Author: Matt Timms
31 Dec 2014
In winter 2012, hundreds of activists packed inside their local Starbucks after reports emerged that the American coffee chain had declared taxable profits only once in its 15 years in the UK. Organised by campaign group UK Uncut, the sit-ins raised awareness of the various tax avoidance schemes employed by companies to shore up their bottom lines. And when it was announced a few months later that the EU was due an estimated €1trn in lost tax revenues, greater than the budget deficit of all 28 member states combined, the focus on companies shirking their tax responsibilities increased.
United in the view that tax avoidance schemes and increasingly selective corporate ethics are starving governments of the revenue they deserve, millions of disadvantaged citizens are beginning to lose patience with known offenders. As a result, major names such as Apple and Amazon are as synonymous today with creative tax planning strategies as they are with innovative products and services, and corporate tax avoidance is fast becoming a key issue for governments across the globe.
The financial costs of corporate tax penalise workers ahead of companies and shareholders
While this is a worldwide problem, it’s a particularly sensitive issue in Europe, where austerity-stricken nations are struggling to find alternative streams of revenue. However, amid the growing pressure on companies to pay their dues, a different debate has begun to take shape, looking at the supposed merits of eliminating corporate tax altogether.
While it is undeniably true that the responsibility falls squarely on the offending corporations, part of the blame should be portioned out to a tax system that gives companies licence to escape undesirable rates. Ruling regimes are tweaking their tax policies with a view to closing what loopholes remain, though without anything close to a complete structural overhaul the issue of avoidance will only rear its head in another form.
To those unfamiliar with the workings of high-end corporate taxation, abolishing the policy altogether looks suspiciously like making concessions to the rich. However, a number of studies conducted in recent years suggest that corporate tax penalises workers ahead of companies and shareholders. In fact, a study by Kevin Hassett and Aparna Mathur of the American Enterprise Institute, entitled A Spatial Model of Corporate Tax Incidence, finds that there is a strong correlation between high corporate tax rates and low wages. “Our results indicate that corporate taxes are significantly related to wage rates across countries” reads the report. “Our coefficient estimates suggest that a one percent increase in corporate tax rates leads to a 0.5 percent decrease in wage rates.”
Popular opinion would have you believe that company owners are the ones bearing the brunt of corporate taxation, although clearly workers are similarly, if not more, disadvantaged by high rates. Whereas companies can easily up sticks and leave the country in search of a preferable taxation regime, the relative costs for individuals choosing to do so are far greater. “The reason is simple” according to a research paper, co-written by Laurence Kotlikoff of Boston University and entitled Simulating the Elimination of the US Corporate Income Tax. “Workers living in a country are generally immobile, i.e. they rarely seek employment abroad. On the other hand, capital that is invested domestically can be withdrawn and invested in other countries. When this capital flight occurs, the workers and their jobs are left behind leading to lower labour demand and real wages for those able to retain their positions.”
Many scholars, Kotlikoff included, argue that by slashing corporate tax rates, affected countries could boost investment, productivity and, crucially, real wages. And in a time when pay increases, particularly in developed countries, are trailing inflation, any mechanism that could remedy the situation is likely to gain popular support, regardless of the negative connotations associated with lowering/abolishing corporate tax. “My research on corporate income taxes has lead me to believe that corporate taxes represent a significant distortion in the economy” concurs Mathur.
Proponents of abolishing the regime also argue that the savings associated with eliminating costly administrative processes and regulatory redrafts would account, at least in part, for lost government revenues, with the rest coming by way of increased income, investment and output. It’s true that such a dramatic rethink of the taxation system is almost impossible to accurately account for, but the logic underpinning such a bold move holds up.
If you want to tear our society apart [zero corporation tax] is the way to start doing it – Richard Murphy, Tax Research UK
Something slightly different
When corporate income tax was first introduced more than a century ago, its primary purpose was to limit the influence of corporations over states and citizens. One report, written in 2004 by Reuven Avi-Yonah of the University of Michigan Law School, reads: “When corporate tax was first adopted in 1909, the real view was dominant and the tax was conceived primarily as a device to regulate corporate management in relation to other stakeholders and the state. Today, however, the aggregate view predominates, and the tax is seen primarily as an indirect way of taxing shareholders.”
Some argue, therefore, that the founding principles of corporate tax no longer hold true, and so policymakers should introduce something akin to a direct shareholder tax. “There are good economic arguments for completely abolishing the corporate income tax and making up the revenues by taxing the payout of corporate income to shareholders” says Mathur. “Currently, the corporate tax effectively represents a form of double taxation where the corporation first pays the tax and then shareholders and other stakeholders make payments on any income they earn from the corporation. So changing that could significantly boost investment and earnings as well.”
One proposed solution to plug the gap left by lost corporate tax revenues is to tax shareholder dividends and capital gains. However, looking at the problem in such a simplistic way fails to account for the enduring issue of corporate irresponsibility, and could give rise to further complications down the line. “Zero corporation tax creates many problems” says Richard Murphy, Director of Tax Research UK. “The first is companies make no contribution at all to society despite the enormous privileges they enjoy, including limited liability, which literally means they can dump their losses on the rest of us.”
Critics insist that exempting corporations from income tax would give them an unfair advantage over workers and upset the balance of corporate and worker duties. “The fact is zero corporation tax is actually about undermining the effectiveness of the tax system, the cohesiveness of society, the ability of the government to deliver the services expected of it and so eventually the rule of law and democracy itself because it would declare some income outside the scope of that law and the need to contribute to society. If you want to tear our society apart this is the way to start doing it” says Murphy.
No matter the answer to corporate tax avoidance, what’s important is that the ramifications of the tax itself are fully understood before entertaining the prospect of eliminating the policy altogether. Rather than asking whether changes to corporate income tax are beneficial for businesses or for workers, surely a better question would be to ask how the ramifications for one are passed on to the other.