Keynote
Tax Policy in a Dynamic World

Thomas Mirow
State Secretary
Federal Ministry of Finance (BMF)
Germany

Ladies and gentlemen,

The citizens of this world are united by their aversion to taxes. Nobody surrenders freely what they have earned through hard work if they cannot see what they will get in return. And no government can win the tax debate without taxpayers benefiting from public expenditures. As such, all those responsible for policy should endeavour to ensure that all parts of society benefit from public expenditures.

But taxes should not just serve to ensure that the funds needed for public expenditures are available. Their collection should also enhance social equality and obstruct growth as little as possible. Many states had found their own particular balance in this respect over the last hundred years or so. But globalisation has caused an enormous upheaval in the various systems which had evolved over many years. The mobility of tax bases requires responses which are often in conflict with our sense of fairness and with which voters do not often agree.

In Europe, this conflict is most apparent in the competition for productive capital, which has led to fierce tax competition. As a result, corporate tax rates have fallen while a greater burden has been put on consumption. Latin America will not be immune to this increased tax competition, and I look forward to hearing how this challenge is being addressed.

It is important here not to take a perspective which is too limited in time span. While it is true that the day-to-day business of politics often requires our full attention, I would like to ask you to discuss long-term structural shifts at this conference.

Tax developments in Europe

Indirect taxes have already been largely harmonised within the EU, but there has been no such development in the field of direct taxes.

This framework has led to varying national priorities within Europe with regard to tax structures. These differences have been actively used in the competition for business, especially in the field of corporate taxation.

Competition between countries

We must ask ourselves a fundamental question here: Should sovereign states, part of whose actual remit it is to correct unwelcome effects of competition, themselves now enter into competition with other countries?

If so, the threat of a race to the bottom in specific sectors cannot be discounted. In extreme cases, this would endanger a country's capacity to act. After all, tax revenue primarily serves to finance the functions of a state. As such, we cannot allow the competition for business to wipe out the basis for fair and growth-oriented policy. Instead, at the very least, a certain amount of cooperation between the states would appear more productive, maybe even beyond the framework of the EU.

The stronger the effects of globalisation on tax policy, the more sensible such an approach would appear to be. We cannot completely and forever restrict the in some parts greatly increased mobility of factors of production and tax bases. But, on the other hand, it is not as if we cannot react at all.

Globalisation

Many people equate globalisation with hope, but for perhaps a greater number of people, the primary sentiment is fear. One thing you notice is that those who are in a position to influence globalisation typically speak of its positive aspects only. For many others, these positive aspects are outweighed by trepidation.

This is also something that can be seen in Germany. On the one hand, globalisation offers Germany tremendous opportunities in the form of worldwide, and particularly economic, integration. This is underlined, for example, by the large number of German companies with a presence abroad, especially in Latin America. Sao Paulo in Brasil is the biggest german industrial location outside of Europe.

On the other hand, globalisation also opens the door to unwelcome possibilities.

Profit shifting

Take companies which are active on a global scale, for example. These can use the possibilities of international integration to make intensive use of tax planning schemes, with a correspondingly negative outcome for national tax revenues.

In Germany, an estimated 100 billion euros worth of corporate profits remain untaxed each year, largely due to the shifting of profits abroad.

This revenue shortfall is not just "annoying", it also means that the quality of state benefits suffers or that a greater burden is put on those factors of production which are less mobile.

Reactions

We have drawn up a combined strategy in Germany to respond to this problem. As part of the 2008 reform of business taxation, we have lowered tax rates for companies while restricting the possibility of profit shifting by introducing instruments such as the interest barrier and the restrictions on the deductibility of capital charges.

I would be interested in hearing whether other countries have similar problems and, if so, how they set about addressing them. Italy is currently discussing the introduction of an interest barrier. What approaches are being undertaken in Latin America?

Beyond this, however, general structural questions must be addressed.
Should, for example, more weight be attached to indirect taxation or even tax elements not dependent on earnings, despite the disadvantages for companies in economic difficulty? Would this mean stepping up the filter function of competition?

Social cohesion

Thankfully, this conference is also going to look at the question of social cohesion. On 14 January 2008, Minister Steinbrück gave a well-received speech whose title translates as "Fairness – a competitive advantage in a globalised economy". The title alone says all you need to know about the content. It would be wrong if globalisation were used as a reason to refrain from having the tax burden shared fairly by all. On the contrary, globalisation positively demands equitable fiscal policies at national level.

The role of the state, in particular its role as protector of the less well-off, is becoming increasingly important under globalisation. After all, we cannot allow the winners of globalisation to use their riches to buy goods for which the state is responsible, such as security or health care, and then demand less state involvement. This would result in a huge loss of acceptance of the state. It would see the end of social cohesion and thus the very basis for attaining prosperity.

Therefore, now more than ever, it is essential that the state invests in education, research and development in order to promote growth and let everybody have a share. As such, no state can afford to go without an efficient and effective tax structure. Ultimately, any potential additional growth from choosing not to exhaust a tax source should always be weighed against the results of less state involvement and social equity aspects in the long-run.

German presidency

The importance placed by Germany on the efficiency and effectiveness of public finances is borne out by the fact that this was one of the priorities of its presidency of the EU last year.

The focus was on a targeted qualitative improvement in the national system of taxes and levies. There was a general consensus that the EU Member States – and ultimately all other countries – should try harder within their own jurisdictions to structure their revenue systems in a fiscally responsible manner conducive to growth.

Moreover, in terms of allocation, a fair and efficient revenue structure which helps prevent distortions and tax planning was seen as important. In addition, revenue structures should promote willingness to take on risk, and thus entrepreneurship, while also providing incentives to work.

There was broad consensus that the EU-wide exchange of information and experience should be enhanced, especially as part of moves to make revenue structures more efficient.

Setting the course for tax policy

Even if we are taking today about a topic which, to a degree, is largely relevant in future terms, in reality it is not unlike climate change: The future has already begun. It would be dangerous to wait any longer.

This means that we must quickly set the course for tax policy if we are to master the challenges of the future, most of which are evident already today. We need to modify our tax structures and, at the very least, to have an international dialogue on the best ways to finance the state.

But given the complexity of the problem, even academic studies can only provide limited assistance in most cases.

Harry Potter may have found the philosopher's stone in the first Potter instalment, but academics and researchers have yet to stumble across it. But maybe we shouldn't put so much hope in Harry Potter – after all the stone was later destroyed in the same book.

It is much more important to search together for viable ways and to learn from each other's experience. With this in mind, I am sure that today's event will prove very useful.

Ultimately, we have to set the course for future tax policy. The outcome of such policy will decide on how much growth our citizens can rely on and how fair they find the state in general, and life in our society in particular. As such, tax policy is a key decider with regard to competitiveness and social cohesion. It is an instrument with which globalisation can be formed, and we should use it well.