Sovereignty IRELAND Wealth Rent-seeking Dynamic scoring Ten Reasons to Defend KPMG Small Democracy Inequality the Corporation Tax. TaSecrecy x How the corporate income tax protects democracy and curbs inequality. Netherlands PWC Shareholders TRANSPARENCYCORPORATION Deloitte Efficiency . and seven myths, busted. Britain SMEs Accenture Cayman Complexity LAFFER Revenue Fiduciary duty USA Brass plates Shareholder value Backstop Offshore Luxembourg Distortions ECONOMISTSSWITZERLAND LOBBYING CompetitiveCASH PILES Representation 1 Ten Reasons to Defend The Corporation Tax Accountability Contents Introduction 3 7 Corporate taxes: a vital tool for 14 rebalancing distorted economies The problem 4 8 The corporate tax helps address 15 Part 1: The benefits of 5 rent-seeking the corporate income tax Outlines ten positive roles that the tax plays. 9 Tax cuts and subsidies won’t 15 stop at zero 1 Revenue 5 10 The corporate income tax spurs 16 2 Corporate taxes hold the 5 transparency and accountability whole tax system together Part 2: Mythbusters 17 3 The corporate tax curbs inequality 6 Tackles the main arguments that have and protects democracy been raised against the corporate tax. 3.1 Corporate taxes also curb 6 concentrations of political and 1 Myth: “Tax avoidance is legal, 17 economic power so what’s the problem?” 3.2 Who pays the corporate tax? 7 2 Myth: Taxes are too high; tax cuts 18 The tax ‘incidence’ hoax will stop avoidance and curb ‘offshore’ 3.3 And now, the evidence 8 3 Myth: Tax is theft 19 4 National tax ‘competitiveness’ is 8 fool’s gold 4 Myth: The corporate tax is unfair 21 4.1 Nothing to do with competition 8 “double taxation” 4.2 What’s good for corporations 9 may not be good for the country 5 Myth: The corporate tax is inefficient, 22 and should be replaced by VAT 4.3 Real investors don’t chase tax breaks 9 4.4 The studies on tax and 9 6 Myth: corporate bosses have a 22 investment are wrong fiduciary duty to minimise taxes 4.5 Do corporate tax cuts really 10 create economic growth? 7 Myths and bamboozlement: the 23 4.6 Below zero: where do you stop? 11 Laffer Curve and Dynamic Scoring How to fix the problems? 25 5 Corporate tax cuts ricochet around 13 the world Endnotes 26 6 Corporate taxes are particularly 13 important for developing countries Photo: John Christensen 2 Ten Reasons to Defend The Corporation Tax Summary The corporate income tax is one of the most precious of all taxes. Yet it is under attack, like never before. Revenue collection is the one which can emancipate us As this document explains, it holds your country’s whole tax system from begging, from disturbing friends… we should not together. It is one of the best ways to tax capital, and it can powerfully curb political and economic inequalities. It helps rebalance distorted need to disturb anybody by asking for aid….instead of economies, boosting broad-based economic growth and prosperity. It coming here to bother you, give me this, give me this, protects democracy. It boosts financial transparency and accountability I shall come here to greet you, to trade with you. and curbs criminal behaviour and rent-seeking. It stops large multinational corporations and their wealthy owners from extracting Yoweri Museveni, President of Uganda, 2005. wealth from societies by free-riding off taxpayer-funded roads, education systems, courts and health services. It protects developing countries in particular, boosting self-reliance and curbing their dependence on foreign aid. And of course it raises trillions in revenue, Taxation, in reality, is life. If you know the position a person worldwide, which governments use as a basis for providing essential takes on taxes, you can tell their whole philosophy. The tax public services. code, once you get to know it, embodies all the essence of Many of these things are hard to measure, and often get airbrushed out life: greed, politics, power, goodness, charity. Everything’s of the equation. Politicians, and the general public forget them. But they are always there. in there. That’s why it’s so hard to get a simplified tax code. In short, corporation taxes make your country a better place to live. It is Sheldon Cohen, former U.S. Internal Revenue Service Commissioner worth fighting for. The best and easiest approach to the corporate tax is not to abolish it, but to tackle its shortcomings. This document outlines ten solid reasons to defend the corporate income tax. It also explodes seven popular myths about the tax. Note to readers: This is a generic document aimed at countries around the world, rich or poor. Please feel free to use or republish any of this material as you see fit: cut and paste sections, adapt it to your country’s circumstances, or make it your own. Attribution to TJN The corporate income tax is would be nice, but we don’t insist. A short summary of this document is available here. under attack, like never before This remains a work in progress. Comments are, as ever, welcome: [email protected] 3 Ten Reasons to Defend The Corporation Tax Box 1: what is the corporate income tax? The problem When corporations make profits, governments generally seek to levy a portion of those profits as tax, to ensure the Politicians, commentators, corporation pays its fair share towards the public services accountants, corporations, think and protections that have contributed towards those profits. tanks, lobbyists and even some It is generally assessed on the basis of net profits: that is, economists push the idea that the profits after costs have been deducted. Typical corporation Box 2: what is a tax haven? corporate tax is a bad, inefficient, tax rates in countries that are not tax havens range There is no general agreement on what a tax haven between 20 and 35 percent. We will often call it “corporate growth-killing tax. Many of them is. They are best known for offering low or zero tax tax” in this report. rates and loopholes, and secrecy - but they offer other urge draconian cuts, and some things too: in this report when we say ‘tax haven’ we are even calling for its complete are focusing only on the tax aspects unless we indicate repeal.1 otherwise. See our general explainer on tax havens for more details.4 Large sections of the world’s media, and wider populations, have accepted this story. Corporate tax rates have been falling around the world.2 Headline rates, averaging 50 percent in OECD countries in 1980, currently average half that – and falling. For low-income countries the fall has been even more vertiginous.3 Meanwhile, a growing feast of loopholes, incentives and other back- door methods are available to help multinational corporations cut their tax burdens, often using tax havens like Luxembourg or Ireland. International efforts to plug some of the gaps are being undermined by lobbying from large global accountancy and law firms, which earn billions from designing ever more elaborate shenanigans to game the global system. The effective tax rates on multinational corporations are being pushed steadily downwards, allowing multinationals increasingly to free-ride on the public services that everyone else pays for. This free-riding doesn’t stop when tax payments hit zero: their Corporate income tax is effective contributions are in many cases turning negative, with no end in sight. worth fighting for... 4 Ten Reasons to Defend The Corporation Tax part 1 The benefits of the corporate income tax Revenue Corporate taxes hold the whole tax system 1 2 Chart 1: The incredible shrinking U.S. corporation tax The most widely understood reason to tax corporations is to together earn revenue. Governments tend to spend roughly or nearly what Corporate income taxes are a crucial backstop to the 100% 6 Excise, estate and other taxes they earn over the long term. personal income tax. Corporate tax revenues make up some ten percent of total If the corporate income tax were abolished, as some 80% tax revenues in OECD countries but in developing countries, have suggested, the corporate structure would become a Payroll tax conservatively measured, they make up typically 15 percent.7 gigantic tax shelter for the wealthy. They would form shell corporations then claim that their earnings are the income 60% The potential for corporate tax revenues is very large. Taxable of the corporation, and thus not subject to the income tax. Corporate income tax corporate profits have soared in most countries since the In fact, when the corporate income tax was introduced in 1980s, as workers have lost political battles with the owners many high income countries just before or during the First 40% of capital; as technology has boosted returns to capital; as World War, it was designed to prevent exactly this kind of transnational corporations have used global arbitrage to Individual income taxes behaviour.9 shake off tax and regulations; as rising commodity prices have 20% boosted commodity-related profits; as inflation has fallen, and If the corporate rate is zero or very low, then people — and amid transfers of widespread public assets to private hands in here we are talking mostly about wealthy individuals — 0% privatisation programmes. could leave their earnings inside the corporation and defer 1950 1960 1970 1980 1990 2000 2010 paying personal income tax on them indefinitely until And yet because of falling tax rates and rising tax avoidance the corporation pays them a dividend at a date of their and evasion, corporate tax revenues as a share of national Graph created by Center on Budget choosing, or perhaps never. Those corporate profits will not and Policy Priorities, April 2013 economies have generally stagnated in rich and poor countries, be effectively taxed over that period.