People pay every single penny of tax that politicians impose on corporations.
The investors that own companies obviously pay (more than one time!) when governments tax profits.
The workers employed by companies obviously pay, both directly and indirectly, because of corporate income tax.
And consumers also bear a burden thanks to business taxes that lead to higher prices and reduced output.
Keep these points in mind as we discuss BEPS (“base erosion and profit shifting”), which is a plan to increase business tax burdens being advanced by the Organization for Economic Cooperation and Development (OECD), a left-leaning international bureaucracy based in Paris.
Working on behalf of the high-tax nations that fund its activities, the OECD wants to rig the rules of international taxation so that companies can’t engage in legal tax planning.
The Wall Street Journal’s editorial page is not impressed by this campaign for higher taxes on employers.
The Organization for Economic Cooperation and Development last week released its latest proposals to combat “base erosion and profit shifting,” or the monster known as BEPS. The OECD and its masters at the G-20 are alarmed that large companies are able to use entirely legal accounting and corporate-organization strategies to shield themselves from the highest tax rates governments try to impose. …The OECD’s solution to this “problem” boils down to suggesting that governments tax the profits arising from operations in their jurisdiction, regardless of where the business unit that earned those profits is legally headquartered. The OECD also proposes that companies be required to report to each government on the geographic breakdown of profits, the better to catch earnings some other country might not have taxed enough.
What’s the bottom line?
This is a recipe for investment-stifling compliance burdens and regulatory uncertainty…the result of implementing the OECD’s recommendations would be lower tax revenues and fewer jobs.
By the way, I particularly appreciate the WSJ’s observation that tax competition and tax planning are good for high-tax nations since they enable economic activity that otherwise wouldn’t tax place (just as I explained in my video on the economics of tax havens).
Existing tax rules have been a counterintuitive boon to high-tax countries because companies can shield themselves from the worst excesses of the tax man while still running R&D centers, corporate offices and the like—and hiring workers to staff them—in places like the U.S. and France.
The editorial also suggests the BEPS campaign against multinational firms may be a boon for low-tax Ireland.
All of which is great news for Ireland, the poster child for a low corporate tax rate.
The Ireland-based Independent, however, reports that the Irish government is worried that the OECD’s anti-tax competition scheme will slash its corporate tax revenue because other governments will get the right to tax income earned in Ireland.
The country’s corporation tax is under scrutiny due to the multinational companies locating here and availing of our low 12.5pc tax rate – or much lower rates in some cases. US politicians have accused Ireland of being a “tax haven”… The OECD, a body made up of 34 western economies, is drawing up plans to restrict the ability of multinationals to move their income around to minimise their tax bill. …a draft Oireachtas Finance Committee report on global taxation, seen by the Irish Independent, contains warnings that Ireland’s corporation tax revenues, which amount to €4bn every year, will be halved under the new system. …Tax expert Brian Keegan is quoted in the report as saying: “Some of the OECD proposals would undoubtedly, result in that €4bn being reduced to €3bn or €2bn. That is the threat.”
So which newspaper is right? After all, Ireland presumably can’t be a winner and a loser.
But both are correct. The Irish Committee report is correct since the BEPS rules, applied to companies as they are currently structured, would be very disadvantageous to Ireland. But the Wall Street Journal thinks that Ireland ultimately would benefit because companies would move more or their operations to the Emerald Isle in order to escape some of the onerous provisions contained in the BEPS proposals.
That being said, I think Ireland and other low-tax jurisdictions ultimately would be losers for the simple reason that the current BEPS plan is just the beginning.
The high-tax nations will move the goal posts every year or two in hopes of grabbing more revenue.
The end goal is to create a system based on “formula apportionment.”
Here’s what I wrote last year about such a scheme.
…the OECD hints at its intended outcome when it says that the effort “will require some ‘out of the box’ thinking” and that business activity could be “identified through elements such as sales, workforce, payroll, and fixed assets.” That language suggests that the OECD intends to push global formula apportionment, which means that governments would have the power to reallocate corporate income regardless of where it is actually earned. Formula apportionment is attractive to governments that have punitive tax regimes, and it would be a blow to nations with more sensible low-tax systems. …business income currently earned in tax-friendly countries, such as Ireland and the Netherlands, would be reclassified as French-source income or German-source income based on arbitrary calculations of company sales and other factors. …nations with high tax rates would likely gain revenue, while jurisdictions with pro-growth systems would be losers, including Ireland, Hong Kong, Switzerland, Estonia, Luxembourg, Singapore, and the Netherlands.
Equally important, I also pointed out that formula apportionment would largely cripple tax competition for companies, which means higher tax rates all over the world.
…formula apportionment would be worse than a zero-sum game because it would create a web of regulations that would undermine tax competition and become increasingly onerous over time. Consider that tax competition has spurred OECD governments to cut their corporate tax rates from an average of 48 percent in the early 1980s to 24 percent today. If a formula apportionment system had been in place, the world would have been left with much higher tax rates, and thus less investment and economic growth. …If governments gain the power to define global taxable income, they will have incentives to rig the rules to unfairly gain more revenue. For example, governments could move toward less favorable, anti-investment depreciation schedules, which would harm global growth.
Some people have argued that I’m too pessimistic and paranoid. BEPS, they say, is simply a mechanism for tweaking international rules to stop companies from egregious tax planning.
But I think I’m being realistic.Why? Because I know the ideology of the left and I understand that politicians are always hungry for more tax revenue.
For example, from the moment the OECD first launched its campaign against so-called tax havens, I kept warning that the goal was global information sharing.
The OECD and its lackeys said I was being demagogic and that they simply wanted “upon request” information sharing.
So who was right? Click here to find out.
Not that I deserve any special award for insight. It doesn’t (or shouldn’t) take a genius, after all, to understand the nature of government.
Let’s close with some economic analysis of why the greed of politicians should be constrained by national borders.
P.S. The OECD, with the support of the Obama Administration, wants something akin to a World Tax Organization that would have the power to disallow free-market tax policy.
P.P.S. And the OECD also allied itself with the nutjobs in the Occupy movement in order to push class-warfare taxation.
P.P.P.S. Your tax dollars subsidize the OECD’s left-wing activism.
Dan Mitchell is an economist and senior fellow at The Cato Institute. Follow him on Twitter. This piece first appeared on his blog.