Tax

EDITORIAL COMMENT: OECD's Comments On Corp Taxes Miss A Fundamental Truth

Tom Burroughes, Group Editor, December 4, 2015

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The OECD has described a pattern of falling receipts from corporate taxes and more burdens on individual taxpayers. The distinction is a false one.

One of the main organizations pushing for greater transparency in banking and commerce, and which fights the alleged evils of tax competition, has come out with a report that suggests there are life-forms other than human beings who shoulder taxes.

The Organization of Economic Co-operation and Development, the Paris-based club of industrialized nations, has issued a report saying revenues from corporate incomes and gains fell to 2.8 per cent from 3.6 per cent as a share of gross domestic product between 2007 and 2014. Revenues from individual income tax rose to 8.9 per cent from 8.8 per cent, while value-added tax revenues rose to 6.8 per cent from 6.5 per cent. About 80 per cent of revenue increases over the 2013-14 period were attributed to a combination of consumption taxes and taxes on personal incomes and profits. This combination also accounts for two-thirds of the rise in revenues between 2009 and 2014.

The OECD’s report will no doubt be seized upon by campaigners claiming that companies are minimizing tax bills by locating tax domiciles in low-tax jurisdictions such as Luxembourg or the Republic of Ireland – e-commerce giant Amazon, as well as coffee retailer Starbucks, have come under attack over such actions, although they aren’t illegal. Facebook, the social media giant, has drawn fire because of its relatively puny tax bill in the UK (Facebook staff reportedly took home an average of £210,000 in pay and bonuses, which will be taxed at high rates). Mark Zuckerberg, Facebook's chief, is reportedly giving away the bulk of his personal fortune to philanthropy.

The OECD is unhappy with the corporate tax revenue trend. “Corporate taxpayers continue finding ways to pay less, while individuals end up footing the bill,” said Pascal Saint-Amans, director of the OECD Center for Tax Policy and Administration. “The great majority of all tax rises seen since the crisis has fallen on individuals through higher social security contributions, value added taxes and income taxes. This underlines the urgency of efforts to ensure that corporations pay their fair share.”

The OECD has been pushing to crack down – as have various national governments such as the UK’s – to stop what is called “base erosion” – the practice of firms shuffling their profits around the world to find the lowest tax places to file reports in. There are clear parallels with attempts by high net worth individuals over the years to use offshore financial centers to minimize their tax bills, a move increasingly made difficult by governments signing tax treaties and pushing for tax data disclosure.

Where is the problem?

So what is the problem with the OECD’s sort of reasoning about corporate tax revenues? The problem is that the OECD seems to have inadvertently suggested that there are creatures other than individuals who pay tax. It is ignoring what is called “tax incidence” – the process whereby taxes are ultimately passed on as costs to different people, often without them realizing it.

For example, if a corporation pays, say, a 35 per cent tax on its profits, as US firms have to, when highest rates in that country are applied, that means those engaging with that corporation, most obviously its shareholders, partners or whoever, will be hit: lower dividends, lower capital returns, less investment in equipment and people, etc.

Of course, a campaigner will respond saying that base shifting means that the taxes paid by firms and their owners (people) often bear little relation to where these firms make their money. Even then, however, the argument is not as simple as it looks. Corporations with operations in dozens of states are by their nature transnational, and the key “value add” components of a business will not necessarily be in the places where, for example, an online retailer has its warehouse, or where the entrepreneurial brilliance that created the firm happens to reside.

There is a parallel argument going on in wealth management and general commerce about clarifying the distinctions that must be made between “avoidance” and “evasion”, as well as ensuring people pay their fair shares in tax. But in the specific case of the OECD’s report on tax burdens, it has, at least from the literature I received this week, not addressed the point that ultimately all taxes are paid by people, rather than something else.
 
Corporations are created and run by persons, served and used by people, and sometimes wound up and merged by people. A more coherent debate about corporate taxes needs to take account of this inescapable set of facts. In fact, it might be useful to revisit the idea of whether corporation taxes make any sense at all, and tax the owners of capital, such as through income tax on dividends and other charges. One benefit of this is that such a move would stop the current "whack-a-mole" process of revenue agencies trying to chase corporations out of their low-tax locations.

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