D Murali

Convergence conundrum

D. MURALI | Updated on November 20, 2011



Taxation is generally seen as a technical task, but it is also fundamentally about the rules of the game that determine, among other things, the level of social spending in society, the distribution of property among social groups, and the concentration of power in society, notes a Monash University research paper titled, ‘ An Examination of Convergence and Resistance in Global Tax Reform Trends,' by Kathryn James. Examining the experience of three countries with VAT reform – Australia, Canada and the US – the author finds that the VAT-reform experience of these three countries encapsulates the tension that arises from a tendency among developed tax systems to converge against frequent and often fierce localised opposition. “This tension speaks to a key debate in the public policy and comparative law literature concerning the transferability of policy ideas or legal instruments across jurisdictions.”

Something that would hold good for IFRS, too, perhaps.

Artful incentives

Well-designed tax incentives can increase involvement with the arts, writes Sigrid J.C. Hemels in ‘ Tax incentives for the arts: the case of the Netherlands,' a recent paper in http://papers.ssrn.com. Tracing that oldest incentive which is still part of Dutch tax law – the exemption of works of art from a person's wealth – dates from 1893, the author opines that tax incentives can be a valuable way to finance the arts, provided there is enough information and democratic control.

An interesting section in the paper is about the difficulties with the current system of incentives for art. For instance, “none of the ministries involved in the tax incentives for films (Culture, Finance, and Economic Affairs) knew in 2003 how much public money (subsidies and tax incentives) was spent in total on the Dutch film industry.” Another example of the lack of co-ordination is that regarding 28 tax incentives, the decision whether something constitutes art or a cultural institution and therefore qualifies for a tax incentive is not made by art professionals, like art counsels or national art funds, but by the Dutch tax authorities, one learns. Also, that there are four different definitions of “museum” for Dutch tax purposes!

Recommended read for the aesthetic taxman, if there were one such.

Aesthetic examples

To the art-inclined tax professionals, there are useful examples from around the world in ‘ From private to public with the help of tax incentives,' a recent research paper by Sigrid J.C. Hemels. One learns, for example, that in Italy individuals and companies can deduct from taxable income 19 per cent of the expenses made for the maintenance, protection or restoration of registered cultural artefacts. And, that, in Germany, it is possible to deduct from taxable income up to 9 per cent of costs for the maintenance and restoration of protected cultural heritage for a period of up to 10 years, provided that certain requirements are met.

Other examples in the paper speak of how Canadian companies which buy a work of art by a Canadian artist worth over CA$200 are granted a deduction from their taxable profit. “Similarly, in Belgium, the value of an artwork by an artist resident in Belgium which has become an integral part of a company building, for example as a fresco or statue, may be deducted for tax purposes from up to 2 per cent of the purchase price of the building.” Hemels cites a tax incentive provision of the French Patronage Act, which grants companies a deduction if they acquire works from living artists and put them on permanent display at a location accessible to the public. She explains that the location may be a museum but also a company's entrance foyer to which the general public is granted access; and that the company may for tax purposes deduct one-fifth of the purchase price over a period five years, with the maximum yearly tax deduction set at 0.5 per cent of the annual turnover of the company. “France grants a similar tax incentive to companies that buy musical instruments and, upon request, gives them on loan to musicians.”

Should be music for the culture-avid.

Sunset worries

Jack VanDerhei of the Employee Benefit Research Institute has written ‘ Tax Reform Options: Promoting Retirement Security,' a paper opening with a grim reminder that one-half of Baby Boomers and Gen Xers are determined to be at risk of not having sufficient retirement income to cover even basic expenses and uninsured health care costs. “In aggregate, the Retirement Savings Shortfalls (determined as a present value of retirement deficits at age 65) for these age cohorts (expressed in 2010 dollars) is $4.55 trillion, for an overall average of $47,732 per individual still assumed to be alive at age 65.” Further sombre statistics in the paper are that 91 per cent of the lowest-income households would be at risk of inadequate retirement income if they had no Social Security retirement benefits, compared with 76 per cent at risk with current Social Security benefits; and that, as per the latest projections of Social Security, the trust fund reserves will be exhausted in 2036.

Alarming messages about the sunset years.

Power tool

Looking for a tool to further economic development that also serves as a tool for consolidating power? Try TIF (tax-increment financing), elaborately discussed in ‘ Crony Capitalism and Social Engineering' by Randal O'Toole. TIF, a taxing method invented by the California legislature in 1952, uses the property (and sometimes sales or income) taxes collected from new developments to subsidise those very developments, as the paper informs. Among the variations is the creation of TIF districts if they are at a competitive disadvantage with cities in neighbourhood, as in Idaho. “Though 13 States have no limit, most States limit the life of the district to between 20 and 50 years.”

The ‘crony' part, as is common around the world, happens when the elected officials use TIF to provide tax subsidies to favoured developers. This reduces the risk to developers, who naturally respond by making campaign contributions to the officials when they run for re-election, notes the author. He gives, as example, the Chicago city, where the mayor Richard M. Daley, transformed TIF into a source of political power. “By the time he left office in 2011, nearly a third of the city was in one of 160 TIF districts. The $500 million a year collected by those districts represented one-sixth of the city's budget.” The paper recounts how TIF became known as “the mayor's slush fund,” because Daley used the money to reward developers who supported him and denied funds to wards represented by aldermen who opposed him. “Daley kept TIF budgets secret – individual aldermen were only allowed to know how TIF money would be spent in their own wards…”

Instructive study.

Published on November 20, 2011

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