The battle to tax multinational corporations does, in my opinion, revolve around just four variables. They are the tax base, i.e. what should be taxed. Then there's the tax rate. After that the issue is place; i.e. where should profit be taxed. Finally there's the question of time, which is when profits should be taxed.
Trust me, it's taken years to summarise all I've written about on this issue to just these four words:
- Base
- Rate
- Place
- Time
It's taken longer still to realise why we have so many problems isn making a tax charge on a multinational corporation stick. Fundamentally that problem is that any state can at best, if it is in open competition with other states, have effective control of only two of these variables at any time.
So, a tax haven can fix its base (nothing) in its place (at least as far as the recording process goes) by abandoning rate and time.
The US can argue for rate (high) and place (US) only by abandoning base (to loopholes) and time (to offshore deferral).
The UK tried to do base (worldwide) and rate (28% to 2010) but lost place (when the controlled foreign company rules failed) and time (by effective deferral that those rules allowed).
You may begin to get my drift, but there is a key assumption in here and that is that states compete. What if they didn't? What if they said that if a tax burden is to be imposed on capital - as has to be the case in the pursuit of equity and balanced budgets then they should stop pretending that they should comply with the micro economic theory of the firm and should instead behave as what they are: governments who have a duty not to fail and an obligation to their own taxpayers and a resulting commitment to each other government to ensure that tax is paid wherever it is due.
Then the story changes. Now we still have four variables but we have to decide which are to be controlled cooperatively and on which variance may be allowed.
We can't solve four variable equations. It is not possible. But we can solve two variable ones. So suppose cooperation controls two variables only leaving the others open to local control. Doesn't that make sense?
If so then what variables do we need to control mutually? To me there seem to be two obvious ones: they are place and time.
Let me deal with the last first: deferral makes no tax sense to any state. It never has and never will. Profits earned now need to be taxed now. Current taxation has to be the norm. In that case the deferral of tax that comes from relocation has to be eliminated. This means that place has to be the connected, but different, variable that has also to be controlled internationally to ensure states can have sovereignty over base and rate.
This means firstly that the allocation of profit to a place has to be reasonable. Unitary taxation provides a mechanism for doing that. This deals with the problem of place. Secondly it has to be complete: country-by-country reporting deals with that by ensuring all profit is captured with the potential for re-allocation wherever it has been attributed to by a multinational corporation. This by default deals with timing: all current profit is apportioned to the place where it is really most likely to have been earned.
But this does not undermine sovereignty. Tax rate still very clearly then remains a variable under local control. And, in arguments I will be making over time, I think this is not the end of the story on base either. It is profit that is allocated. Whether to tax all, part of none of it should then be a decision for the state to make.
There is not time to expound on this last idea this morning: I am at a seminar today and this blog is a mere rehearsal for what I might (I stress, might) be saying. That issue on base is unlikely to come up in detail. It is still a research work in progress.
But if we remember there are four variables in tax and we can only control two individually we have a basis for international cooperation that is more realistic than demanding control of all four, or different ones on different occasions.
We have a long way to go in beating international companies on tax. Getting the intellectual framework right would be a useful start though.
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Understanding the technicalities of tax controls gives me sub-lumbar discomfort, although I am grateful for your explanations Richard.
I have wondered if there are a few things on the margins that could be done to help. For instance when our government exercises largesse on the taxpayers behalf and provides subsidy (investment?) to a (nominally) British company why can it not carry an embargo in the terms and conditions on the funds being moved beyond our borders? In other words subsidy from the UK government is made to a UK company, not its foreign based subsidiary/parent in Luxembourg, BVI, et al. It cannot be diverted into bond issues or onto the balance sheet of a foreign subsidiary to be returned to the UK company as a loan at extortionate rates to synthesise a tax loss. If the UK company doesn’t want to sign up to this, fine, let them go elsewhere for funds.
With apologies for what I suspect must be a dumb question.
You would think your logic obvious
It is
But it is not reflected in the current system – especially on the costs of funding
It is an issue that has to be addressed
Richard, I have been trying to point out to you two very important things over the years. They are not neoliberal points, they are not even neoclassical points. They are simple truths about our reality.
The first is this:
“What if they said that if a tax burden is to be imposed on capital — as has to be the case in the pursuit of equity and balanced budgets”
“We have a long way to go in beating international companies on tax. ”
Taxing companies (whether international or domestic) and taxing capital are not the same thing. Because of tax incidence. You get this well enough on employers’ NI. It would help if you would get it on corporate taxation as well.
The second is that as I have also been trying to tell you for years the only way to make corporate taxation actually the same thing as capital taxation you must have just the one international system for the taxing of corporate returns. Including, crucially, the same rate and base everywhere. For exactly the same reason: tax incidence. The point is explicitly made in any discussion of the incidence of corporate taxation.
Any intermediate system simply will leave you with this problem that taxing corporates is not the same as taxing capital. There will always be, in any variable system, leakage to the burden falling, in some part, upon the workers in the form of lower wages in the taxing jurisdiction.
The only two possible systems that will deliver what you are saying you want, the taxation of returns to capital (without that leakage to wages) are:
1) Abolition of corporate taxation and simple taxation of the returns on capital as normal income.
2) One single global corporate taxation system with one base, one rate.
Any and every intermediate system will have that leakage to wages.
And as I have told you for years:
1) Without CT taxes on capital become wholly voluntary, and that is unacceptable
2) We have no idea who owns corporations so that to tax those unknown people we must tax the company as their agents
3) Your theory that the company is merely a collection of contracts between the individuals who own it is wrong – it clearly delivers synergies over, above and beyond that: your ideological claim is wrong. That surplus can be and must be taxed in the entity
4) In practice the world rejects your view: the International Accounting Standards Board considers the corporation an entity separate from its members, for example
5) In the short term it’s clear tax on profits does fall on capital and it’s not clear we have ever reached the long term, or whether we live in a continual round of short term change
And yes, maybe you’re right – a single base and rate is ideal. That’s on the agenda of the seminar I am at this morning
In the real world that is more likely than you would like to think now
“1) Without CT taxes on capital become wholly voluntary, and that is unacceptable”
?? The returns to capital are as visible as income is visible to the taxing jurisdiction. If you mean people will lie about it, then yes, they will, as they lie about income from labour or lie about VAT etc.
“2) We have no idea who owns corporations so that to tax those unknown people we must tax the company as their agents ”
But as I keep pointing out, by taxing the company we are also taxing labour in that jurisdiction.
“3) Your theory that the company is merely a collection of contracts between the individuals who own it is wrong — it clearly delivers synergies over, above and beyond that: your ideological claim is wrong. That surplus can be and must be taxed in the entity ”
I do not believe that firms are simply a collection of contracts. For I have read Ronald Coase on the Theory of the Firm. The very existence of a firm is proof perfect that there is some of that synergy that you talk of. And I’m the guy who has been telling you for years that this is why country by country reporting does not work. Precisely and exactly because the form, firm or not firm, creates extra profit over and above the basic economic activity that is taking place in each jurisdiction. There is therefore profit that is not attributable to one or other jurisdiction, that is created purely by the form of organisation.
Using your own argument it is just and righteous that a tax jurisdiction get a slice of the surplus created within that jurisdiction. But if the surplus is created by the form of organisation, the multinational, then why does any specific jurisdiction have a right to a slice of the surplus created, clearly and obviously, not in that jurisdiction?
“4) In practice the world rejects your view: the International Accounting Standards Board considers the corporation an entity separate from its members, for example ”
Of course, it’s a legal person. We have the form of the corporation exactly in order to create an entity that is separate from its members. To allow people to sue it for example. But legal form and economics are not the same thing. If they were then employers’ NI would be paid by the corporation, not the workers.
“5) In the short term it’s clear tax on profits does fall on capital and it’s not clear we have ever reached the long term, or whether we live in a continual round of short term change”
Nice try but we’ve had corporation tax for a lifetime now. Yes, that is the long term. Which is why any and every paper looking at the incidence of corporation tax (yes, even ones you have quoted yourself) argues about what the split is between labour and capital, not whether there is one or not.
And every such paper also agrees on what is the determinant of the split. The size of the taxing jurisdiction relative to the global economy plus the mobility or not of capital. How much is argued about but not whether.
Which is one of the reasons I find your insistence that multinationals must pay more corporation tax in developing countries so odd. Because as small economies relative to the global one, and given that we’re talking about foreign capital which is obviously perfectly mobile (it can decide not to arrive for example) we know that the burden will weigh more heavily on local wages than it would in a larger economy like the UK or US.
Tax resource extraction, Ricardian Rents, to the hilt, yes of course. But small economies looking for foreign investment are exactly where corporation tax is contra-indicated precisely because most to all of the burden will be upon local labour.
Oh, and the local taxation encourages democratic participation argument often used. Given that corporates don’t have the vote that means that it would be better to explicitly tax the workers the burden of that corporate tax, not the non-voting corporation.
So, so wrong on so many counts Tim
But I’ve said it all before so many times I can’t be bothered to repeat it bar the one new point yoy raise on country-by-country reporting where the answer is obvious: of course it may be hard to allocate profit to place but as a matter of fact companies do and the result is taxed. What we want to know is how and why they reach those decisions and what the consequences are so of course we need country-by-country reporting as we do not know that now.
You would, I guess, rather that was not known so that the return to profit was not taxed
I do want that return taxed
And despite all you say the overwhelming evidence from the real world is that corporation tax does really tax capital – or business would really not seek to avoid it with such vigour
You’re just wrong and you know it, but you’ll deny it forever. And we all know why
It would be quite interesting to use the ConDem govt’s reduction from 28% to 20% in the main UK corporation tax rate as a test case to measure how much of the reduction in the corporate tax burden gets transmitted through to workers in the form of higher wages. Given that wages have been declining in real terms throughout the 2010 to 2015 parliament my guess is – not much; it looks more likely to me that the impact of reducing corporation tax was to increase (after-tax) profits – which is as Richard suggests. Having said that, one would have to do some econometrics to see the exact impact. A useful project for 2014.
Surely if the relationship Tim Worstall claims is true wages should have risen in real terms in the UK?
They haven’t – as we know
The reality is that the supposed economic support for the claim that tax charges fell on labour is based on research that very oddly only tested corporation tax increases – not falls – which is lousy economic research
It also ignored the fact that the tax increases may have been necessitated by financial stress that also resulted in wage decreases
Causality is not proved by a correlation – especially a highly selective one
The fact the IASB recognises companies as separate entities — so what? A company is a separate legal entity – we all know that. But it is an entirely abstract creation by law. It doesn’t actually exist in a tangible way.
Please produce on your blog a photograph of a company to prove otherwise.
When you say the world rejects Mr Worstall’s view — you’re right. There are too many vested interests with a stake in keeping the taxing of companies going (and keeping it complicated)!
Lawyers, accountants, tax officials, and yes, the tax avoidance lobby such as Tax Research. You all derive a comfortable living and prestige from the taxing of companies whilst producing nothing useful.
None of you will ever vote against it.
The point about the IASB is they have rejected the idea that the corporation is a mere agent for its members
As for the rest, I am amused you lump me in with the majority – it says a great deal about where you are
Sorry to labour the point, but if there is no corporation tax, there is no corporate tax avoidance.
What happens to Tax Research then? The campaign against a problem that no longer exists would evaporate. (Great! Problem solved!) But so do the BBC interviews, the invitations to speak at conferences, influence with MPs. You’d need to find something else to do (presumably your work on accounting issues and other taxes would still have a place).
And on the IASB point that it is not a mere agent for its owners (and I assume you are not using the word ‘agent’ technically to describe X who can create legal obligations for Y), what is it then? Can the IASB produce a photo of a company?
I like your approach to problem solving
Let’s presume we don’t tax corporations and that will solve the problem of corporation tax
I bit like saying let’s ban the legal sale of alcohol was a great success once upon a time
And just like saying problems in health care are solved via a market that denies some access
Note the similarities: pretending a problem does not exist any more is not a solution, it just usually Meeks it’s worst aspects that much more obvious
Your analogy with alcohol prohibition is apt, but I think you have it the wrong way around.
The ban had too many loopholes, made criminals out of ordinary people faced with incentives to cheat. Created opportunities for organised crime and corruption.
Ending the ban was the right thing to do.
The ban itself was supported by an unlikely alliance of ‘Baptists and bootleggers’. Those wanting the ban as a moral issue, and those who exploited the ban commercially.
Very similar analogy to corporation tax.
Plenty of loopholes. Plenty of incentives for otherwise decent people to use those loopholes. The issue of whether they are under a legal duty to exploit those loopholes is a red herring — the point is, there are incentives to do so. Add to this, plenty of political clout to ensure those loopholes aren’t properly closed.
And the system has its own Baptists and bootleggers in the form of accountants, lawyers, tax officials etc. And given organisations such as Tax Research derive income and publicity from the ongoing problem, they do at least create the appearance of falling into the ‘bootlegger’ camp, at least in part. (They may also straddle the ‘Baptist’ camp, I don’t question that).
Isn’t it time we at least contemplated the possibility of abandoning this dysfunctional tax base, and chose another tax base which is less open to abuse?
Unitary corporation tax solves that problem
Next?
“The US can argue for rate (high) and place (US) only by abandoning base (to loopholes) and time (to offshore deferral).”
The US taxes domestic companies at Federal and local level on a world-wide basis, not US only.
I find your comment that the US has abandoned base ‘to loopholes’ bizarre. Loopholes are unintended and unwanted workings of tax law. The US works to close loopholes all the time. True there are media stories in the US and here that describe the intended working of the tax laws as a ‘loophole’ but that is simply because the media does not understand tax law.
Having made two statements about the working of US tax law that are just plain wrong, I can only surmise that you are not really that familiar with how US tax law operates.
And, of course, it is simplistic to look only at the ‘headline’ rate of corporate tax. The US has a high headline rate but a multiple of intended deductions and reliefs, at least partially to encourage certain behaviours. Other countries may have a low headline rate but far fewer reliefs. If companies in the US and elsewhere have similar effective rates despite differing headline rates this is not proof of scheming tax avoidance but that the tax regimes are working as the respective legislators intended.
Your comment is so obviously self contradictory that it is really not worth saying any more about it