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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Seems to me that the difficulty in collecting either corporation tax or some other taxes like capital gains and income taxes due to efforts to avoid and ultimately abolish such taxes [at a minimum to abolish corporation tax] is a good argument for their being phased out and replaced by a tax which would be of an order of magnitude harder to avoid. That’s LVT. Not only would this diminish greatly the demand for a massive avoidance industry which contributes little to the wider economy, so enabling business to get on with business, rather than the business of avoidance., it might serve to diminish the vast amount of resources and ingenuity currently directed into property speculation. Another exercise in self enrichment with little benefit for the wider community.
It’s a great idea
I jjust wish I believe it could work
But I don’t, at least not to replace other taxes the way people want to suggest
I raised a question with Dean Baker on the land issue at a conference a couple of years ago. He obviously doesn’t understand that either.
In Australia the local adviser industry blocked the removal of the fringe benefits tax because they made such good profits advising companies how to purchase and dispose of their company vehicles
There is probably a good case for getting rid of Corporation Tax & having a detailed Land Value Tax. As many people have pointed out, CT is almost absurdly easy to escape by the simple answer of putting a brass plaque in a low-tax jurisdiction. Land, by contrast, isn’t going anywhere.
The alternative. Which would be feasible but cause howls of fury, would be to say that the Corporation which is not tax RESIDENT in the USA cannot be quoted on a US stock index & likewise for the UK, Germany, Hong Kong etc.
Frankly I fed up with corporations that have legally manipulated governments and thereby people as taxpayers to a point of a total impasse. Every global move by corporations/banks have been to make everyone else play by all the rules of law but illegally fight not to have them apply in anyway to them.
The biggest mistake in history is how all allowed banks and corporations to continue after the recession as though the biggest fraud heist never happened and responsible corporations finessed their way out of criminal liability by ‘being too big to fail’. Globally corruption is now so infused that citizens feel invaded. Their bank assets are now no longer their own property, but subject to illegal, bailouts and bail-ins. All their paid for public services are now targeted to be sucked of all value by a multiple of trade agreements. Corporation operate with impunity and arrogance everywhere, pollute at will, because again taxpayers/customers can always be forced by their governments to pay. For most, a small step in righting of perverse imbalance to the system would be to end all unjustifiable corporate subsidies and tax cuts/avoidance, period. And an end to all their threats, you want to leave to make another country suffer…..go. The same applies to taxpayer paid for wars for control and theft of other countries resources. They want to fight and invade another country, stop the lies and go ahead but pay the real price. Citizen/taxpayers are tired of the invented lies and the cost of seeing lives sacrificed for corporate profits and benefits for a few. Bottom line, what happens when they have all the money and own all the resources…..what then. They no longer have goals or visions, just greed.