Politics, n. A strife of interests masquerading as a contest of principles. The conduct of public affairs for private advantage. Ambrose Bierce, The Devil’s Dictionary.
America’s corporate and political elites now form a regime of their own and they’re privatizing democracy. All the benefits — the tax cuts, policies and rewards flow in one direction: up. Bill Moyers.
As governments across the globe have struggled with growing government debt, the pressures of austerity and stagnant economic systems, ire has been thrown at the corporate fat cats who have, according to the court of political opinion, been avoiding paying their fair share of taxes. However, the battle over taxation is an old one. The political authority of the day — King, Church, Congress, Parliament, etc. — invariably scrapes and pillages to fund both noble and ignoble activities while rich and poor alike bury their silver in trenches, barns and corporate tax havens. The modern variant of these dramas have been most recently played out in the British Parliament and US Congress as the CEOs of various multinationals have been brought into the dock to explain their nefarious attempts to keep corporate cash out of the hands of taxman.
The circus that has surrounded these discussions is one that is itself mainly emotional and devoid of a real understanding of the complexity of actually trying to tax multinational corporations. To the layperson the debate is simple. If they pay their share of taxes on the income they earn why is it not fair that ‘rich’ corporations do the same? However, such a viewpoint is a naive personification of the corporation. As too is the logic of those like Joseph Stiglitz, who argue that corporations should pay their fair share of taxes because they utilize societal infrastructure. While Stiglitz acknowledges the complexity of actually figuring out how much to tax a corporation in a specific jurisdiction, he fails to understand that the whole point of a tax system is not to generate a pay as you go system but to ensure that a society shares in the wealth created by economic activities generated within that society.
What is no doubt clear to nearly anyone who has attempted to keep up with this debate is that the global tax system as it currently exists is dysfunctional. However, that dysfunctionality is not new, nor is it, like Stiglitz’s argument, fundamentally the result of private interests. Politicians ultimately decide on the structure of the tax system and the failure of the tax system to account for the activities of multinational corporations (which, by the way, are actually less powerful in terms of economic dominance today than in decades past) reflects (a) the failure of politicians to understand the management of multinational corporate and economic networks, (b) the naive attempt to develop quick fix domestic tax solutions to problems that are global and, most importantly, (c) the lifeblood on which politicians trade off legislation and political favours for votes, money, influence and their legacy. Politicians are effectively like two dimensional beasts operating in a world they do not understand is three dimensional, while the multinationals easily move about in three dimensions (p.s. A homage to E.A. Abbott and Flatland). The result has been a hodgepodge of tax rules and rates in different jurisdictions that are completely at odds with modern economic structures and increasingly incapable of funding societies’ basic needs.
For many the solution is to add yet more rules and regulations that will ‘force’ corporations to pay more of their ‘fair share’. However, this is an impossible endeavour and one more likely to do more harm than good. For example, any one solution — e.g., taxes based on revenue generation in a jurisdiction — will, by definition, simply preference one jurisdiction over another. If we decided that we are going to force corporations to pay income taxes based on where they sell their products (e.g., in the USA or the UK) we effectively dissuade demand and essentially tax individuals/workers in the jurisdictions in which product is produced (e.g., China or Thailand). Similarly, if the producing nations decide that they are going to tax corporate profits based on the level of production they dissuade production and it amounts to a partial tax grab from the consuming nations customers. Any such system would be both overly complex and lead to tax systems operating as little more than cash grabs with countries attempting to figure out what they can tax that would keep tax revenues local. The only thing more regulation like this would ensure is a boom in the tax advisory business and more government employment and the potential of a global tax war.
An alternative is to recognise that corporations are not people (in spite of the Citizens United ruling in the US Supreme Court) and that what needs to be taxed is the components of the process that leads to production of goods and services. What this would imply is that the corporate tax rate would be reduced to zero and that any income generated by any component in the system would be taxed equally. What would such a system look like? It would be quite simple. Companies would bear no taxes and hence need to account for nothing from a tax point of view. Workers would be taxed on their income and all benefits (regardless of whether they were in-kind or in-cash). Executives would also be taxed at the relevant tax rate on all monetary and non monetary compensation. Investors (i.e., shareholders) would be taxed based on the capital gains of any shares sold (again at the rate at which any income would be taxed without any preference) and all dividends would be taxed as income. If a company chose to pay fewer dividends and invest the money in new corporate ventures it simply would not be taxed until it was released to the owners/shareholders as future dividends or employees as future pay and compensation.
Such a system has many benefits. First, it does not matter what the jurisdictional structure is. If one country wanted to tax consumption via a VAT or ad valorem tax this is a separate decision. However, the taxes accruing to a country from any company would be driven entirely by whether or not there were workers and owners/shareholders in the jurisdiction. Second, the ‘infrastructure’ usage argument is also a separate decision. If political institutions wanted to charge companies for infrastructure this would be a separate decision that would have nothing to do with ‘potential’ real or actual economic gains. If there were actual gains these would show up in revenue either through the consumption taxes or the value generated via employment and dividends either from company directly or via the network of economic activities generated by the company. Third, there is no gaming this system. All benefits and income are taxed. Fourth, if the government was worried about power being concentrated in the hands of a corporate elite a simple solution would be to require minimum dividend payouts. For example, if we required the company to pay out all its profits in dividends each year (so that it would show zero profit) then the entire corporate system would be visible and taxable. Requiring minimum dividend payouts (e.g., 50% of profits in any given year or over some period) would ensure that capital owners are always taxed and hence corporate profits are taxed.
This idea is not new. Many others have outlined variations of this logic. However, the point I am attempting to emphasize is that a counter-intuitive solution may be the best solution. In many ways the politicians and various informed pundits are falling into the fallacy of expertise acknowledge by Sherlock Holmes in The Adventure of the Abbey Grange: “Perhaps, when a man has special knowledge and special powers like my own, it rather encourages him to seek a complex explanation when a simpler one is at hand.” This simpler solution may, of course, be politically impossible to implement, despite its simplicity, logic and value. While it addresses the direct problem of where is it fair to impose taxes, it also removes in one fell swoop, one of the most powerful and popular tools in the political toolkit — the ability to hand out economic goodies to politically supportive clienteles that are paid for by political opponents and those lacking in political power and influence.
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