In 2012, the corporate income tax rate was reduced from 26%
to 24 percent. With the comparable rate in Germany at 29% and France at 33
percent, Britain stood to reap the revenue-benefits of a significantly lower
tax rate within the European Union. That the 24% rate would be pared down to
21% in 2014 suggests that everything else equal, the state of Britain was set
to reap a sustainable competitive advantage over other states with respect to
attracting business, and thus jobs. The move is not without risks, however.
The move by the British could trigger reduced rates in other
states, resulting in a “race to the bottom” wherein corporations get away with
less tax and the governments have to cut back on basic services due to
insufficient revenue in the coffers. In early 2013, for example, Bank of
America moved billions of pounds of complex financial transactions through
London from Dublin in order to apply the loss carry-forwards on the underlying
investments to the state with the higher tax rate. At the time, the corporate
tax rate in Ireland was only 12% so the loss deductions could benefit the bank
more if applied against profit in Britain. As a result, Britain would collect
less in tax from the bank and the bank would pay less in tax, due to the rate
differential between Ireland and Britain.
In short, a bank that had made horrible acquisitions in 2008
was able to “play the rates” to get some kind of “silver-lining” benefit at the
expense of the E.U.’s state governments. Because of the disproportionate fiscal
role of those governments in the E.U., business could effectively play them off
against each other. Were there a federal corporate income tax, the benefits of
shifting carry-forward losses from Dublin to London would be mitigated because
the more of the tax bill in Europe would be unaffected. Therefore, in addition
to forestalling more of a fiscal balance within the E.U. to the benefit of the
euro, the reliance on state tax in the E.U. can be exploited by corporations
such that less tax revenue is collected.
In terms of business, Bank of America’s taking advantage of
differential tax rates illustrates a sort of “operating at the margins” that
misses the point that the bank had “missed the big picture” in acquiring Merrill
Lynch and Countrywide in 2008. That is to say, any cleverness in minimizing the
tax bill within the E.U. does not make up for the colossal blunders at the hand
of Ken Lewis and the board in 2008. That the bank is too big to fail, meaning
that there is systemic risk should it collapse, is thus a particularly
dangerous risk for the global financial system. Simply stated, expertise in
reducing the tax it pays in Europe does not make up for the greater ineptitude
at the bank, so there is a significant possibility that the bank will go under.
Putting these thoughts together, the E.U. is vulnerable
fiscally due to its reliance on the states for tax revenue, and the global
financial system is vulnerable in terms of systemic risk at least in part
because banks like Bank of America can exploit the E.U.’s weakness and thus
give policy-makers the impression that
the systemic risk is tolerable.
Sources:
Jill Treanor, “Bank
of America Makes Derivatives Switch from Dublin to London,” The Guardian, 28 January 2013.
Dan Milmo, “Corporation
Tax Rate Cut to 21% in Autumn Statement,” The Guardian, 5 December 2012.
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