The latest logical error in the tax avoidance story

We have more evidence concerning offshore tax avoidance by those horrible large corporates. Evidence which will undoubtedly be used the wrong way, to do something which isn't actually implied, let alone proven,  by the research.

Multinational companies shift about 40% of the profits they earn outside their home countries into tax havens, eluding tax-collection efforts, according to an analysis that points to persistent gaps in government revenue collection.

That research is here by Gabriel Zucman and whoever he's got to do the sums this time. There are two basic logical errors here. The first is that they study how profits are shifted around - fair enough. But they then assume that profits which are shifted aren't taxed. This is not so. Sure, Apple might send some large sum of profits off to Bermuda for a rum punch and a tan. That means that EU countries don't get much tax revenue as it passes from them, to Ireland, to Bermuda.

But that doesn't mean that those profits are never taxed. When and if Apple takes it onshore into the US it becomes subject to the tax system there. In fact, Apple just made the largest tax payment by any taxpayer anywhere, ever, on exactly that basis.

It's the second which is the much worse error though. They claim to see little to no evidence that, as standard economic theory predicts, higher taxes reduce investment. "Real investment" as they call it seems to be near entirely uninfluenced by tax rates, it's just the legal form and location of profits which changes.

We can see where this is going to go, can't we? If real investment is unaffected by tax rates then we can tax those profits much more highly, reverse the decline in corporate tax rates, and still gain the same investments! Huzzah!

Except, except, they also show that a very large portion of such taxes are avoided through those offshore arrangements. So, what would we expect the influence of tax rates no one is paying to be upon investment decisions? That is, we can either show that lots of corporate taxation is avoided, or we can show that corporate taxation levels don't make any difference to investment decisions, but we cannot show both that tax rates make no difference and also that they're all avoided. Taxes that aren't paid aren't going to influence all that much, are they?

What this paper doesn't show is that investments, real investments that is, are unaffected by tax rates. But that's undoubtedly the way the paper will be used.