Harmful Tax Practices: Harmful to Whom?

In the December 2009 National Tax Journal, which targets an academic and policymaking audience, there are several articles on international tax avoidance and evasion. One, by Gaetan Nicodeme, who works with the European Commission, is titled “On Recent Developments in Fighting Harmful Tax Practices.” These “harmful” tax practices, as you might guess, are policies some countries implement that allow people from other countries to lower their tax burdens. If these tax practices are harmful, I have to ask, who is hurt by them?

Obviously, these policies benefit the taxpayers, because the policies allow taxpayers to keep more of their own money. The implication seems to be that the harm comes from the reduction in tax revenues collected by high-tax countries. In another article in the same issue, referring only to the United States Jane Gravelle says, “Losses may be as much as $70 billion per year.” But it appears to me that what Gravelle calls losses are really gains: gains to taxpayers who get to keep $70 billion more of their own money.

In reality, the gains are larger than that, because taxes discourage economic activity. If “harmful” tax policies allow taxpayers to keep more of the money they earn, that will promote entrepreneurship and investment, and will generate economic growth. The economy is better off because some enterprising individuals have found ways to keep more of what they earn.

One might debate whether this additional economic activity adds up to $70 billion, but regardless, with the bloated government budgets in the US, the EU, and the rest of the developed world, it would be hard to argue that we ought to be channeling even more money into the public sector.

Indeed, another name for “harmful tax practices,” although not mentioned in these National Tax Journal articles, is international tax competition. That tax competition helps to keep the taxes going to already excessive governments from growing even larger, and in fact, these “harmful” tax practices are really helpful. We would be better off if we would join in that international tax competition, rather than trying to keep our government’s competitors from offering their services to overburdened taxpayers.

Taxpayers can easily see that keeping more of their incomes from the tax man is a benefit, not a harm. But it is interesting to see how academics and government officials have a different view on things.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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