By Jason Piper, tax and business law manager, ACCA
How can governments use the tax system to promote economic growth? The stock answer is ‘reducing the burden of taxation on business’, or some similar form of words. Across the world, policy makers have answered the call by cutting the rates of tax, and in some cases the base on which that tax is levied. And the result has been concerns about the race to the bottom, and a focus on who may be making up the shortfall in domestic treasury receipts if companies aren’t paying the tax.
But 8 years of research from the World Bank suggests that governments may be missing a trick in focussing on the direct tax charge recorded in the accounts as they try to attract new business to invest in their jurisdiction. Although the correlation hasn’t been tested to scientifically confirm the link, economic growth across the hundred or so economies measured in the annual ‘Paying Taxes’ survey is linked more closely to reductions in the administrative burden of complying with the tax system than it is with the actual rates applied. (You can find the 2013 survey, which sets out the conclusions, here ) To put it another way, business is more worried about how hard it is to fill the forms in than it is what numbers actually go into it.
There’s an obvious logic when you think about it – time spent on tax compliance is specifically diverted away from the productive efforts of the business. Reducing the time spent on administration will increase the time available for creation of economic wealth. On the other hand, changing tax rates (the distribution of the profits already earned) simply reallocates the existing wealth in the system. For that reallocation to actually promote growth, it needs to be reinvested by the business, and for it to promote the maximum amount of growth the business return has to be greater than the multiplier effect of the equivalent public spending funded by the taxation. And while you can argue about the relative multiplier effects of private or public sector investment, the fact remains that any growth based on that investment is only going to come on stream some time in the future; the extra hours spent on making product, or chasing sales, this year will have an impact straight away. The opportunity cost of wasting business time on sterile administrative bureaucracy is, or certainly should be, clear.
So what can governments do to reduce that administrative burden? Well, keeping taxes simple is the answer. Of course that’s easier said than done, and as ACCA’s paper on Simplicity in the Tax System explores there is a tremendous amount to think about. Key to the whole affair though is clarity of mind and clarity of purpose from the policy makers. If a single tax is expected to perform several roles then it’s inevitable that there will be tensions in how it is set up, and between the different outcomes it is supposed to deliver. Society as a whole pays the price of undue complexity in the tax system, and politicians owe it to us all to think more carefully about the broader impact of every tweak to the system, every tinker at the edges – and to shift the direction of travel towards simplification, rather than rate reduction.