Defending the World Bank

To be blunt, I don’t think the World Bank should exist. We don’t need an international bureaucracy to promote economic development in poor nations. Particularly since the policies that we know will work – free markets and small government – oftentimes are hindered by intervention from multilateral institutions such as the World Bank.

For example, I’ve spent the past few days in Vanuatu, where I’ve been fighting against the adoption of an income tax, and I’ve been repeatedly told that the World Bank is one of the groups (along with the Australian Tax Office) urging the adoption of this anti-growth levy. It is both depressing and upsetting that outsiders are seeking to hinder growth in this poor nation, but what really galls me is that World Bank bureaucrats (like their colleagues at other international bureaucracies) are exempt from paying any income tax.

All this being said, my general philosophical hostility (and, in Vanuatu, targeted genuine anger) toward the World Bank doesn’t preclude me from admitting when the bureaucracy does good work. It has played a positive role in helping some nations set up private retirement systems, and it has produced research warning about the link between corruption and complicated tax systems.

Perhaps most laudable, the World Bank every year publishes Doing Business, an index that dispassionately measures the degree to which government policy imposes costs on those who create and operate companies. Indeed, it was just two months ago that I wrote about the most recent issue (mostly to grouse that America is falling in the rankings, so thanks Obama).

All of which puts me in a strange position, because although I have written that the World Bank is my “least despised international bureaucracy,” I never thought I would dedicate an entire column to defending its work.

But a friend formerly known as the Princess of the Levant sent me an article by José Antonio Ocampo and Edmund Fitzgerald, which attacks Doing Business for…gasp…encouraging tax competition.

Since I’m a knee-jerk defender of tax competition (and bearing in mind that the enemy of your enemy is sometimes your friend), I feel obliged to jump into the debate and defend the World Bank’s report.

Here’s the basic argument of Ocampo and Fitzgerald.

…there is a serious flaw in the report’s formula: the way it treats corporate taxation. …The problem is that “regulatory burden,” according to Doing Business, includes…promoting budget-straining tax competition among countries… This may sound like an argument for overhauling Doing Business’ “paying taxes” indicator. But what is really needed is for Doing Business to drop that indicator altogether…when it comes to the paying taxes indicator, the report has things all wrong. Indeed, it runs counter to the global consensus on the need for effective international cooperation to ensure equitable collection of tax revenues, including measures to limit tax avoidance by multinationals and other private firms. A race to the bottom in corporate taxation will only hurt poor people and poor countries. If Doing Business is to live up to its own slogan, “equal opportunity for all,” it should abandon the tax indicator altogether.

Wow. I find it remarkable that leftists openly argue in favor of suppressing information on tax policy because of their ideological hostility to tax competition.

For all intents and purposes, they’re admitting that taxes do matter.

The article also makes some other assertions that deserve a bit of attention. Most notably, the authors repeat the silly claim by some leftists that the way to get more growth is with a bigger government financed by higher taxes.

…taxes that are necessary to fund public infrastructure and basic social services – both of which are critical to enhance growth and employment. Even the report recognizes that, for most economies, taxes are the main source of the government revenues needed to fund “projects related to health care, education, public transport, and unemployment benefits, among others.”

Yet if it’s true that big government stimulates growth, why did the world’s richest nations become rich when government was very small and taxes were largely nonexistent?

Ocampo and Fitzgerald somehow want people to believe that if a little bit of government spending is associated with good economic results, then this somehow means a lot of government must be associated with better economic results.

Maybe somebody should introduce them to the concepts of diminishing returns and negative returns. And once they master those concepts, they’ll be ready to learn about the Rahn Curve. Heck, there’s even a World Bank study I can recommend for them.

Though the authors do raise one semi-decent point. Some of the taxes paid by companies actually are borne by workers. Ocampo and Fitzgerald don’t seem to understand how this works since they jumble together some taxes that are borne by labor with other that are borne by capital, but there is a kernel of truth in their argument.

Doing Business exaggerates the tax burden on companies. For one thing, it considers all the kinds of taxes firms might pay – not just corporate income tax. Specifically, the report’s estimates for “total tax rate as a proportion of profits” include taxes for employees’ health insurance and pensions; property and property transfers; dividends, capital gains, and financial transactions; and public services like waste collection and infrastructure. Those are taxes that should be categorized as social contributions or service charges.

Having bent over backwards to say something nice about their article, let’s now close by highlighting the most preposterous assertion in their piece.

They basically reject the entire field of microeconomics and the underlying principles of price theory – not to mention reams of academic evidence – by denying that tax rates have any impact on behavior.

…the assumption underpinning it – that low corporate taxation promotes growth – does not withstand scrutiny. Research conducted by the International Monetary Fund and others indicates that tax competition does not promote productive investment worldwide.

Remarkable. They even think citing the IMF somehow strengthens their case, when that’s actually more akin to citing Dr. Kevorkian.

P.S. Just in case anyone is worried that this pro-Doing Business column means I’m getting soft on the World Bank, rest assured that I will never be a fan of a bureaucracy that equates higher taxes with a good report card. But I’ll always be the first to admit when an international bureaucracy does good work.