I (with others) have a letter in the FT this morning:
Reform would be little more than additional VAT
From Professor Richard Murphy and others
Martin Wolf is right that the world's corporation tax systems need major reform (“The world needs to change the way it taxes companies”, Opinion, March 7). He is entirely incorrect about the required solution.
Corporation tax has three purposes. One is to protect the income tax base from attack. The second is to tax capital, which by and large it does, making it a rare tax as a result. And third, it is a tax that should be used to apportion taxable benefits to those locations where value is added in the global supply chains that benefit us all.
Mr Wolf misses all these points and proposes a destination-based cash flow tax. This, in effect, is nothing more than an additional VAT in those places with the biggest consumer markets in the world. The consequence is that it will be regressive within a state as the incidence will be highest on those with lowest income, since the tax will be easy to pass on to consumers. It will reapportion taxable income from the world's poorer regions and states to the richest ones of all. It will, as a result, increase global inequality when the precise opposite is needed.
There is a basis available for global international tax reform. It is to apportion the global profits of companies to states on the basis of where their sales, employment and assets are located. This would deliver global tax justice and coincidentally achieve the other objectives of an effective corporation tax. This is the required direction in which reform must take place.
Professor Richard Murphy
City, University of London
Professor Leonard Seabrooke
Copenhagen Business School
John Christensen
Chair, Tax Justice Network
Professor Prem Sikka
Professor Emeritus, University of Essex
Professor Sol Picciotto
Professor Emeritus, Lancaster University
Professor Andrew Baker
Sheffield University
Paul Monaghan
Director, The Fair Tax Mark
Dr Duncan Wigan
Copenhagen Business School
Nicholas Shaxson
Author, “Treasure Islands”
Robert Palmer
Director, Tax Justice UK
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[…] favour of reforms that are decidedly unhelpful. That suggested by Martin Wolf in the FT last week, about which I have a letter in the FT this morning, is one such decidedly unhelpful reform that moves in the exact opposite direction from that which […]
Much depends on how such a system of DBCFT was implemented, but I do think it has at least some interesting features for debate. Not least being destination based stops companies from profit shifting, and basing it on cash sales ( instead of profit ) makes it much harder for companies to manipulate their tax liability (eg through transfer pricing distortions). And of course the biggest advantage is that it would work as a unilateral reform to tax Amazon and others, in the absence of any real inter-governmental cooperation today.
On the face of it yes, increasing VAT would be regressive, but that depends what you do with the rest of the fiscal/tax system. In the United States Andrew Yang proposes a 10% VAT rate ( currently 0% ) to fund a universal #FreedomDividend (or Basic Income). This would be progressive, and very redistributive regionally, particularly if some essential items of consumption were zero rated, such as childrens clothing or tampons.
The feature that most interested me about this idea however, was the fact that it was NOT a pure VAT. Companies could instead deduct in-country labour costs (and potentially other in-country costs such as R&D) from their VAT bill. This effectively becomes an incentive to invest in local production for local consumption, competing with more linear Global supply chains. In fact, this was so much a feature of the idea, that most comments on Martin Wolfe’s FT article were calling it an import tarrif by the back door.
Of course this needs careful consideration from the point of view of developing countries. Obviously, looked at Globally, a system that taxes sales might favour rich coutries at the expense of undeveloped ones. Yet one thing developing countries need, in order to make their local production more competitive with imports, is a form of import tarrif ( which is why the efforts of WTO, World Bank and America to remove all import tarrifs in the 1990s were so damaging. Indeed in some cases they halted halted progress of manufacturing in poorer countries ). If local producers, particularly in Africa, could get an advantage through VAT deduction of local labour, this might indeed stimulate growth of more regional circular economies that they, and the rest of #TheGlobalRace need so urgently.
None of this says I would back the proposal as it stands, but I think it does include some interesting features which we need to understand.
I am not keen on taxes you have to put right
That never happens
DBCFT is not corporation tax
And it is not a tax on capital
Nor does it protect a local income tax
So it fails on all counts
It’s a good, direct and very clear letter about a subject that is made more complicated than it ought to be by those who seek to skimp on their responsibilities.
[…] I noted on Monday, I did, along with others, have a letter in the FT criticising the proposal that Martin Wolf made for the adoption of what is called a ‘destination […]