from their shareholders to produce results. Many problems of recent times came from our banking industry which seemed to behave like a bookmaker speculating with money it did not have – why? In my view – greed rather than sound business investment.

    When the value of shares and therefore the security of a company can be affected by the resignation or retirement of a director or the comment of someone in the media there is something wrong and it is not taxation.

    1. Marion I agree wholeheartedly about the greed factor. That is a huge problem.

      However, agressive taxation is worse in Europe than in America. For instance in Sweden if you start up a new company the first thing you have to do is pay tentative taxes based on tentative revenues. Unless you put up a share capital of $9,000 you have to pay 65-70 percent of estimated revenues. Needless to say that means that a lot of companies fail fairly quickly.

      Small and medium sized companies are the backbone of the economy in all countries. So when you have less and less such companies less jobs are created and you end up in a vicious circle. In Switzerland new companies are given three years to get up and running, which is something that would be beneficial to adapt in EU countries such as Sweden.

  5. Great article and a very good point to think about. History teaches us that companies will always choose the lowest cost route, and unfortunately (or not), nowadays it tends not to be in the West. I'm not sure governments are the only ones to blame, as cases like the Greek crisis show us that not taxing in on your assets may lead to a downfall in these tough times.

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