D Murali

Policy options of a small open economy

D. MURALI | Updated on September 18, 2011



Research Round-Up

A small country can be viable as an international banking centre (IBC), argues ‘ Tax havens or safe havens,' a recent paper in SSRN (Social Science Research Network). A small country that hosts an IBC is a safe haven when it is able to provide a high level of institutional infrastructure, whereas it chooses to be a tax haven when it cannot be competitive in institutional infrastructure, write the authors Patrice Pieretti, Jacques-François Thisse, and Skerdilajda Zanaj. “An IBC need not be as bad as claimed in the general press because its presence fosters institutional competition across countries, which is ultimately beneficial to all investors,” they argue.

A post about this paper in http://trueeconomics.blogspot.com highlights the basic dilemma in the policy options of a small open economy (SOE) when it comes to attracting IBC activity. The economy needs to choose between either becoming a tax haven, a safety haven, or both for investors from large economy. “In other words, the SOE is required to establish a competitive advantage relative to a large economy in terms of two possible instruments — taxation and institutional infrastructure.” The problem is that in reality, the same SOE will not be able to provide both, viz. quality institutions and tax haven protection, since the latter contradicts the former, explains the blog. “One can argue that in the past some tax havens were institutionally extremely robust, but in the current globalisation-altered world, good institutions require compliance across the borders, not just within the country.”

Topical read, at a time when the idea of amnesty for offshore funds is being debated, closer home.

Church tax

Economists may not bring god in their equations. But that does not prevent Teemu Lyytikäinen (of London School of Economics, Spatial Economics Research Centre), and Torsten Santavirta (of the Department of Economics, Aalto University School of Economics, and the Swedish Institute for Social Research, Stockholm University) from exploring ‘ The effect of church tax on church membership.' There is to our knowledge no study by economists on the implications of church tax, i.e. the cost of membership, for people's religious participation, the authors note. In their view, one possible reason is that the religious communities are in relatively few countries funded by a pay-to-play system, such as by a tax levied on their members' income, the authors explain. “In most Western countries a church tax would be inconsistent with the constitutional separation of church and state. Finland is however not the only exception. For instance, Austria, Germany, Sweden, Denmark, and Iceland all impose a similar tax on members of their largest religious congregations.”

A footnote informs that in Finland the church tax is a separate income tax; and that it varies between 0.75 and 2.25 per cent depending on the municipality of residence and is set by a democratically elected parish council. “For comparison, the tax in Germany is 8 or 9 per cent of the income tax, i.e., a person paying an income tax of 20 per cent pays a church tax of 1.6 per cent.” An important caveat in the paper is that the authors make no aspirations to explain the change in religiosity, beliefs, or values of individuals or societies. Acknowledging, however, that the church's popularity might decline as people find other ways than state church to practise their spirituality or religiosity, the authors safely postulate that the increasing popularity of opting out from state church may not be a consequence of decline in belief among people.

Insights of import, irrespective of what your belief system may be.

Consolidated returns

An educative article about the ‘ Consolidated corporate income tax returns in the US' is available in http://papers.ssrn.com. Written by Martin J. McMahon Jr. of the University of Florida - Levin College of Law, it begins by explaining that a consolidated return permits the includible corporations that are members of an affiliated group of corporations to combine their incomes, net operating losses, and credits into a single return. The principal advantage of filing consolidated returns is the ability to combine the income and loss of each member of an affiliated group into a single taxable income, the author notes. “Filing a consolidated return also permits the members of the affiliated group to exclude inter-company dividends from gross income in computing taxable income and to defer recognition of gain or loss on inter-company transactions.” There is, however, one glaring statutory weakness in the consolidated return regime, feels the author. That weakness, according to him, is the exclusion of foreign affiliates from the consolidated return. He sees this issue to be part of the much larger debate on whether the US should move from its quasi-world-wide-taxation/ semi-territorial tax system to either a robust world-wide-taxation regime or to a purely territorial regime.

Recommended read for international taxation professionals.

Ethics debate

Michael Hatfield, a professor of law at the Texas Tech University School of Law, has recently written in ‘ Tax Notes' about the ‘ethics debate,' in the wake of an IRS standard for practitioners preparing tax returns and advising on tax return positions. Fundamentally, he finds the process for setting an ethics standard to be debatable, because it involved a federal agency issuing proposed regulations on the standards for disciplining professionals under its authority followed by a voluntary professional association issuing detailed comments on the proposed regulations and arguing that its standards were the ones that should be adopted instead.

That we use the word ‘ethics' to describe the results of an inter-institutional process settling standards backed by the institutional threat of discipline should strike us as an odd, if not incorrect, word choice, frets Hatfield. “This is the ‘law of lawyering' rather than the ethics of lawyering, and the process is that of 21st century American bureaucracy, not ethical reasoning. Or at least not ethical reasoning Socrates would recognise…” Today, legal ethics questions are answered the same way others are, the author rues. “Rules are researched and then applied in light of potential consequences. Contracts and pollution are regulated that way, and so are lawyers. But when the object being regulated is the bar, we call it ‘ethics.'”

Of professional interest, for the concise discussion of ethics regulation.

Published on September 18, 2011

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