The Tax Loophole “Scandal”

It seems that for once, Mr. Juncker actually did something right: during his time as the prime minister of Luxembourg, he allowed, to paraphrase Mises, “capitalism to breathe”, by making it possible for companies to save on their tax bills. These tax loopholes (which the establishment press propaganda refers to as “tax avoidance”, or even worse, “tax evasion” schemes, even though they are perfectly legal) are a subject that plays into the hands of statists like few other. Only protectionism may be a fallacy that enjoys even greater populist appeal.

It should be perfectly clear that consumers can only benefit when companies manage to escape the avarice of governments to some extent. But envy is a powerful political motivator, and the fact that the average citizen as a rule cannot arrange his affairs to enjoy the same tax advantages is cunningly employed by etatistes to create a populist outcry over the “unfairness” of it all.

Let’s be serious though. The average citizen, resp. consumer cannot expect any advantages whatsoever from an increase in corporate taxation. What it will mean to the average citizen is only this: the prices consumers pay will rise, fewer jobs will be created, and the returns of pension funds (which invest in the shares of these companies) will decline. There will be zero offsetting benefits from the fact that the State will enlarge its loot. On the contrary, that enlargement will only benefit political cronies and will lead to even greater waste of scarce capital.

Surely no-one seriously believes that everybody else’s taxes would be lowered if these tax loopholes were closed? There’s not even a sliver of a chance of that happening. One would have to be quite naïve to actually believe that. And yet, judging from the reader comment sections of articles about these loopholes in the mainstream press, there is a hue and cry as if these companies were snatching the milk from the mouths of hungry babies.

We dislike almost everything about JC Juncker – except the stuff he is now attacked for.

(Photo via DPA)

Anyway, no good deed goes unpunished, and Mr. Juncker is now in the “hot seat” as they say. A typical complaint in the European mainstream press reads as follows:

“Last week, several media outlets, including the Munich-based Süddeutsche Zeitung, published the most detailed accounts yet of the tricks used — and the eagerness brought to bear — by Luxembourg officials to help companies avoid paying taxes. The strategies were often developed together with company leaders and served to entice multinationals to set up shop in Luxembourg. The tiny country on Germany’s western border, for its part, benefited from tax revenues it wouldn’t otherwise have seen. It was, in short, a reciprocal relationship.

But it was also a relationship that was disadvantageous for Luxembourg’s EU partners — and for European cooperation itself. Many of the companies that set up shop in Luxembourg, after all, no longer paid taxes in their home countries where they produced or sold the lion’s share of their products.”

(emphasis added)

Another way of formulating the above can be seen here (note though that this particular article is not primarily about the tax schemes, which are only incidental to the its main theme. In fact, its critique of European democracy has merit. However, we only want to highlight the specific way here in which the tax schemes issue was put):

“[...] the issue is about the tax avoidance schemes in Luxembourg that were engineered during former Prime Minister Jean-Claude Juncker’s tenure. And about the billions of euros in revenues lost by other EU countries as a result.”

(emphasis added)

The average (non-Luxembourg) citizen reading this probably immediately thinks: “we lost money!” However, “we” didn’t lose squat. The State lost some loot – but “we” are not the State. As noted above, the average citizen actually tends to benefit from the situation.

Luxembourg is a nice place in several respects

(Photo via: lessentiel.lu)

The Loopholes Should be Extended to Everyone

We already discussed the topic of tax loopholes extensively on a previous occasion (see “The EU and Loopholes” for details). Needless to say, our assessment of the issue is pretty much the opposite of what one can read almost everywhere else. Anyway, it is well worth repeating here what Murray Rothbard had to say on the topic.

Above we briefly outlined a utilitarian argument: the average citizen, or society at large if you will, does not stand to benefit from the closing of so-called tax loopholes, on the contrary. Essentially, it is a “lose-lose” proposition for consumers. Not only will they have to bear an increase in direct costs, but there will be a slew of indirect costs as well, with no offsetting benefits.

Rothbard tackles the moral aspect below, by explaining why what appears the be “unfair” on the surface is actually anything but. The moral outrage is in reality misdirected. As Rothbard says:

““Many writers denounce tax exemptions and levy their fire at the tax-exempt, particularly those instrumental in obtaining the exemptions for themselves. These writers include those advocates of the free market who treat a tax exemption as a special privilege and attack it as equivalent to a subsidy and therefore inconsistent with the free market. Yet an exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. In the latter case a man is receiving a special grant of privilege wrested from his fellowmen; in the former he is escaping a burden imposed on other men. Whereas the one is done at the expense of his fellowmen, the other is not.  For in the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master.

It is clear that if a certain burden is unjust, blame should be levied, not on the man who escapes the burden, but on the man or men who impose it in the first place. If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone. The exemption itself cannot be considered unjust unless the tax or other burden is first established as just.

Thus, uniformity of treatment per se cannot be established as a canon of justice. A tax must first be proven just; if it is unjust, then uniformity is simply imposition of general injustice, and exemption is to be welcomed. Since the very fact of taxation is an interference with the free market, it is particularly incongruous and incorrect for advocates of a free market to advocate uniformity of taxation.”

(emphasis added)

And this is precisely how the average citizen should actually look at these things. There is no mileage in complaining about the fact that some manage to escape getting looted to the same extent as others and demanding that the State should loot them just as heavily. Instead, the demand should be that the tax exemption enjoyed by those using the loophole be extended to everybody.

Murray Rothbard. As he once noted: “The State is a gang of thieves writ large”.

(Photo via mises.org)

Conclusion:

It is in a way amusing that the “leader of a gang of bureaucrats” who is reportedly one of the EU’s most committed centralizers and arch-federalists now stands accused of having helped companies to save on their tax bills in the EU. Ironically, this proponent of the European super-state in the process actually helped the tiny principality of Luxembourg to benefit at the expense of other governments in Europe. However, such tax competition should not be decried.

The optimal outcome from the point of view of Europe’s citizens would not be to stop Luxembourg from offering a better deal, but to induce others to consider offering better deals as well. The real reason behind the hue and cry is that the governments of countries with the highest taxes want to “harmonize” taxation across all of Europe so that there is no longer anything to keep their avarice in check. People should really think twice before they condemn Luxembourg’s tax loopholes.