The World Bankâ€™s Slippery Advocacy of Tax Cuts
Doing Business enjoys the highest circulation of any World Bank publication. It ranks countries based on the favourability of their regulations to business.
It is like the Heritage Foundationâ€™s Index of Economic Freedom and the Cato/Fraser Instituteâ€™s Economic Freedom of the World Report, but supported by the World Bankâ€™s credibility and clout. (Notwithstanding corporate Canadaâ€™s incessant complaints about regulation, Canada comes in 7th out of 183, placing in the top 4%.)
One chapter of Doing Business is â€œPaying Taxes,â€ which is defined broadly to include employer contributions to social security programs. The World Bank and PricewaterhouseCoopers also release an expanded version of Paying Taxes as a separate report.
The chapterâ€™s first page features some very reasonable sentences:
Taxes are essential. In most economies the tax system is the primary source of funding for a wide range of social and economic programs. . . . Besides paying for public goods and services, taxes also provide a means of redistributing income, including to children, the aged and the unemployed.
Despite this acknowledgment that taxes are important, the Paying Taxes indicator is constructed to award the best scores to countries where businesses do not pay any. Specifically, the indicator measures how many tax payments are due each year, how long it takes to comply with tax rules, and the effective tax rate.
Countries that levy appreciable business taxes can achieve decent rankings by streamlining their tax administration. But the best scores go to countries with both ultra-low tax rates and streamlined administration.
Indeed, the top Paying Taxes score for 2011 went to the Maldives, which is widely regarded as a tax haven. The World Bank calculates that all of its business taxes and social-security payments amount to below 10% of profits.
Furthermore, both the Doing Business report and the separate Paying Taxes report assign check marks to countries that cut taxes and â€œXâ€ marks to countries that raised taxes. For example, the 2011 reports criticize that â€œIceland increased the corporate income tax rate from 15% to 18%,â€ even though 18% is still quite low and Iceland clearly needs the additional revenue.
The World Bank calls for â€œKeeping tax rates at a reasonable level,â€ but makes no attempt to define such a level. Nor does it accept any tax increases as being reasonable.
The irony is that, as an international financial institution, the World Bank has a direct stake in developing countries collecting sufficient revenue to service or repay their loans. It is well placed to discourage international competition from pushing taxes below â€œa reasonable level.â€
Instead, the World Bank promotes a ranking system which implies that zero is the optimal tax rate. The separate Paying Taxes report explicitly encourages tax competition:
Governments use the Paying Taxes results to benchmark their tax systems against neighbouring countries, or their economic peers. . . . This section of the study therefore explores the results from a number of different regional, economic and income groupings.