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 E.U. states with respect to attracting business, and thus jobs. The move was not without risks, however.
The move by the British could have triggered reduced rates in other states, resulting in a “race to the bottom” wherein corporations would get away with less tax and the governments would 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 have benefited the bank more if applied against profit in Britain. As a result, that state stood to collect less in tax from the bank and the bank stood to pay less in tax--all due to the rate differential between the states of Ireland and Britain.
The move by the British could have triggered reduced rates in other states, resulting in a “race to the bottom” wherein corporations would get away with less tax and the governments would 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 have benefited the bank more if applied against profit in Britain. As a result, that state stood to collect less in tax from the bank and the bank stood to pay less in tax--all due to the rate differential between the states of 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 have been mitigated because the more of the tax bill in Europe would have been 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. could be exploited by corporations such that less tax revenue would be collected.
In terms of business, Bank of America’s taking advantage of differential tax rates illustrates a sort of “operating at the margins.” Did this redeem the bank? Lest it be forgotten, the bank had screwed up rather unroyally in acquiring Merrill Lynch and Countrywide in 2008, given all the real-estate debt and financial derivatives held by those institutions. That is to say, any cleverness in minimizing the tax bill within the E.U. could not possibly make up for the colossal blunders at the hand of Ken Lewis and the board in 2008. The bank was even then too big to fail, meaning that there was systemic risk to the financial system (and economy) should the bank have collapsed, so any cleverness at working tax differentials should not distract us from the big picture concerning not only that bank, but also any large bank as being too big to fail and yet fully capable of making huge blunders that could compromise even a large bank's very existence. In other words, expertise in reducing the tax-bill in the E.U. does not make up for greater ineptitude because the low-probability, very high systemic risk is simply too dangerous; the Great Depression of the 1930s illustrates what could happen.
As for the E.U, it was (and is) vulnerable fiscally because its reliance on the states to collect and spend tax revenue. The E.U. Government, like the early U.S. Government, has evinced the weakness of dependency (on its states). The reticence of state officials to cede more governmental sovereignty to the Union has been at least part of the problem, with banks like Bank of America being able to exploit differential state tax-rates as a result. The welfare of the whole--the Union--has suffered as a result.
In terms of business, Bank of America’s taking advantage of differential tax rates illustrates a sort of “operating at the margins.” Did this redeem the bank? Lest it be forgotten, the bank had screwed up rather unroyally in acquiring Merrill Lynch and Countrywide in 2008, given all the real-estate debt and financial derivatives held by those institutions. That is to say, any cleverness in minimizing the tax bill within the E.U. could not possibly make up for the colossal blunders at the hand of Ken Lewis and the board in 2008. The bank was even then too big to fail, meaning that there was systemic risk to the financial system (and economy) should the bank have collapsed, so any cleverness at working tax differentials should not distract us from the big picture concerning not only that bank, but also any large bank as being too big to fail and yet fully capable of making huge blunders that could compromise even a large bank's very existence. In other words, expertise in reducing the tax-bill in the E.U. does not make up for greater ineptitude because the low-probability, very high systemic risk is simply too dangerous; the Great Depression of the 1930s illustrates what could happen.
As for the E.U, it was (and is) vulnerable fiscally because its reliance on the states to collect and spend tax revenue. The E.U. Government, like the early U.S. Government, has evinced the weakness of dependency (on its states). The reticence of state officials to cede more governmental sovereignty to the Union has been at least part of the problem, with banks like Bank of America being able to exploit differential state tax-rates as a result. The welfare of the whole--the Union--has suffered as a result.
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.See also: Skip Worden, Essays on the E.U. Political Economy and Essays on Two Federal Empires.
