The Economist, in an article published over the weekend has realised why we need corporation taxes:
Corporate taxes are a poor way to raise revenue. Since the burden is ultimately borne by people, whether investors, workers or consumers, it would, in theory, be more efficient to tax them directly. But abolishing corporate levies would create its own problems (see article). In poor countries with large informal sectors, big companies are a rare source of reliable tax revenue. In rich countries, wealthy people would doubtless turn themselves into companies to avoid income taxes. For policymakers, therefore, the priority is to make corporate taxes less distorting and less easy to avoid.
The fact is that corporation taxes are like democracy, easily the worst way of taxing the income earned by companies that will at some unpredictable date in the future become the income of others bar all the other ways we have tried, including not doing it at all.
How to make it less easy to avoid? The Economist is unambiguous: the OECD arm's length pricing approach has to go:
Better to think of each firm as a single entity. Then countries could either agree to share the tax on companies' worldwide profits according to a formula that takes account of their sales, employees, assets and so on; or allow the entire worldwide profits to be taxed by the home country, with a tax-credit mechanism for countries where the work actually goes on or revenue is earned–but, crucially, not brass-plate jurisdictions–in order to avoid double taxation. In both cases, the incentives and opportunities to move profits into tax havens would be greatly reduced.
Quite so. But the OECD has just flunked this. So we get the Google deal. And as the Economist concludes:
Tax diplomacy, like politics, is the art of the possible. But failing to push harder for a radical overhaul, at a time when the planets were aligned for change, looks like a costly mistake.
So now we have to start all over again.
And I argue that is possible.
And even essential.
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But you have to first question why the OECD flunked it – and find a way to remove such shadowy obstacles!
Richard, I’d like to get the Labour Party to take a clear position in support of the principles of unitary taxation and country-by-country reporting. I believe Jeremy Corbyn and John McDonnell would be sympathetic but official policy entering the last election was woolly and it’s now time for a more explicit position.
I appreciate you are not a Labour Party member but I would welcome any thoughts you might have on the essentials of such a policy. I and others can then work out how best to pursue a Conference motion or other mechanism. Members of other parties can of course pursue something similar through their own forums.
Labour is doing a tax policy review
I would hope these policies might come out of it
But I do not know
You can write to John McDonnell and ask for your comment to be passed on to that review, I am sure
I have submitted evidence
Thanks. Is that evidence public?
yes
Will be broadcast on the web, at least
That Economist article is groudbreaking in my view. And you are not alone in your views that more fundamental change is needed. Here are some people the same opinion: http://www.icrict.org
I like the ideas of Mariana Mazzucato with regards to the state taking a corporate ownership position in return for state assistance to businesses e.g. in the form of patents, grants, loans, tax allowances, banking licences, drugs licences, etc..
This would help deal with the public risk/private gain dilemma, where it is in the interest of the state to assist domestic business success and growth, but where it currently gets no capital reward from any eventual private capital gain.
This should of course be in addition to a fair level of corporation tax on profits, not instead of it. It would also need the necessary safeguards to avoid the obvious abuse by capitalists trying to force the sale of state shareholding positions before optimum value had been achieved.
This would develop a self perpetuating flow of public sector asset sales for future investment, in return for the public investments made to help these businesses prosper.
Add in more encouragement of cooperative worker/community ownership and this would help the journey to democratise the economy and reduce inequality.
https://www.youtube.com/watch?v=vw5aHJI5XCA#t=16
I agree
And if they could not provide pensions doing the same thing too
I wonder how much EU laws would prevent the sort of state intervention which Mariana proposes. I was at the Labour CND conference on Saturday where the issue of state sponsored diversification away from military was to the fore. I didn’t get a chance to query whether the EU would be a barrier in that case too where we will need to protect nascent new industries.
It is a good question
I doubt it us the answer
Carol – most of this state assistance to business is given away free by the UK state at the moment, so it would be most bizarre if there were EU regulations that prevented the state receiving something in return.
However, knowing the EU there could be such a perverse logic lurking somewhere in their regulations!
But as they are tearing their own regulations up daily and fighting among themselves so much at the moment, I’m not sure this would be top of their agenda for the next few years.
Paul Mason’s article today about the migrant crisis and the EU “possible responses” is truly shocking.
http://www.theguardian.com/commentisfree/2016/feb/01/europes-refugee-story-has-hardly-begun-greece
EU rules on ‘state aid’ can be very broadly interpreted. It is under these that the Competition Commissioner Margrethe Vestager wants to investigate the tax affairs of Google and others.
These rules could certainly become an issue on diversification, as states can claim exceptions for defence that are not available elsewhere, which could make it harder to guarantee alternative employment for those working on Trident replacement. It also makes it difficult to build direct links across sectors, e.g. Port Talbot steelworks is about to lose 750 jobs while there is a proposal to build a lagoon a few miles away to generate green electricity from the tidal energy of the Severn Channel but the rules make it hard to guarantee steel jobs for environmental benefits. If we could, it would be easier to justify the public funding needed for the lagoon.
I am a reluctant supporter of Britain staying in the EU but against a joint campaign with Cameron. The issues we need to get fixed in the EU are quite different to those the government is pursuing. Enabling states to support and benefit from new or green industries is one of those.
Like you I am a reluctant pro staying in the EU person
The EU is horribly flawed
Leaving may be even worse though
Watch this space for democratic EU reform!
http://diem25.org/#
What would be the disadvantage of saxing sales instead of profit?
I wrote extensively on this issue on Saturday
There are too many well funded, articulate and well connected vested interests who benefit from the existence of corporation taxes for the concept to ever disappear.
Accountants and lawyers, HMRC staff, academics and even the tax justice lobby (Tax Research included) earn good money and social prestige from the existence of corporation taxes.
What would they do if there were no corporation taxes, no corporation taxes to avoid, and no tax corporation tax avoidance to condemn?
For that reason alone, it isn’t going to disappear anytime soon.
I would live to address other issues
I assure you, nothing would please me more
It’s at times like this you must be delighted that economics is not a science! But just tries (mostly) to use scientific principles!
What other issues? Give me your top 3, I am genuinely interested.
I bet they are all more important than arguing about these esoteric and largely divisive issues.
This is the thing that bugs me – how tax (and especially corporation tax) absorbs so much of the world’s intellectual talent, which could be used for much better things.
Google is the bad boy at the moment. But as a company started by 2 young lads less than 20 years ago, it is now able to put £130m into the UK coffers – and they aren’t even British. And they provide a terrific free service. Wow, what an achievement.
cT is like MP’s expenses: the tip of an iceberg and as important for what it symbolises as anything else
What else?
1) The Green New Deal
2) poverty
3) the NHS
And I admire no one who sets out to cheat or free ride
Google isn’t free…. You become the product when you click on their little terms & conditions box!
I agree, it is indeed frustrating how much talent, brainpower and ingenuity is absorbed by corporation tax when it could be used for better things. I suspect hwoever, the vast majority of that brainpower is NOT being used to develop better tax systems or to ensure governments have the resources they need to run a civilized society…The diversion of so much potentially productive talent into the cause of tax avoidance (and all the other myriad forms of lucrative financial trickery) is a clear sign of a malfunctioning economy. In my view.
I’ve noticed a few articles now around the topic of how governments are shifting away more from reliance on corpoate taxes as a revenue raising measure.
For example this suggesting more reliance on VAT versus corporate tax:
http://www.vatlive.com/european-news/vat-replacing-corporate-income-tax/?utm_source=VAT+News+December&utm_campaign=117deae274-Jan+2nd+news&utm_medium=email&utm_term=0_fd72a6cb5d-117deae274-133115289
Not sure where this particular data comes from but is certainly consistent with other data I have seen.
Seems Labour is keen to keep this subject in the media for a bit longer…
http://www.theguardian.com/commentisfree/2016/feb/03/george-osborne-google-tax-labour