Believing that the self interest of tax professionals will save the US corporation tax is not a basis for hope

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Martin Wolf had this to say in the FT this morning:

Limited-liability, privately owned joint-stock companies are the core institutions of modern capitalism. These entities are largely responsible for organising the production and distribution of goods and services across the globe. Their role is both cause and consequence of the revolution in the scale and diversity of economic activity that has taken place over the past two centuries.

He then went on to discuss corporate governance issues, and that's worth reading, but I picked up the point for another reason, which is that there continue to be arguments in the USA about abolishing corporation taxes.

I have already dealt with this issue before now, most recently here, but it looks like debate on it is persisting in the USA and when people I think to be noted liberals, like Dean Baker, give it favourable house room on his blog I worry, at least a bit.

Why's that (to not repeat the earlier arguments)? Well, in  no small part that is because Dean Baker fails to make any mention in his article of the impact that the abolition of the US corporation tax might have on other states.  I  think that is pretty astonishing when one of the major reasons for this debate happening in the US is that so many major US corporations are stashing their profits outside that country to avoid paying tax in their home jurisdiction.  It's as if people like Dean Baker have not noticed that this is not just a problem for the US: the abuse that Google, Apple, Starbucks, Amazon, Microsoft, and so many others including  Twitter and Facebook are deliberately structured to permit does not just have an impact on the USA, it has massive impact on countries like the UK, and around the world, including a great many developing economies.

There is nothing anyone can do to stop the USA abolishing its corporation tax if it wants to: that is its democratic right, and I am not suggesting otherwise. But, if that is what it does the ramifications for other states will be enormous. The desire of US corporations to avoid tax everywhere else in the world will grow enormously. The pressure on countries like the UK  to abolish corporation tax will be significant. Developing countries rely heavily on corporate taxation revenues and will lose out heavily as a consequence of any such US decision. But  as significantly, and like it or not, the recovery of the resulting tax loss will be very difficult.

Dean Baker assumes, with little justification giving the current weak state of collective bargaining in the USA,  that 20% of the benefit of any cut in corporation tax will be passed on to labour (which is itself ironic: right-wing economists suggested 100% of the burden of the current tax is actually paid by labour, although I do not agree with them). This will yield some modest additional tax.  He then suggests much of the rest that would be lost could be recovered in the USA by reforms to higher rate income tax and capital gains tax, but worldwide he entirely misses the point that very large parts of the private wealth sheltered in the shares issued by major corporations is not directly held in the names of those who actually benefit from it.

Much will be in pension funds, where there is no tax paid, and that will represent a redistribution of wealth to those who happen to benefit from such funds, who are, by definition, already in the wealthier parts of the economy in most cases.

Yet more is hidden in private companies, and most especially in private trusts, and many of these are offshore. Much of this will be difficult, if not impossible, to trace or tax, meaning that any estimate of the tax recovery has to take this fact into account, and this is not being done. The incentive to hide offshore will only increase if corporation tax is abolished which fact does, of course, confirm what I've long argued, which is that corporation tax is, in very large part, all about tax avoidance in the first place.

There is, however, an amusing  response to Dean Baker's comments on the web from one of his close associates and co-authors, Jared Bernstein. He is not persuaded by Dean Baker's arguments. One way he's not convinced is that he's not at all sure  that getting rid of corporate tax would get rid of the corporate tax avoidance industry: as he says, and as I suggest above, that industry will simply move elsewhere.  It's naive to think otherwise.

In fact Baker himself has his doubts: he suggests that in principle the US corporate tax yield should be more than 3% of US GDP and is in fact only about 2%. In that case  he guesses that the difference, of more than 1% of GDP, represents corporate tax avoidance activity. Of that sum he reckons half will go to the corporations and half to their advisers, giving those advisers revenues of tens of billions a year. And his question then becomes a pragmatic one, which is whether or not the advisers will  support abolition of the corporation tax when it's an absolute goldmine in revenue for them at present, at direct  cost of the government (and nothing pleases them more).

I hope he's right,  but cynicism should not be the foundation for arguing for the retention of this tax. If, as Martin Wolf argues,  corporations are the core institutions of modern capitalism than the idea that they should go untaxed is, quite simply, absurd if we are to have a broadly based, equitable and just tax system that ensures the taxes are paid in the right place and at the right time. Our corporation tax systems may not achieve this at the moment, but that's not a reason for abolishing them. That's a reason for amending them. This debate has to focus on what is important, and abolition is not.

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