It has genuinely been fascinating to spend the last two days discussing international tax and it's relationship to the funding of developing countries over the last two days at a workshop at the Institute of Development Studies at the University of Sussex.
There is one assumption that we all seem to share is that corporation tax is an essential part of the tax system and as far as I can tell that is because the belief is widespread that this tax is paid by the companies themselves and the incidence of the tax falls on capital.
We need to say this, often. In the last week there has been an OpEd in the New York Times calling for the abolition of corporation tax. Oxford University has a centre for business taxation which seems to be largely dedicated to this argument. These arguments are based on a myth that has been created, deliberately and purposively I am sure, that corporation tax is not paid by the companies themselves but do instead, and without any reasonable economic support, say that the tax is actually really a burden on company employees. The aim is obvious: those who own shares in large companies (in particular) are subtly but very deliberately campaigning to have the tax they pay at source on their income earned as a result of that ownership scrapped which would then give them an enormous opportunity to defer tax on that income almost indefinitely.
What those who promote such arguments appear to ignore is the consequence of their actions. Arguing that there should be no corporation tax undermines the credibility of our income tax which could then be readily and easily avoided.
Worse, those developing countries that are much more heavily dependent upon corporation tax as an income source than developing countries (and that is most of them) will have that opportunity undermined because, as is still all too obviously the case, shifting profits to low and no tax states is all too easy.
In both cases the outcome of an abolition of corporation tax would be a shift of the tax burden onto those less able to pay, or the denial of services to those who really need them, and for whom they are absolutely essential.
Again, that is not chance; that is deliberate. The argument about abolishing corporation tax is not about economics and nor is it about economy recovery, job creation or anything else (major corporations already having hundreds of billions of spare cash available for this purpose). It is actually about ideology and the real desire of a few to redistribute wealth upwards. That is all this debate is about. And we should name it for that.
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More attempts to head down the American route -40 million in poverty, great achievement!
Underpinning all of this is ethics, or rather a lack of them. The ciphers of the elite, whether they are the companies that they own or the bought and paid for politicians, “academic” institutions or NGOs portray the mindset of the elite.
This is the true entitlement culture.
The elite wish to eliminate all obligations, whether this is to society or the environment. It is not difficult to find examples of this behaviour throughout the Big Business sector.
If Adam Smith were alive today, He would be appalled
Is this really about the major companies of the west. I would have thought this was about the small companies who don’t have the expertise or financial ability to set up interesting corporate structures. If they didn’t have to pay corporate tax, then they don’t need to file them for starters making more time for normal business. Although this would reduce the amount they pay on accountants.
First this is about big business
Second, I find your logic bizarre
But big business moves money into tax havens. Smaller companies cant afford to pay people to move things around. If there was no corporate tax rate, this wouldn’t affect companies like Amazon. It wont because they don’t pay anything in the first place. Please tell us how much Starbucks pays in corporate tax.
It has to be about big businesses because governments wouldn’t allow small businesses to escape paying tax.
Have there been any suggestions as to how the concept of no corporation tax will apply to small businesses?
I think you would pretty rapidly see the return of the close company rules
You will remember them. Only those of our age will
Close company apportionment seems to be the only logical conclusion of the draft rules on mixed partnerships.
I can’t see a way to logically sustain the difference in treatment the draft legislation requires, where a company with a two 50% shareholders is subject to corporation tax but a partnership with two corporate partners, each owned 100% by an individual, is subject to income tax.
In each case a business is owned and run by two individuals whose liability is limited by shares, an almost identical commercial position – but the tax position is fundamentally different.
You are right – that makes no sense
“Please tell us how much Starbucks pays in corporate tax.”
The only reason they do not pay it is because they CAN. If the government is going to let companies away with abuses, then many of them are simply going to take advantage of that lax attitude, aren’t they?
They are sticking to the letter of the law? well – laws can be tightened and toughened to deter obvious rampant abuse, can’t they?
There are a lot of arguments in favour of 0 corporate tax, as indeed it would put small companies on a level footing with the larger ones!
Drop corporate tax and introduce zero tolerance on borderline expenses. Having been myself in the fortunate position of having an unmeltable credit card, you cannot not be tempted by the arbitrage. Take the ability to arbitrage away and every company in the UK, MyCoffeeShopAroundTheCorner and Starbucks are on an equal footing.
Where Richard is right, is the issue of some practices in developing countries, but royalties can cover this to a large extend.
All utter nonsense
Because then you create a situation where there is no tax on self employment
Please offer mature comment or do not bother
When you say “that corporation tax is not paid by the companies themselves but do instead, and without any reasonable economic support, say that the tax is actually really a burden on company employees” I think that is incorrect.
There is plenty of evidence:Bill Gentry [US Dept of Treasury] concludes from a literature survey that “labor bears a substantial burden from the corporate income tax.”
A study co authored by Economist, Alison Felix at the Federal Reserve Bank of Kansas City titled ‘Corporate taxes and union wages’ finds that “Labor bears a substantial weight of the corporate tax. While this burden has fluctuated over time, the relationship between corporate taxes and wages has been consistently negative.”
Then this paper from last year titled ‘Do Higher Corporate Taxes Reduce Wages?
Micro Evidence from Germany: “A 1 euro increase in [corporate] tax liabilities yields a 77 cent decrease in the wage bill”
Those studies are all rejected comprehensively in the link I provide
To put it another way, they are a collection of poor economics in pursuit of wishful thinking
Only the 2nd of the three authors works I cited is discussed in the link you provided.
I think you will find the other papers are derivative
Read the link I provide
Prof Kim Clausing comprehensively dismisses these arguments
My reading of the 2007 and 2009 papers is they simply acknowledge that labour bears some of the burden of the corporate tax burden. The 2007 paper concludes that whilst there is some merit to the suggestion labour bears the burden, it is based on assumptions that may not be wholly relied on and requires further research. The 2009 paper merely says “Efforts to tax firms more heavily create burdens that will be distributed among stakeholders, possibly including many groups [sic i.e. including labour] that governments otherwise attempt to help.”
Hardly compelling.
And the 2013 German micro evidence paper is as it states a micro analysis and admits more work would need to be done to expand to a national or international model.
All I can see from these papers is that there is an acceptance that corporate tax rates affect labour, capital and prices. But it seems to me that it is far from unclear actually how the burden affects each of three, not least because there are so many other variables that affect labour costs, prices and behaviour of investors that it is not possible to generalise.
Back to the main point of the blog, it seems to me that if corporation atx were abolished, then many (especially those with capital — i.e. wealth) would invest via corporate tax structures and inevitably this would lead to lower tax revenues for government. That was why corporate tax was created in the first place!
We agree on the last point
You also miss the fact that despite the tenuous conclusions you note they are trumpeted as fact
There is no factual evidence of any significant incidence of a corporation tax on labour (bar, maybe, in high rent companies where profit has anyway been captured by employees)
This should be v easy to prove since, thanks to PAC, we know the identities of companies that pay not a p in Corporation Tax. We can compare them to equivalent undertakings in the UK that DO pay CT. If the theory were true then Starbucks, Google, etc would pay higher wage rates AT EVERY LEVEL (not just at Director-level) than their counterparts in the UK that pay CT.
If they don’t then this counter-intuitive theory can finally be condemned to the WPB it should never have been pulled from.
I have pressed the hidden ‘like’ button.
The Clausing paper argues that one good reason why the incidence is not upon labour is because corporates have become very good at shifting tax liabilities around through debt financing, cross border sales and so on.
In fact, all of the things that you campaign against. It does become pretty difficult at that point. Corporate taxation does not fall on the workers because companies dodge it: therefore we must stop corporate tax dodging so that the incidence will fall on the workers?
I suspect Kim Clausing would laugh herself silly that someone could read such an absurd argument into her paper
In that context it’s only fair to say I last saw her at lunchtime
Excellent: so you might be able to ask her about that interpretation of the paper then?
I know what she’d think of it
It’s very clear she thinks there is no empirical evidence on any basis of a link between corporate tax and labour rates
As her paper very clearly and robustly shows
“In this context,
it is important to note that the reporting of profit in particular tax
jurisdictions is becoming increasingly discretionary. Truly global multinational
firms are adept at using complex chains of ownership together
with tax-motivated decisions regarding the holding of
intangible property, the structure of finance, and the transfer pricing
of intermediate goods, in order to report income where it is most
lightly taxed. If global firms separate the location of their profits from
the location of their investments and employment, then workers need
not bear the burden of the corporate tax. The firms that are adept at
shifting income face a lighter tax burden, which need not adversely
affect their workers. Whereas immobile firms behave like closedeconomy
actors, and thus they are unlikely to generate the open-economy
incidence result.”
That is part of the conclusion of the paper.
Indeed
What she is saying that to even attempt to link tax rates and investment and wage rates is in this case absurd
There is clearly no link to be made
And it’s even bad theory to think it exists
Can one of you perhaps contact Professor Clausing to resolve this?
I am fairly certain she will agree with Richard on this, but why not find out from the source directly?
A look at the wages of the massed workforces of tax avoiding companies is all that’s needed to demolish the argument that it’s the paying of corporation tax that is a burden on their workforce.
So I sent an email to Professor Clausing.
“I read that as stating that precisely because many multinational firms
are “tax dodging” therefore the incidence of the corporate income tax
is not upon the workers in the form of lower wages.
I can see the logic here. If Google sells all its EU advertising from
Ireland, as it does, then the corporate income tax rates across Europe
will not affect its decisions to invest in Europe. For however many it
hires or employs, it knows that it will be paying tax in Ireland on
the revenues and or profits of such hires.
The same would be true of the various arrangements of Microsoft,
Facebook, Amazon, Apple and so on.
In wider terms, it is precisely the jurisdiction shopping that such
companies undertake that explains the lack of evidence of an impact
upon labour of the corporate income tax.
I just wanted to check that that is the implication that you are
making in this part of your conclusion?”
Her response?
“Thank you for your email. Yes, that is the implication.”
She goes on:
“It does not necessarily imply that if the dodging went away, that labor would bear the tax. (That remains an empirical question, and there is not much evidence (as I note) that K/L ratios are sensitive to taxation, which is what you would need for a large effect on labor.)”
Note the necessarily there. It might, it might not, it remains an empirical, not a theoretical, point to be proven one way or the other.
But you claim persistently that there is clear and unambiguous evidence that the cost of corporation tax is born by labour
Do you know agree that there is no evidence to support that claim, which you now appear to have conceded?
In other words, do you admit all those making this point are simply wrong?
Whilst I appreciate the undoubted brilliance of Prof Clausing, I do think this is all getting silly.
Tim should know the ‘market’ argument here. If Co A pays CT & Co B (famed for its boogie-woogie bugle boy) doesn’t.
Co A, supposedly, has less funds, so can pay lower wages to its employees, so gets a lower performance than the boogie-woogie bugle boy Co B.
The problem with this this is that it is diametrically opposed to the sort of Classical economics Tim claims to believe.
Co A & Co B will charge the same prices, because this is set by the market
Co A & Co B will pay the same wages, because this is set by the market
Co A & Co B will pay the same utility costs, because this is set by the market
Co A will recognise a lower profit for shareholders than Co B.
You are describing a closed economy where capital and labour cannot leave – capital especially
Economists assume an open economy where capital especially can leave
Then, they say, capital moves to lower taxed states or accumulates faster there and so labour is more productive and so, they day, us paid more
But as Clausing has pointed out, capital need not move to achieve this – where profit is recorded does
And this also ignores portfolio investment
And residence based taxation
And tax subsidies for debt
Plus the fact that capital is not mobile and people less so
And there are social constraints
And that corporate tax behaviour between states has been remarkable consistent e.g. With falling rates meaning in practice the whole worl approximates to knew vlosed economy
Which is why she says you may well be right after all!
An interesting argument (William1@1.23z).
Company 1, a large online retailer, pays little corporation tax.
And low wages.
And most of its ´employees´ are not employed by it, they are employed by agencies at minimum wage + little.
Effectively, the employees are paid by productivity.
Very few disabled, even fewer aged, and a lot of imported labour goes through the doors.
Then there is company 2, a store-based-and-online retailer, who does pay CT, and makes a profit, and pays its staff a low[ish] rate (and employs agency staff as well, but demand based).
It also employs a wide variety of staff.
The common theme would seem to be more about low wages. And low tax.
Richard
thank you. You & your colleagues have plainly put a lot of thought into this & I’m sorry that my comment was rather simplistic.
No need to apologise
You triggered a useful chain of thought
The argument for taxing capital is much broader than just incidence. Economist Thomas Piketty has done some highly influential work on inequality. His most recent book looks at three centuries of data on capital and argues that the trend towards widening income equality can “be checked only by worldwide taxation of capital.”
The quote is from a review by Branko Milanovic of the World Bank. The review also calls Piketty’s framework “new and extraordinarily rich” and his book “one of the watershed books in economic thinking”.
Link to review and summary below:
http://mpra.ub.uni-muenchen.de/52384/
“Thomas Piketty’s “Capital in the 21st century” may be one of the most important recent economics books. It jointly treats theory of growth, functional distribution of income, and interpersonal income inequality. It envisages a future of relatively slow growth with the rising share of capital incomes, and widening income inequality. This tendency could be checked only by worldwide taxation of capital.”
I have a lot of respect for Piketty
I am struggling to see how cutting or eliminating corporate tax will generate jobs or generally benefit labour, because the tax falls on labour????
The rich and powerful interests and their ciphers would have us believe that there is strong causal link between corporation tax and “labour”. A fiscal see saw if you like. As the rate of corporation tax goes up, the burden on labour increases and when the tax comes down this burden decreases. The causal link being as sttrong as the steel bar of the see saw.
However, the relationship is far more complex. For a start employee costs, I believe, are almost universally accepted as a deduction for corporation tax as opposed to dividends which are not. It is true that interest is accepted also a corporation tax deduction, but this introduces another twist that again benefits capital – think of the common trick of Venture Capitalists to load a company up with debt.
I think we should be careful to identify that this is is aimed at “Big Business”, because not only would it save them tax, but also the costs of setting up and maintaining complex structures to facilitate the offshoring of profits.
The first step in this direction was taken with the Patent Box rules.
Next, we should identify the “Labour” affected by a possible reduction in corporation tax rates. I would suggest it is that of the most senior employees, those who have captured a significant share of capital’s profits as remuneration and not those of the ordinary workers. They at best receive a tiny share of capital’s profits.
Business views both “labour” and corporation tax as costs, which are to be minimised to the maximum possible extent, hence the offshoring of jobs and profits.
These costs reduce the return on capital.
In my mind corporation tax falls squarely on capital and for reasons of “moral hazard” should not be abolished. In this respect I have set out my views above.
Any causal link between labour (of the ordinaty workers) and coporation tax has all the substance of a strand of cooked spaghetti.
What we are being sold by the “snake oil salesmen” acting for the oligarchy and corporate power is “corporation tax fudge” or the latest version of trickle down economics!!
I promise, this is an issue I will be returning to
Corporation tax is not the largest area of taxation revenue in the UK. It is also quite expensive to collect. It has already been degraded in the UK over the years by lack of enforcement.
I think the thinking goes that if one can tax a company’s outputs through VAT, employees through PAYE, and shareholders with witholding taxes, then only retained profits are not taxed, and over time when these are paid out as either dividends or wages they will be taxed. So Corporation tax is really “only” a cash flow tax.
I am not saying this is fair, with its emphasis on indirect taxation, but it is the way many countries have gone, because a tax on profits is always difficult due to problems of its definition and location and with large admin costs to collect.
Companies have not gone that way
It is true no company taxes profit
At least 149 have a corporation tax