I wouldn't call a 15% tax on corporations "communism". The actual policy objective is reasonable even if many can argue both sides with rational debate.
The main problem is this idea that a bunch of people on the liberal side of the Western world can create "global goals" and try to strong arm the rest of the world into following, which then leads to the inevitable outrage and disappointment when the rest of the world does not follow. And yet it never seems to happen in the other direction -- e.g. Africa deciding on global rules and then trying to force Europe to follow them, assuming they have a right to set global goals. The global goals only flow in one direction.
The idea that corporate tax policy is something that countries outside of the EU have actually thought of, and are doing their best to address in their own way, and for their own purpose, is something that never occurs to these self-described "global planners" who are in reality deeply provincial and trapped in their own micro-culture.
It is also something that people on the other side of this debate have thought of, which is one of the reasons not to tax corporations at all, but to tax those who receive the profits of corporations and that are domiciled in a particular tax jurisdiction. There is a lot of self-contradictory results when you try to tax the business separately from the owner of the business -- for example, a corporation can deduct interest payments but not dividend or share repurchases, when all three are basically the same thing, and a corporation has the option of doing all three. So this incentivizes corporations to take on debt, which then promotes financial fragility. Lots of distortions happen in a vain fight against "tax loopholes", when the real problem is that you are trying to tax the company separately from the owners.
So then you say, "I agree that trying to define 'profits' is prone to tax loopholes, so I will tax corporate revenue". Good idea! But then you will penalize business that have high expenses, e.g. a retail store that buys an item and sells it for a 20% markup would be driven out of business by a 15% tax on sales. So you say, "I will tax revenue net of input prices". And all of a sudden you have a value added tax, which is a form of sales tax, which is regressive. And then people complain about that regressivity and say "we should be taxing income instead", which was my original point!
So you keep chasing your tail because you are making decisions without really thinking things through, much like the decision for the EU to cavalierly set "global goals" even as it's relative importance is rapidly shrinking, even as Asia is pretty much ignoring all these goals because they are following their own interests and don't care about EU global goals.
It's not that simple. As far as I know, corporate taxes are already flat. (If they weren't, corporations could easily split into several smaller ones to keep their profits below some threshold.)
The big issue is with "just a flat rate that everyone pays". What do you pay that rate over? Big corporations manage to pay that rate over nothing. Generally those corporate taxes are paid over profits, so corporations avoid taking profits in countries that tax them. They sit on their money, pay it out as bonuses to executives, and take their profits in tax havens.
The issue isn't the tax rate, it's the loop holes. It's that the amount that's taxed is easily manipulated. Instead of easily manipulatable profits, the tax should be levied on something less easily manipulatable. Like revenue. Of course that already happens: VAT taxes, only because you pay them on all products, they are effectively paid by consumers, not corporations.
But how about allowing corporations to deduct their local external costs from their revenue? Not easily manipulatable foreign external costs, but simply the costs made in the same market as where the revenues come from? Then you're effectively still taxing profit, but tied to the local market, cutting tax havens and internal trickery out of the picture. A company on the other side of the world selling in your country but not making any costs there; no labour, manufacturing, rent, etc; would pay tax over their entire revenue, whereas a local shop that has does have all those costs, and therefore cannot help but invest in the local economy, gets to deduct those costs and pay less taxes.
I think that could do a lot to even out the imbalance and make the playing field a lot fairer.
Since this became such a public debate issue in Europe, I've actually more or less landed on the idea that maybe corporate taxes (taxing profits) are a lost battle. The only way to really combat it is for different countries to collude and perhaps sanction tax havens. Even then, I doubt they will be able to raise much tax.
Modern tax systems are diverse by design: sales tax/VAT. Excise/sin taxes, income taxes, CGT, employer taxes, etc. The mix is designed to reduce volatility. It's also designed to max out tax revenue while avoid damaging the economy by discouraging things like labour, savings, or other important activities too much. The effective maximum revenue for a country to collect in taxes appears to be somewhere in the 35%-45% of GDP range. After that diminishing returns on taxes kick in. Most euro countries are taxing (or rather spending) near that max. So, they can't afford to let corporate taxes.
Problem is that corporate tax is unavoidably problematic. Large multinationals can arrange their activities (not just their paperwork) depending on taxes. I doubt an single country want to create a tax the ensures large companies avoid setting up local subsidiaries within their borders. The end result is a different set of rules for the large and/or sophisticated that is more lenient than the rules on small companies.
Personally, I would rather see corporate tax abolished than see it applied in such a way that it discriminates against small companies.
This would make total sense if the entire world were under one tax system. Taxing corporations is a way of of taxing the dividends of shareholders outside your country, whose income you can't tax individually.
Its becoming clearer that the world is shifting towards coordinated world-wide tax rates, similar to how central banks are coordinated. Modern trade is complex and almost always multinational. Clear and easy tax rates will actually allow anyone to enjoy fair taxation, instead of the current unequal situation in which megacorps can use complex schemes to drastically reduce their rates, while normal businesses can't.
Incidentally , the most unequal territory in terms of shifted profits is Europe. An EU-wide corporate tax of 20-25% would be good for business
Taxing corporations is one of those things that seems pretty obvious until you really dig into the details, at which point you end up with some uncomfortable conclusions. Thus there is this endless handwringing about corporations paying so little yet at the end of the day, the solutions (those that work) are quite unpopular.
Let's walk down this rabbit hole:
So you want to tax corporate profits. Well, trouble is, it's easy to hide profits. For example, interest payments are subtracted from profits, which allows investors to lend money to corporations as loans, and the interest is only taxed by the recipient, but if you lend money to the corporation by purchasing equity, that is taxed twice. This asymmetric tax treatment incentivizes taking on debt and thus financial fragility and short-term thinking. OK, you say, let's treat interest and dividends the same. Then you have this issue with massive executive compensation, which is untaxed as it is treated as an expense. You'd like for that to not be tax-exempt as well. Thus you decide to tax value add -- that is revenue net of your cost of goods. That way, you catch cheaters, since if corp A reports something as a cost (payment to B), then B better record it as a revenue. B can't hide. Except now comes the foreign sector. What if B is a foreign company? There's the rub. One option is to say the foreign company also has to pay you taxes based on what it sells to A. This would effectively put an end to all the shell company shenanigans. To be fair, you can give credit for income paid to other jurisdictions so you don't end up double-taxing (like we do), but that's minor. So now you are happy with your system. You survey the landscape and what have you accomplished? A sales tax! This is just a value added tax, or VAT, which is another form of sales tax. But sales tax is regressive! And very unpopular. So there is this problem where Americans don't want a national sales tax of, say 20%, but they do want a corporate profit tax of, say 40%. And they are really angry when they see the effective corporate tax being so low, say 5%.
This reveals a cold truth, which is that corporations are effectively pass through entities for the human owners of the corporations. So why tax them twice? Well, because we have so many tax loopholes and such large trade deficits that 40% of our corporations are owned by foreigners that don't pay US taxes and 40% are owned by pension funds and tax-advantaged retirement accounts so that only 20% of US equities are subject to any tax at all. So this thrashing around about corporations reveals yet another uncomfortable truth, which is that our massive outsourcing has resulted in an erosion of the tax base just as much as it has destroyed middle class jobs.
This brings us back to a new variant of the old trilema, which is that you can't have free flow of capital (or equivalently, trade) across borders, a floating currency, and your own interest rate policy.
You can only have two of these. Except the tax version of this is that you can't have free flow of capital (that is trade), a floating currency, and your own corporate tax policy. The best you can do is a national sales tax for goods sold to your own citizens. If you try to tax corporations, you will run into the two-headed hydra that your corporations are owned by overseas investors and that your corporations have set up overseas businesses that sell them valuable inputs, so valuable that all the value is routed overseas.
So what happens is people create a tax policy that tries to also avoid tariffs on trade and foreign capital flows, and then they are shocked when corporations arbitrage that away.
It is scary to what extent corporate taxes can be avoided. Something is there is seriously broken and radical ideas are worth contemplating when the there is such a discrepancy between plan and outcome.
Should profit be accruing unchecked in corporations? Certainly there should be some pay back to society as society bears some external costs. Not only that but there may be better places capital could be deployed. These can be different at different times - management doing reinvestment, shareholders moving capital elsewhere, employees spending and taxman spending. A robust scheme would employ a balanced approach. At any time one may be preferable and some will argue for extremes. But things are changing - always - until this time it will be different - only to return shortly later violently to mean.
Discussion of corporate profits requires to also be looking at income tax and the treatment of dividends and capital gains is always being simplistic. But the essay is not trying to propose a solution. It is simply pointing out that there is a systemic escalating credibility problem:
> It could be argued that the existence of a tax that countries cannot properly enforce is one of the factors undermining trust in governments and feeding populist movements.
Bloomberg is not known for its social attitude and one may argue that they are advancing here a very liberalist agenda by talking up a fake problem. I give some leeway this time due the next paragraph:
> There are other ways governments can keep corporations in check -- for example, through environmental, safety and labor regulations, which U.S. Republicans and Brexiters dislike but which ultimately benefit consumers in a way the corporate tax doesn't. There are also other ways governments can get the revenue -- for example, by paying more attention to private income from corporate dividends and pass-through entities, or the European way -- by placing an additional burden on consumption through a value-added tax. In the U.K., VAT contributes 10.7 percent of GDP to the budget. To compensate for the absence of a corporate tax, it would need to go up from 20 percent to 25 percent -- the level that currently exists in Sweden and Croatia, for example.
Finding ways to tax that can not be escaped is critical. Also important is to find ways to tax that don't burden labor too much. However this approach needs to take into account that shifting (or acknowledging the fiat-accompli) of collecting tax from less sophisticated and mobile citizens and workers is putting pressure on well paid full time employment. Tariff free zones may not be so compatible with that approach.
Last but not least - hoarding profits (most extreme in case of Apple) as it going on at the moment is a recent phenomena. There used to be a tax on that called inflation. Any balancing would need to look at where and with volume new money is entering the system and going nowhere.
I think an open discussion of tax policy is important and thankfully organisations like the OECD are working to create frameworks for countries to use to make good policy choices. (especially in the international context) I recommend looking into their papers if you're interested.
That said I found the arguments in this document missing some important points.
They don't clearly separate the benefits of corporate taxes from a domestic vs international standpoint. These are two very different issues. On the international side they talk about the race to the bottom where counties are attracting companies through lower tax rates. They suggest this is a negative trend but don't offer solutions - because it's a complex issue with no easy fix. Sovereign countries can chose their tax regime and therefore there is an incentive for some to become tax havens. As an individual country it will hurt you to raise the corporate tax rate since there is a higher incentive for companies to move profits. So are they suggesting all counties agree to raise their corporate tax rates? It's not clear. Countries are obviously aware of this issue and are working with the OECD to draft solutions.
On the domestic side they gloss over the fact that most countries work to have an integrated tax system. That is, no matter how you structure you taxes when income flows to an individual the total tax paid on that income should be the same. So having a corporation (which usually has a lower tax rate than individuals) gives you a deferral of tax. This is to encourage businesses to reinvest.
They claim that if there is no corporate tax then companies will create shell companies and put income there. Tax authorities aren't stupid. Even now it would be beneficial to do that since corporate rates are lower than personal rates. Thats why if the company isn't earning business income (I.e. you just throw your personal wealth there invested in passive income) the tax rate of the corporation is bumped up to the highest personal rate on that income. So doing what the document suggests would be illegal.
The only real argument for changing the corporate tax rate should be (from a domestic standpoint) based on the deferral. That is, do you think companies should pay less tax to help grow their business faster and only pay tax when the owner stops reinvesting in the business?
Obviously this is a complex topic and I think that this document glosses over alot of that complexity. Just to note that I'm most familiar with the Canadian tax system so that's what I've based the domestic discussion on. However, all countries have similar tax policy objectives and should have similar rules in place.
The argument for corporate income tax is misplaced. Many socialist countries have a low (or no) corporate income tax and that's goods.
A country shouldn't tax the things it would like to encourage. In this case, that companies re-invest and not pull the funds out to pay investors.
Capital gains tax should probably be mentioned. Why is it a much lower rate than income tax? Why not talk about that?
Strange also that the article doesn't really target one specific part of the tax code - they don't mention any loopholes at all. If they'd like to see a change, name exploits.
The article is outrage porn - not trying to inform, or make a specific change. It's simply trying to get clicks and shares.
It's really a shame to see the new york times go this route.
Yes to this: "corporation tax, as it is structured today, is unfit for purpose in a globalised economy".
Where Apple sold its computers is well-defined, you can count each one and tax it. Where their employees work is also well-defined, they have desks, and beds.
Where they made their profits simply isn't well-defined. How much was due to the software (California), the marketing (let's say London), the assembly (China), the logistics (in between)? These question don't have sharp answers. Sure, Apple's accounting guys write down some numbers. But once you attempt to tax them, you discover that they have great freedom in what column they write those numbers in.
I increasingly think the correct corporate profit tax rate is zero. Tax the goods they sell. Tax the salaries they pay. Tax the capital gains when shareholders sell, if you must. These things all involve actual people and take place in particular countries. The rest is an abstraction.
In ideal world that might work, but in reality, the countries that can afford to set low corp taxes do it, and the countries that can't don't. As usual, the rich get richer, and corporations get bigger
The only winning move is not to play here. Economists and policy wonks across the world, of all political persuasions, are constantly suggesting better ways to tax than corporate income. Corporate taxes are lower, more even, and less of an issue outside the U.S. and U.K., but over here "corporate profits" is a dirty word and so you win votes by taxing them, the seeming logic being that if you tax a behavior that makes the behavior less evil.
Actually a common reason given for having corporate taxes is they're easier to collect since you collect from fewer payers.
The biggest problem is they obscure tax burden. All tax burden is ultimately born by individuals. If you levy on the corporation instead of the individual directly, then the burden just gets divided between clients, suppliers, owners, and employees, and how it get divides ends up depending upon the relative price elasticity of demand for each of their services. When taxes are levied on individuals directly, how the burden gets distributed can instead be codified in law.
At least in that sense, corporate taxes are somewhat anti-democratic. Politicians and voters are out for blood on this, but what they really want is for the owners to pay more tax. That can be better accomplished by just taxing capital gains and carried interest.
There is, of course, also tremendous deadweight loss in that business decisions are often dictated by what results in the best tax treatment rather than what is economically optimal. The fact that it actually makes financial sense to entirely relocate operations to other countries is itself a pretty big indictment of taxes like this. That's a huge amount of resources being allocated in a way that does not result in any improvement to the goods and services.
But, to the point of this treaty, if they're not going to eliminate corporate taxes and tax owners directly instead, the next best thing is at least make the taxes the same everywhere so the relative change in rates will stop dictating business decisions.
Or this has nothing to do with "ideology". And it's meant to reduce the unfairness in tax rates between individuals (who pay taxes on worldwide income) and corporations (which do not).
The main problem is this idea that a bunch of people on the liberal side of the Western world can create "global goals" and try to strong arm the rest of the world into following, which then leads to the inevitable outrage and disappointment when the rest of the world does not follow. And yet it never seems to happen in the other direction -- e.g. Africa deciding on global rules and then trying to force Europe to follow them, assuming they have a right to set global goals. The global goals only flow in one direction.
The idea that corporate tax policy is something that countries outside of the EU have actually thought of, and are doing their best to address in their own way, and for their own purpose, is something that never occurs to these self-described "global planners" who are in reality deeply provincial and trapped in their own micro-culture.
It is also something that people on the other side of this debate have thought of, which is one of the reasons not to tax corporations at all, but to tax those who receive the profits of corporations and that are domiciled in a particular tax jurisdiction. There is a lot of self-contradictory results when you try to tax the business separately from the owner of the business -- for example, a corporation can deduct interest payments but not dividend or share repurchases, when all three are basically the same thing, and a corporation has the option of doing all three. So this incentivizes corporations to take on debt, which then promotes financial fragility. Lots of distortions happen in a vain fight against "tax loopholes", when the real problem is that you are trying to tax the company separately from the owners.
So then you say, "I agree that trying to define 'profits' is prone to tax loopholes, so I will tax corporate revenue". Good idea! But then you will penalize business that have high expenses, e.g. a retail store that buys an item and sells it for a 20% markup would be driven out of business by a 15% tax on sales. So you say, "I will tax revenue net of input prices". And all of a sudden you have a value added tax, which is a form of sales tax, which is regressive. And then people complain about that regressivity and say "we should be taxing income instead", which was my original point!
So you keep chasing your tail because you are making decisions without really thinking things through, much like the decision for the EU to cavalierly set "global goals" even as it's relative importance is rapidly shrinking, even as Asia is pretty much ignoring all these goals because they are following their own interests and don't care about EU global goals.
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