Wednesday, April 08, 2009

Are Corporate Tax Loopholes Ripe for a Crackdown?

The New York Times poses the question in our headline.

"With Western governments shifting to a more interventionist bent as the recession deepens, the burden of re-filling their dwindling coffers will fall increasingly on hard-pushed and less-mobile workers. So the time may be ripe for countries to look again at closing loopholes for companies."

Quite right. Interesting words, too, from Mario Monti, the president of Bocconi University and a former European commissioner. He

"said there was a need to define exactly what constituted corporate profit; then, countries should try to agree on a floor for company tax rates that would not be breached. If that cannot be globally, he suggested, at least it might be possible regionally. Tax revenues are falling and each member is playing the role of tax haven relative to its partners. . . how can governments take care of redistribution if their hands are tied?”

The NYT then wheels out a Big Four accountant, who, predictably, is in favour of shifting the burden of tax away from corporations and onto the rest of us.

“Companies are constantly looking to save costs, and tax is a major cost.”

That's what you may think. But if you really think about it, it makes no sense to think of tax as a cost. It is a distribution out of profits, putting tax in the same category as a dividend - a return to the stakeholders in the enterprise. Prem Sikka, in The Guardian, explains:

"Let us get back to the basics. To generate wealth, at the very least, three kinds of capital need to be invested. Shareholders invest finance capital and expect to receive a return. Markets exert pressure for this to be maximised. Employees invest human capital and expect to receive a return in the shape of wages and salaries. Society invests social capital (health, education, family, security, legal system) and expects a return in the shape of taxes.

Over the years, corporate tax rates have been reduced, but the return on social capital is under constant attack by tax avoidance schemes. The aim is to transfer the return accruing to society to shareholders. Companies have reported higher profits, not because they undertook higher economic activity or produced more desirable goods and services, but simply by expropriating the returns due to society."

Well said.

A second-last word for Jeffrey Owens of the OECD, which we've criticised enormously of late. He spouts some nonsense.

“We’re in favor of fair tax competition,” Mr. Owens said.

We challenge Mr. Owens to set out his case explicitly: what does 'fair' tax competition involve, and how can any tax competition - which is, in short, a race to the bottom on tax - be called fair? We've asked the OECD before -they haven't responded - so we're asking again now. Please enlighten us. Read more here.


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