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Doing Business Should Stop Promoting Tax Competition

Summary:
NEW YORK – The World Bank Group has just released Doing Business 2017: Equal Opportunity for All, the latest version of its flagship report. According to the Bank, the annual report is one of the world’s most influential policy publications, as it encourages countries to reduce the regulatory burden on the private sector. But there is a serious flaw in the report’s formula: the way it treats corporate taxation. Doing Business reports rate 11 areas of business regulation in 190 countries, using data on compliance burdens collected by PricewaterhouseCoopers (PwC). The Bank then formulates an overall score that supposedly reflects the ease of conducting commercial activities, and ranks countries according to that score. The lower the regulatory burden on businesses, the higher a country ranks. The problem is that “regulatory burden,” according to Doing Business, includes the collection of taxes that are necessary to fund public infrastructure and basic social services – both of which are critical to enhance growth and employment. Even the report recognizes that, for most economies, taxes are the main source of the government revenues needed to fund “projects related to health care, education, public transport, and unemployment benefits, among others.

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NEW YORK – The World Bank Group has just released Doing Business 2017: Equal Opportunity for All, the latest version of its flagship report. According to the Bank, the annual report is one of the world’s most influential policy publications, as it encourages countries to reduce the regulatory burden on the private sector. But there is a serious flaw in the report’s formula: the way it treats corporate taxation.

Doing Business reports rate 11 areas of business regulation in 190 countries, using data on compliance burdens collected by PricewaterhouseCoopers (PwC). The Bank then formulates an overall score that supposedly reflects the ease of conducting commercial activities, and ranks countries according to that score. The lower the regulatory burden on businesses, the higher a country ranks.

The problem is that “regulatory burden,” according to Doing Business, includes the collection of taxes that are necessary to fund public infrastructure and basic social services – both of which are critical to enhance growth and employment. Even the report recognizes that, for most economies, taxes are the main source of the government revenues needed to fund “projects related to health care, education, public transport, and unemployment benefits, among others.”

Beyond promoting budget-straining tax competition among countries, Doing Business exaggerates the tax burden on companies. For one thing, it considers all the kinds of taxes firms might pay – not just corporate income tax.

Specifically, the report’s estimates for “total tax rate as a proportion of profits” include taxes for employees’ health insurance and pensions; property and property transfers; dividends, capital gains, and financial transactions; and public services like waste collection and infrastructure. Those are taxes that should be categorized as social contributions or service charges.

Augmenting estimates further, Doing Business does not measure only expected tax payments. It considers the cost (in staff time) of activities like filing returns, making claims, and, beginning this year, post-filing processes, to be part of the tax burden on businesses.

In reality, corporate-tax payments, as a share of gross profits, are quite low. According to Doing Businessown data, the world average amounts to just 16%, with the European Union coming in at 13%, the United States at 19%, and Latin America, Asia, and Africa at 16%.

But even those figures are probably too high, because of another reality that Doing Business overlooks: tax avoidance and evasion. Whatever a country’s official corporate-tax rate might be, the reality is that few companies actually pay the full amount.

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