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Hungary is first off the mark in race to cut corporate taxes to zero. Will Singapore follow suit?


viktor-orbanBefore the election Trump promised to cut the US corporate rate to 15% and impose a special 10% tax rate on profits repatriated to the US by American corporations. The US corporate tax rate is currently one of the highest in the world at 35% though a plethora of tax breaks and loopholes mean that MNCs often pay considerably less tax. Rates of effective tax range from the high teens right down to close to zero in the case of top technology companies like Apple and Google.

One of the aims of cutting corporate taxes is to stop the wave of US companies moving their domicile to tax havens like Ireland, Switzerland, Singapore and the UK. A Trump adviser, Stephen Moore, told BBC Radio 4 that “if you cut the corporate tax rate, you are going to see a flood of companies leaving Ireland and Canada and Germany and France and they are going to come back to the United States.”

I pointed to this as one of the unwelcome consequences of Trump’s victory for Lee Hsien Loong and the PAP in my last blog. Two  examples of  large US corporations which have chosen to redomicile in Singapore for tax purposes are Flextronics and Broadcom.  Now if US corporate taxes are cut to 15% they might reincorporate in the US. If they do so it will illustrate how easily undercut an economic strategy based on low tax rates and not on genuine innovation and creativity is. One of the constant themes of my blog has been how the PAP’s development strategy is not based on any  fundamental edge but instead on gaming the system by having no labour protections, no minimum wage, few environmental protections, low or no taxes, banking secrecy and allowing corporations to bring in cheap labour from much poorer countries in Asia. At the same time our productivity record has been shameful leading to us slipping down the OECD rankings to near the bottom of the list, a comparison that would be even more unfavourable if we benchmarked Singapore against global cities rather than countries.

Ultimately this strategy is easily copied by other countries even if they do not enjoy Singapore’s enormous locational advantage at the crossroads of world trade and English educated workforce. It is also vulnerable to pushback from the much larger economies whose jobs and tax revenues are threatened. One of the other proposals from Trump’s economic advisers is to tax companies based on the proportion of sales generated in the US which ultimately would make domicile meaningless.

Hot on the heels of the US announcement about tax cuts, Hungary has just announced it plans to cut corporate tax rates to 9% . Hungary’s PM, Viktor Orban, admires the Singapore model and aspires to build an “illiberal”state. We can expect other countries that have relied on low tax rates to lure foreign investment to follow suit. The ultimate outcome will probably be the abolition of corporate tax altogether or else cut to such low levels that the revenue generated becomes miniscule. The losers will be the  governments of tax haven countries and their  resident workers who will now have to pay higher taxes to make up the shortfall. The winners will be   MNCs and wealthy shareholders who are able to extract the income and avoid the taxes on distributions paid by ordinary people. The US may win as well if it taxes companies on their US sales rather than profits which are subject to manipulation.

In economics we call this the prisoners’ dilemma since competition leads to a suboptimal outcome from the point of view of the countries involved. If instead they cooperated and harmonised tax rates they could extract higher revenues from companies and not have to make up the shortfall by raising other taxes.

Will Singapore follow suit in cutting corporate tax or reducing it altogether? What is clear is that the days when PAP Singapore could game the system while its major trading partners would let it get away with it are numbered.

 

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