To be against the UN tax convention
We are against this idea:
Under discussion is a new UN tax convention that may permit states to tax economic activity where it actually occurs, rather than allowing multinationals to shift profits to tax havens. The Tax Justice Network (TJN) said last year that nations lose $492bn (£390bn) annually due to corporate tax abuse. The global south bears the greatest losses, which undermine public services like health and education. If enacted, the convention would create a legally binding framework requiring multinationals to pay tax where they employ staff and do real business – not where they stash profits. This would replace the outdated arm’s-length principle with unitary taxation, ensuring fair profit allocation. It would mean an end to Amazon, Google and Apple putting billions through lower-tax jurisdictions while extracting wealth from higher-tax ones.
One possible response to this is that of course we’d be against this, lickspittle running dogs of the capitalists as we are. On the other hand it’s also possible that we actually understand this little corner of economic policy better than the Tax Justice Network - not difficult for an organisation founded by Richard Murphy - and so are against it for rather better reasons.
That last claim, about Amazon et al, was already solved by the first Trump Administration. The rat run of money - say, and as an example - through Ireland to a Caribbean island only worked if those profits were not taxed in the United States. Which, if they were kept offshore from the US they were not. Now they are taxed. Taxed by the US. Foreign taxes paid are deducted from that US bill to be paid. So, the incentive to put the money where it can gain a rum punch and a tan tax free is gone - there’s nothing to be gained from doing that. The problem is solved.
The other claim, about poor countries. We actually know about tax incidence. A paper on that here. With respect to a corporate tax it’s not the corporation that pays it. It cannot be - all taxes lighten the wallet of some live human being. It is some combination of the shareholders (ie, the capitalists) in the organisation being taxed and the workers in general in the economy doing the taxing. That second is because we always get less of whatever it is that we tax and taxing capital returns means less capital invested. The workers’ wages are determined by the average productivity in an economy, capital is what improves productivity and therefore wages.
This is one of those economic things that is obviously true, the important thing about it being how much is it true? How much of the incidence of that corporate taxation falls not on the shareholders, the capitalists, but upon the workers in the form of lower wages? Reasonable estimates for the US indicate maybe 25% on the workers. Other equally reasonable suggest 75%. At least one for the UK suggests 50% (one that appeared here in fact).
We even know what it is that determines this capitalists or workers split. A dual influence of how big is the economy under discussion relative to the global one and how mobile is capital? For in this international sense we employ an observation from Adam Smith - closely connected with his observation about “invisible hand”. He was talking about how foreign profits are higher than domestic but even so, some will still just invest at home. We continue with this, these days, and point out that there’s an average level of profit out there. Obviously there is, that’s just a certainty. But, if you tax returns to investment then the returns, in that place doing the taxing, fall below that average. Thus less investing will be done there, with those effects upon productivity and investment.
The smaller the economy taxing the more foreigners can just not bother to invest there. Also, obviously enough, foreign capital that hasn’t arrived as yet is perfectly mobile - there’s no reason for it to arrive at all if it doesn’t wish to. Combine these two together and we will now insist that the incidence of a corporate or capital tax upon wages will rise in a small poor economy. Then rise again when it’s a tax on those dastardly foreign corporates.
So much so that Tony Atkinson and Joe Stiglitz (yes, that Joe Stiglitz) pointed out all the way back in 1980 that the effect on a poor economy (a poor place, by definition, has a small economy) could be over 100%. That is, the taxation of foreign capital in that economy will lower the workers’ wages by more than the tax collected - all the burden, and more, of the tax is carried by the workers.
The UN treaty - and the Tax Justice Network - are therefore demanding that the poorest workers in the world should receive lower wages in the name of sticking it to The Capitalist Man. We continue to suggest that this isn’t sensible. Nor, even, moral.
It’s possible to put this in a shorter way. The poor places of the world are desperately short of the capital that would make them richer. Why in buggery would we tax the capital that makes those desperately poor places richer?
But then we understand the economics of taxation. The UN and the TJN on the other hand……
Tim Worstall