tag:theconversation.com,2011:/ca/topics/corporate-tax-6153/articlescorporate tax – The Conversation2023-02-23T19:57:31Ztag:theconversation.com,2011:article/2000342023-02-23T19:57:31Z2023-02-23T19:57:31Z$1 trillion in the shade – the annual profits multinational corporations shift to tax havens continues to climb and climb<figure><img src="https://images.theconversation.com/files/512027/original/file-20230223-2492-ja174s.jpg?ixlib=rb-1.1.0&rect=45%2C32%2C1033%2C685&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Looks like paradise – especially if you're a multinational corporation in need of a tax haven.
</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/relaxing-on-hammock-after-a-beach-day-in-the-royalty-free-image/897476216?phrase=cayman%20islands">LeoPatrizi/E+ via Getty Images</a></span></figcaption></figure><figure class="align-center ">
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<p>About a decade ago, the world’s biggest economies <a href="https://www.oecd.org/g20/summits/los-cabos/">agreed to crack down</a> on multinational corporations’ abusive use of tax havens. This <a href="https://doi.org/10.1787/23132612">resulted in a 15-point action plan</a> that aimed to curb practices that shielded a large chunk of corporate profits from tax authorities.</p>
<p>But, according to our estimates, it hasn’t worked. Instead of reining in the use of tax havens – countries such as the Bahamas and Cayman Islands with very low or no effective tax rates – the problem has only gotten worse. </p>
<p><a href="https://doi.org/10.35188/UNU-WIDER/2022/254-6">By our reckoning</a>, corporations shifted nearly US$1 trillion in profits earned outside of their home countries to tax havens in 2019, up from $616 billion in 2015, the year before the <a href="https://doi.org/10.1787/23132612">global tax haven plan was implemented</a> by the group of 20 leading economies, also known as the G-20. </p>
<p><a href="https://doi.org/10.35188/UNU-WIDER/2022/254-6">In a new study</a>, we measured the excessive profits reported in tax havens that cannot be explained by ordinary economic activity such as employees, factories and research in that country. Our findings – which you can explore in more detail along with the data and an interactive map in <a href="https://missingprofits.world">our public database</a> – show a striking pattern of artificial shifting of paper profits to tax havens by corporations, which has been relentless since the 1980s. </p>
<h2>Global crackdown</h2>
<p>The current effort to curb the legal corporate practice of using tax havens to avoid paying taxes began in June 2012, when world leaders at the <a href="https://www.oecd.org/g20/summits/los-cabos/">G-20 meeting in Los Cabos, Mexico</a>, agreed on the need to do something.</p>
<p>The Organization for Economic Cooperation and Development, a group of 37 democracies with market-based economies, <a href="https://doi.org/10.1787/23132612">developed a plan that consisted</a> of 15 tangible actions it believed would significantly limit abusive corporate tax practices. These included creating a single set of international tax rules and cracking down on harmful tax practices.</p>
<p>In 2015, the G-20 adopted the plan officially, and implementation began across the world the following year.</p>
<p>In addition, following leaks like the <a href="https://www.icij.org/investigations/panama-papers/">Panama Papers</a> and <a href="https://www.icij.org/investigations/paradise-papers/">Paradise Papers</a> – which shed light on dodgy corporate tax practices – public outrage led <a href="https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses">governments in the U.S.</a> and Europe to initiate their own efforts to lower the incentive to shift profits to tax havens. </p>
<h2>Profit-shifting soars</h2>
<p><a href="https://doi.org/10.35188/UNU-WIDER/2022/254-6">Our research shows</a> all these efforts appear to have had little impact. </p>
<p>We found that the world’s biggest multinational businesses shifted 37% of the profits – or $969 billion – they earned in other countries (outside the headquarter country) to tax havens in 2019, up from about 20% in 2012 when G-20 leaders met in Los Cabos and agreed to crack down. The figure was less than 2% back in the 1970s. The main reasons for the large increase were the growth of the tax avoidance industry in the 1980s and U.S. policies that made it easier to shift profits from high-tax countries to tax havens.</p>
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<p>We also estimate that the amount of corporate taxes lost as a result reached 10% of total corporate revenue in 2019, up from less than 0.1% in the 1970s. </p>
<p>In 2019, the total government tax loss globally was $250 billion. U.S. multinational corporations alone accounted for about half of that, followed by the U.K. and Germany.</p>
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<h2>Global minimum tax</h2>
<p>How do policymakers fix this?</p>
<p>So far, the world as a whole has been trying to solve this problem by cutting or scrapping corporate taxes, albeit in a very gradual way. In the past 40 years, the global effective corporate tax rate <a href="http://globaltaxation.world/">has fallen from 23% to 17%</a>. At the same time, governments have relied more heavily on <a href="https://gabriel-zucman.eu/files/PikettySaezZucman2022RKT.pdf">consumption taxes</a>, which are regressive and tend to increase income inequality.</p>
<p>But the root cause of profit-shifting is the incentives involved, such as generous or lenient corporate tax rates in other countries. If countries could agree on a <a href="https://www.jstor.org/stable/24437292">global minimum corporate tax rate</a> of, say, 20%, the problem of profit-shifting would, in our estimation, largely disappear, as tax havens would simply cease to exist. </p>
<p>This type of mechanism is exactly what more than <a href="https://www.oecd.org/newsroom/130-countries-and-jurisdictions-join-bold-new-framework-for-international-tax-reform.htm">130 countries signed onto in 2021</a>, with implementation of a 15% minimum tax set to begin in 2024 in the EU, U.K., Japan, Indonesia and many other countries. While the <a href="https://apnews.com/article/russia-ukraine-biden-poland-2577a450b3cb18f325d61e9920e2593d">Biden administration has helped spearhead</a> the global effort to implement the tax, the U.S. <a href="https://www.politico.com/news/2022/07/15/manchin-rejects-global-tax-plan-00046103">has notably not been able</a> to get legislation through Congress. </p>
<p>Our research suggests implementing this type of tax reform is necessary to reverse the shift of ever-greater amounts of corporate profits going to tax havens – instead of being taxed by the governments where they operate and create value.</p><img src="https://counter.theconversation.com/content/200034/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ludvig Wier is also Head of Secretariat at the Danish Ministry of Finance, holds a PhD from the University of Copenhagen and does research for UNU-WIDER, which provided funding for the underlying research in this story. The views expressed in this paper are those of the authors, and do not necessarily reflect the views of the Ministry of Finance of Denmark, UNU-WIDER, the United Nations University, nor its program/project donors. All data are available online at <a href="https://missingprofits.world">https://missingprofits.world</a>.</span></em></p><p class="fine-print"><em><span>Gabriel Zucman receives funding from the Stone Foundation, the Carnegie Foundation, the European Research Council, and the European Commission grant TAXUD/2020/DE/326.</span></em></p>New research shows that companies are shifting record amounts of their profits to tax havens, despite a global effort to crack down on the practice.Ludvig Wier, External Lecturer of Economics, University of CopenhagenGabriel Zucman, Associate Professor of Economics, University of California, BerkeleyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1782572022-03-06T12:15:17Z2022-03-06T12:15:17ZCorporate taxes can be good for shareholders: Why some actually want their companies to pay tax<figure><img src="https://images.theconversation.com/files/449610/original/file-20220302-13-kbwrv2.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C6240%2C4156&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">When it comes to shareholder credits, shareholders prefer their corporations pay the standard tax they owe — not a lower tax — to ensure higher cash flows.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>There is a prevailing assumption that, in the name of profit, shareholders don’t want their corporations to pay taxes. It’s easy to see how less taxes should mean more money in their pockets, but it turns out this is a common, yet understandable, misconception. </p>
<p>Contrary to this belief, shareholders (people who have invested money in a company in exchange for a share of the owndership) sometimes prefer their corporations to pay taxes to maximize cash flows. But, how can that be? Take common news stories about <a href="https://theconversation.com/the-pandora-papers-how-punishing-tax-cheats-can-serve-as-a-deterrent-170435">offshore tax schemes</a>, creative tax planning and <a href="https://www.cbc.ca/radio/day6/episode-363-apple-s-tax-shelters-marvel-vs-dc-london-s-wartime-stretcher-fences-lost-jewish-music-more-1.4391482/how-apple-managed-to-pay-almost-no-tax-on-billions-in-profits-1.4391505">corporations reducing their taxes</a>, for example. These stories all seem to imply that less taxes mean higher cash flows for both corporations and shareholders.</p>
<p>It turns out that isn’t always true. Certain incentives, like shareholder credits that reduce the amount of tax owed on dividends, actually <em>encourage</em> shareholders to prefer their corporations pay the standard tax they owe — not a lower tax — to ensure higher cash flows for themselves.</p>
<h2>A brief overview</h2>
<p>Some countries around the world, such as Australia and Canada, run what’s called an “integrated tax system.” This means that corporate income and individual income are only taxed once, together, as the money makes its way from the corporation to the shareholder. Other countries, like the United States, do not integrate corporate and personal tax, leading to <a href="https://www.investopedia.com/terms/d/double_taxation.asp">double taxation</a> where corporations and individuals end up paying tax twice on the same income. </p>
<p>Let’s take a closer look at why this is important.</p>
<p>Imagine three people: Person A is an employee, Person B runs an unincorporated business and Person C is the sole shareholder of a corporation. Each of these cases generates income of $100,000 for the same type of work. It makes sense that, because the economic activity is the same, taxes at the end of the day are the same. It shouldn’t matter which person you are or how you organize your work life. </p>
<p>But because Person C and their corporation pay taxes separately, that can change which of the three persons you’d prefer to be. To remedy this, we need some way to account for the difference in taxes each person pays. Integrated tax systems are designed to do just that, by ensuring all three individuals are taxed the same amount.</p>
<h2>Integration in action</h2>
<p>Now let’s consider how this works for the shareholder. </p>
<p>Shareholders pay taxes on the dividend payments they receive from a company. Dividend payments are monetary rewards shareholders receive for investing in a company. To accomplish tax integration, shareholders include their proportion of the corporation’s pre-tax income (also known as the dividend) in their individual taxable income as a dividend. The tax is then calculated and shareholders are able to reduce their individual tax liability with credit for taxes the corporation has already paid. </p>
<p>My colleagues and I <a href="https://doi.org/10.2308/accr-52315">developed a numerical illustration</a> to show the incentive this system creates. Shareholders want the corporation to pay taxes and to avoid spending money on <a href="https://www.investopedia.com/terms/t/tax-planning.asp">costly tax planning</a>. The <a href="https://www.penguinrandomhouse.com/books/304634/nudge-by-richard-h-thaler-and-cass-r-sunstein/">valuable tax credits nudge</a> shareholders into wanting their corporations to pay taxes, rather than paying for tax planning to reduce tax — all in the name of greater shareholder after-tax cash flows.</p>
<p>Next, let’s take this illustration into the real world.</p>
<p>In our study, we used a set of European countries that eliminated their integration systems, mostly in the mid-2000s. We compared these “eliminating” countries to other countries that did not change their tax policy and found that getting rid of the credits also got rid of tax incentives. After the change, corporations in these countries engaged in substantially more tax planning to reduce the standard tax they owed. </p>
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<img alt="A woman walks by the entrance to a building that says 'Cour de Justice de L'union Europeenne' on the front." src="https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/449931/original/file-20220303-6135-1h3jaqq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A series of rulings by the European Court of Justice in the late 2000s led several countries to eliminate their tax integration systems.</span>
<span class="attribution"><span class="source">(Geert Vanden Wijngaert)</span></span>
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<p>Why? In the new tax system without integration, income could be taxed twice as it transferred from corporation to shareholder. So, to maximize shareholder cash flows, the new incentive was to minimize the amount of corporate income that was initially taxed.</p>
<h2>Hold your horses</h2>
<p>Long story short, shareholders can prefer their corporations to pay taxes. But don’t go overboard — no silver bullet exists to kill taxpayers’ inherent preference to minimize taxes. </p>
<p>Our research also showed that other important factors can limit the attractiveness of the shareholder credit incentive. The more a corporation operates in foreign jurisdictions (which do not offer credits), the fewer credits it generates and the more dispersed the shareholders are. This results in a weaker incentive to generate shareholder credits with higher corporate taxes.</p>
<p>In each of these cases, shareholders would rather the corporation minimize its taxes. Nevertheless, an integrated tax system with its shareholder credits might just change the way you, I or governments think about shareholder tax incentives. Typical shareholders want more cash flow, and they’ll do anything — including paying more tax — to get it.</p><img src="https://counter.theconversation.com/content/178257/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Bauer does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Incentives, like shareholder credits for corporate taxes paid, mean that shareholders want their corporations to pay taxes.Andrew Bauer, Assistant professor, Canada Research Chair in Taxation, Governance and Risk, University of WaterlooLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1608612021-05-17T02:44:00Z2021-05-17T02:44:00Z‘Patent boxes’ are said to boost innovation. The evidence says they don’t<p>On budget night federal Treasurer Josh Frydenberg announced Australia is getting its own “patent box”.</p>
<p>What is a patent box? </p>
<p>Despite its odd name, it is a relatively straightforward concept. It means <a href="https://www.industry.gov.au/data-and-publications/patent-box-policies">lowering the tax rate</a> on all income derived from patents registered in a nation. About half the members of the European Union, Britain and China are among those to adopt patent boxes in some form.</p>
<p>Australia’s patent box scheme will initially be limited to medical and biotechnology patents, but with scope to expand it down the track.</p>
<p>If a company has a drug patent, for example, the profit from selling that drug will be taxed at a rate of 17%, instead of the usual company tax rate (now 25% for companies with an annual turnover less than A$50 million and 30% for those with more).</p>
<p>In <a href="https://joshfrydenberg.com.au/latest-news/budget-2021-2022/">his budget speech</a> Frydenberg cited world-leading Australian innovations such as Wi-Fi, the Cochlear bionic ear and a vaccine for cervical cancer. “We want to see more innovation commercialised in Australia,” he said.</p>
<p>Will the patent box help? The evidence from overseas is not promising.</p>
<h2>Another race to the bottom</h2>
<p>A 2015 <a href="https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_57.pdf">European Commission report</a> examined the effect of patent boxes on 2,000 companies in 12 countries from 2000 to 2011. It found the patent boxes benefited companies financially but had limited effect on increasing local research & development. </p>
<p>To take advantage of the lower tax rate, multinational companies filed more patents in these countries with patent boxes than previously. But they didn’t change the location of their research teams.</p>
<p>The European Commission report noted fears about patent boxes sparing another “race to the bottom” in corporate taxation, with nations competing to be more attractive to foreign companies. If one country had more preferential tax rates, it would attract more patent filings. If other nations followed suit, the only real beneficiaries would be the multinational corporations using the schemes to reduce their tax obligations “without a change in real research activity”</p>
<p>Its results, the report concluded, “confirm these fears”.</p>
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Read more:
<a href="https://theconversation.com/how-to-get-the-most-out-of-research-when-universities-and-industry-team-up-156590">How to get the most out of research when universities and industry team up</a>
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<h2>Australian warnings</h2>
<p>This all should be known to the Australian government.</p>
<p>A <a href="https://www.industry.gov.au/sites/default/files/May%202018/document/pdf/patent_box_policies.pdf?acsf_files_redirect">2015 report</a> from Australia’s Office of the Chief Economist came to a similar conclusion to the European Commission study.</p>
<p>Introducing a patent box might lead to more patents being filed in Australia, it said, but they would mostly be ones derived from research and development done overseas. It warned:</p>
<blockquote>
<p>The most important cost associated with the implementation of a patent box regime is a fall in tax revenues collected from innovative companies. Since the fall is likely to exceed revenues collected from (re)allocation of IP income to Australia, the overall return of a patent box regime is likely to be negative.</p>
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<p>IP Australia, the federal agency administering intellectual property rights, detailed the poor record of patent boxes in its submission to the federal parliament’s <a href="https://www.aph.gov.au/ResearchandInnovation">Inquiry into Australia’s Future in Research and Innovation</a> in 2016. It said the literature on such schemes found little if any benefit for actual innovation, at great cost to taxpayers.</p>
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Read more:
<a href="https://theconversation.com/money-for-telescopes-and-vaccines-is-great-but-the-budgets-lack-of-basic-science-funding-risks-leaving-australia-behind-160780">Money for telescopes and vaccines is great, but the budget's lack of basic science funding risks leaving Australia behind</a>
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<h2>Bad plan, bad design</h2>
<p>On top of all this, Frydenberg’s proposed patent box is poorly targeted. </p>
<p>Ideally the subsidy should only apply to new patents - or better yet, new inventions. But the scheme will allow the lower tax rate on all patents, even if they were granted many years ago or are no longer owned by their original inventor. </p>
<p>This means in its first year alone the patent box is set to deliver a $100 million gift to companies sitting on old patents without any actual new innovation.</p>
<p>Even if you want to subsidise innovation, it makes zero sense to subsidise old patents. Other countries have avoided this pitfall by limiting the subsidy to new ones. </p>
<p>In short, a patent box is good in theory but bad in practice; and the design of the Australian government’s patent box is particularly bad. It will likely end up being just another way multinational companies can avoid paying tax.</p><img src="https://counter.theconversation.com/content/160861/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Isaac Gross does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Lowering the tax rates on profits from patents registered in Australia is unlikely to increase local research and development. But it will be a gift for multinationals.Isaac Gross, Lecturer in Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1572952021-04-02T12:19:30Z2021-04-02T12:19:30ZBiden wants corporations to pay for his $2 trillion infrastructure plans, echoing a history of calls for companies to chip in when times are tough<figure><img src="https://images.theconversation.com/files/393222/original/file-20210401-15-1m667mv.jpeg?ixlib=rb-1.1.0&rect=161%2C152%2C5829%2C3817&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Biden is asking companies to cover the tab for his infrastructure plan. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Biden/8fc737c142234133a8ff7226d9b79c92/photo?Query=Biden%20AND%20infrastructure&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=295&currentItemNo=45">AP Photo/Evan Vucci</a></span></figcaption></figure><p>President Joe Biden <a href="https://www.washingtonpost.com/us-policy/2021/03/31/biden-infrastructure-climate-plan/">just proposed a roughly US$2 trillion infrastructure plan</a>, which <a href="https://www.rev.com/blog/transcripts/joe-biden-speech-on-2-trillion-infrastructure-plan-transcript-march-31">he ambitiously compared</a> to the interstate highway system and the space race. He aims to pay for it solely by taxing companies more, including the <a href="https://www.taxpolicycenter.org/statistics/corporate-top-tax-rate-and-bracket">first increase in the corporate tax rate since the 1960s</a>. </p>
<p>Biden said he wants to increase the rate from 21% to 28% – which would still be below the 35% level it was at before the <a href="https://www.taxpolicycenter.org/taxvox/new-congressional-study-finds-little-economic-benefit-2017-tax-cuts">2017 tax cut</a> – and strengthen the global minimum tax to discourage multinational corporations from using tax havens. Together, he estimates it would raise the necessary funds to finance his plan over 15 years. </p>
<p>“No one should be able to complain about” raising the rate to 28%, Biden said in a speech announcing the plan. “It’s still lower than what that rate was between World War II and 2017.”</p>
<p>As an <a href="https://scholar.google.com/citations?user=9iqK9wMAAAAJ&hl=en&oi=ao">expert on tax policy</a>, I believe he’s got a point. </p>
<p>What’s more, I think the president’s plan appeals to the basic principle of tax fairness that the corporate income tax was founded on: The taxes a person or business pays should be commensurate with the benefits they receive from public spending. And companies receive quite a lot. </p>
<h2>History of the corporate tax</h2>
<p>Prior to the 20th century, the federal government funded itself primarily with <a href="https://www.everycrsreport.com/reports/RL33665.html">tariffs and excise taxes</a> on goods such as alcohol and tobacco. </p>
<p>The first corporate income tax was signed by President Abraham Lincoln in 1862 to help fund the Civil War and then phased out in the 1870s.</p>
<p>As the U.S. grew in the early 20th century, policymakers worried about the economic and trade risks of relying too heavily on <a href="https://www.politico.com/magazine/story/2017/11/12/tax-reform-is-splitting-the-gop-its-happened-before-215820/">high tariffs</a>. So in 1909 they created the corporate income tax that we know today, <a href="https://www.britannica.com/topic/Payne-Aldrich-Tariff-Act">almost as an afterthought</a>, in a bill that was designed to reform tariffs.</p>
<p>Corporate taxes did not become a major part of the U.S. tax system until they were used to help finance World Wars I and II. Before 1916, the <a href="https://www.taxpolicycenter.org/sites/default/files/legacy/taxfacts/content/pdf/corporate_historical_bracket.pdf">rate was just 1%</a> but grew to 12% during WWI and ballooned to 40% during WWII. Congress also passed “<a href="https://www.cambridge.org/core/books/deficits-debt-and-the-new-politics-of-tax-policy/8631AECFC3EBC760978370D51166BB76">excess profits</a>” taxes of up to 95% to curb wartime profiteering in certain industries.</p>
<p>Corporate tax revenue as a share of total government revenue peaked during the war, in 1943, at just under 40%. </p>
<p><iframe id="Dat4x" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Dat4x/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>After the war, excess profits taxes were eliminated, but lawmakers kept the regular rate high and raised it to 52% in 1951 as the U.S. entered the Korean War. </p>
<p>The thinking on corporate taxes began to change in the 1960s. In his 1963 <a href="https://millercenter.org/the-presidency/presidential-speeches/january-14-1963-state-union-address">State of the Union</a> address, President John F. Kennedy proposed corporate tax cuts, arguing that they would “encourage the initiative and risk-taking on which our free system depends – induce more investment, production, and capacity use – help provide the two million new jobs we need every year – and reinforce the American principle of additional reward for additional effort.” </p>
<figure class="align-right ">
<img alt="President John F. Kennedy gestures with his right hand as he speaks in front of a lectern in 1962." src="https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=407&fit=crop&dpr=1 600w, https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=407&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=407&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/393223/original/file-20210402-17-u6gr1b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">President John F. Kennedy was an early proponent of cutting corporate taxes to spur investment.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/PresidentJohnFKennedy/a3a77811f65e457698bf05eccd5a42df/photo?Query=corporate%20AND%20tax&mediaType=photo&sortBy=arrivaldatetime:asc&dateRange=Anytime&totalCount=534&currentItemNo=1">AP Photo</a></span>
</figcaption>
</figure>
<p>Shortly after JFK’s assassination, <a href="https://taxfoundation.org/happy-birthday-kennedy-tax-cuts/">Congress passed his Revenue Act of 1964</a>, which lowered the corporate rate to 48%. </p>
<p>But the high costs of the Vietnam War led Lyndon B. Johnson to add a temporary surcharge in 1968, which raised the rate to a high of 52.8% before being lowered back to 48% by 1971.</p>
<p>After that, the corporate tax rate began its 50-year decline as successive administrations, especially Republican ones, gradually chipped away at it. As a result, by 2020, corporations were covering just 7% of government revenue – compared with the 33% borne by individuals and families – even as <a href="https://fred.stlouisfed.org/series/A053RC1Q027SBEA">they rake in record profits</a>. </p>
<p><iframe id="4KfUm" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/4KfUm/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>This same trend has been seen around the world as globalization prompted many countries such as China, Japan and European Union member states to lower business taxes in a global “<a href="https://www.washingtonpost.com/business/2018/07/24/across-globe-taxes-corporations-plummet/">race to the bottom</a>.” In 2016, <a href="https://www.oecd.org/tax/corporate-tax-remains-a-key-revenue-source-despite-falling-rates-worldwide.htm">corporate tax rates made up just 9% of total government revenue</a> on average in countries in the Organization for Economic Cooperation and Development. </p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://theconversation.com/us/newsletters/weekly-highlights-61?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=weeklybest">Sign up for our weekly newsletter</a>.]</p>
<h2>The benefits principle</h2>
<p>It seems that after 50 years of falling corporate tax rates, this trend may finally be coming to end – at least in the U.S. </p>
<p>Although Republicans in Congress <a href="https://guce.yahoo.com/consent?brandType=nonEu&gcrumb=cHOummg&done=https%3A%2F%2Fnews.yahoo.com%2Frepublicans-form-conservative-coalition-fight-195356032.html">remain firmly opposed to any increase in taxes</a> to pay for infrastructure spending, the public seems to be on Biden’s side. A 2019 <a href="https://news.gallup.com/poll/1714/taxes.aspx">Gallup poll found that</a> more than two-thirds of Americans believe that corporations pay less than their fair share in taxes. More recently, <a href="https://morningconsult.com/2021/03/31/biden-infrastructure-plan-raising-taxes-wealthy-corporations/">47% of those polled</a> on early reports on Biden’s infrastructure plan said they’d be “more likely” to support it if it was paid for with corporate tax increases, while 31% said it would have no impact on their views. Only 21% said it would make them less likely to support it.</p>
<p>I believe the popular appeal of Biden’s plan is that it reflects the <a href="https://www.investopedia.com/terms/b/benefits-received-rule.asp">benefits principle</a>, which states that a tax bill should be based on the value of the benefits a person or company receives from the government.</p>
<p>And that’s <a href="https://fraser.stlouisfed.org/title/tariff-1909-payne-aldrich-tariff-5874/fulltext">basically the reasoning</a> behind the corporate tax created in 1909.</p>
<p>A <a href="https://supreme.justia.com/cases/federal/us/220/107/">1911 Supreme Court decision</a> that upheld the constitutionality of the corporate income tax explicitly invoked the benefits principle, arguing that with incorporation owners of a business enjoy “distinctive privilege[s]” — such as protection from individual liability and the ability to sell stock — “which do not exist when the same business is conducted by private individuals or partnerships.</p>
<p>"It is this distinctive privilege which is the subject of taxation.” </p>
<p><a href="http://whynationsfail.com/">Decades of research</a> show that businesses benefit tremendously from being located in countries with political stability and inclusive institutions that promote the rule of law, protection of property, due process and democratic participation. Companies based in the U.S., perhaps more than anywhere else, enjoy all these privileges. </p>
<p>And that’s before we even get to what government directly spends money on. Companies have benefited enormously from investments in <a href="https://www.apta.com/wp-content/uploads/APTA-Economic-Impact-Public-Transit-2020.pdf">mass transportation</a>, <a href="https://www.eda.gov/opportunity-zones/">local development</a>, <a href="https://borgenproject.org/economic-benefits-of-education/">free public education</a>, <a href="https://hbswk.hbs.edu/item/quantifying-the-economic-impact-of-the-internet">the internet</a> and many other types of infrastructure. </p>
<figure class="align-center ">
<img alt="Heavy traffic moves along an interstate highway in Seattle with large signs directing cars to various offramps" src="https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=486&fit=crop&dpr=1 754w, https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=486&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/393224/original/file-20210402-23-1rhz031.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=486&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Corporations have benefited greatly from federal spending on the interstate highway system and other infrastructure projects.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/SeattleViadoom/7db17f2fe4b8480e805b6cfdc0979eb3/photo?Query=interstate%20AND%20highway&mediaType=photo&sortBy=arrivaldatetime:asc&dateRange=Anytime&totalCount=1720&currentItemNo=46">AP Photo/Ted S. Warren</a></span>
</figcaption>
</figure>
<p>Speaking of infrastructure, and <a href="https://www.washingtonpost.com/us-policy/2021/03/31/what-is-in-biden-infrastructure-plan/">Biden’s plan</a>, companies arguably benefit more than anyone from repaired bridges, upgraded electrical grids, increased broadband access, and research and development. According to a review of the research by the Congressional Research Service, public investment in core infrastructure, especially during a recession, <a href="https://fas.org/sgp/crs/misc/R44896.pdf">can spur faster productivity growth and reduce long-term unemployment</a>.</p>
<p>One objection to the benefits principle logic - as economists are fond of reminding us - <a href="https://www.econlib.org/library/Enc/CorporateTaxation.html">is that businesses cannot actually pay taxes</a>. Only people can. When a business is taxed, that tax is passed on in some combination of higher consumer prices, lower wages and lower returns to capital. Economists call this concept <a href="https://www.investopedia.com/terms/t/tax_incidence.asp">tax incidence</a> and often argue that a misunderstanding of tax incidence is what leads many people to support higher taxes on business.</p>
<p>But economists may be missing the point. The benefits principle justification for taxing corporations relies on the logic of <a href="https://law.yale.edu/justice-collaboratory/procedural-justice">procedural justice</a> - an emphasis on the fairness of the process rather than the outcome. If corporate balance sheets benefit from public investment, procedural justice dictates that their taxes should reflect that benefit, even if those costs and benefits are ultimately passed on to individuals.</p>
<h2>The price you pay</h2>
<p>And so it makes a lot of sense for companies that will benefit so much from these investments to pick up the tab. Investment that <a href="https://www.wsj.com/articles/biden-infrastructure-plan-aims-to-boost-economys-productivity-over-time-11617269403">boosts productivity will mean big gains for corporate America</a>. </p>
<p>As the recent experience with COVID-19 vaccine development has shown – in which the U.S. <a href="https://www.scientificamerican.com/article/for-billion-dollar-covid-vaccines-basic-government-funded-science-laid-the-groundwork/">has invested billions of dollars</a> to get a vaccine in record time – businesses also benefit from investment in basic science research. The sooner everyone is vaccinated, the sooner the economy and business can get back to normal. </p>
<p>Put simply, a reasonable level of taxation can be thought of as the price corporations pay for all the benefits of American taxpayers have given them.</p><img src="https://counter.theconversation.com/content/157295/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephanie Leiser does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The corporate tax was created on the principle that people and companies should be taxed based on what they receive in benefits – and US corporations have received an awful lot.Stephanie Leiser, Lecturer in Public Policy, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1321432020-03-30T13:27:29Z2020-03-30T13:27:29ZBiggest companies pay the least tax, leaving society more vulnerable to pandemic – new research<figure><img src="https://images.theconversation.com/files/317793/original/file-20200228-24680-ngnwwx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Giant advantages. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/kiev-ukraine-february-21-2012-logotype-193169738">Bloomicon</a></span></figcaption></figure><p>The coronavirus pandemic is rocking financial markets, disrupting supply chains and sharply reducing consumer spending. The crisis <a href="https://theconversation.com/coronavirus-your-guide-to-winners-and-losers-in-the-business-world-134205">is hitting</a> the likes of airlines and high street retailers particularly hard, and is decimating many small businesses. Unfortunately, this is proving devastating for millions of precarious and low-income workers across the world.</p>
<p>Many governments – including <a href="https://www.ifs.org.uk/publications/14771">the UK</a> and the <a href="https://www.reuters.com/article/us-health-coronavirus-fed-stimulus-analy/us-stimulus-package-is-biggest-ever-but-may-not-be-big-enough-idUSKBN21H0E7">US</a> – have announced fiscal stimulus packages, including tax relief, to individuals and business. Such measures are welcome, but our <a href="https://doi.org/10.1177/0032329220911778">new research</a> suggests that they should be understood against broader shifts in the tax regime which leave society less able to withstand the pandemic.</p>
<p>As we show by looking at American companies, these shifts reinforce inequality not only between large and small firms but also between high and low-income households. The result is a fraying social fabric through which the coronavirus can spread rapidly.</p>
<h2>The big discount</h2>
<p>The graph below maps the worldwide effective tax rate – the rate that is really paid as opposed to any rate set by governments – for US non-financial corporations listed on the stock market. The dark grey bars show the average tax rate of the top 10% of corporations ranked by revenues, while the light grey bars show the bottom 90%. The line above the bars shows the ratio of the tax rate of the top 10% relative to the bottom 90%. </p>
<p><strong>Worldwide effective tax rates</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/323950/original/file-20200330-146695-1fwf5wl.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/323950/original/file-20200330-146695-1fwf5wl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/323950/original/file-20200330-146695-1fwf5wl.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/323950/original/file-20200330-146695-1fwf5wl.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/323950/original/file-20200330-146695-1fwf5wl.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/323950/original/file-20200330-146695-1fwf5wl.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=506&fit=crop&dpr=1 754w, https://images.theconversation.com/files/323950/original/file-20200330-146695-1fwf5wl.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=506&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/323950/original/file-20200330-146695-1fwf5wl.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=506&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Source: Compustat/Wharton Research Data Services.</span>
<span class="attribution"><span class="source">Sandy Hager/Joseph Baines</span></span>
</figcaption>
</figure>
<p>This shows that the worldwide tax system was progressive in the 1970s, with the largest corporations paying slightly higher rates than the smaller ones. By the mid-1980s the system had turned sharply regressive and has stayed so ever since. For 2015-18, smaller listed corporations were effectively paying a 41% rate on their profits, while larger corporations paid 28%. </p>
<p>What accounts for this persistent tax advantage for larger corporations? Are they gaming the domestic system? Or do they enjoy a foreign tax advantage because they have the resources to evade taxes and shift profits to low-tax jurisdictions? To address these questions, we compared the tax rate on domestic income to the rate on foreign income.</p>
<p>The graphs below looks at how much US corporations really pay in taxes to different authorities. Again comparing the largest 10% corporations with the rest, the top left graph focuses on tax payments in the US as a whole. The top right graph drills down to US federal taxes while the graph on the bottom left is for the total taxes paid to US states. These three graphs show that the entire domestic system of taxes, both federally and at state level, has been persistently biased towards large corporations since the mid-1980s. </p>
<p><strong>Effective tax rates by jurisdiction</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/323952/original/file-20200330-146666-opdv7s.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/323952/original/file-20200330-146666-opdv7s.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/323952/original/file-20200330-146666-opdv7s.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=556&fit=crop&dpr=1 600w, https://images.theconversation.com/files/323952/original/file-20200330-146666-opdv7s.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=556&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/323952/original/file-20200330-146666-opdv7s.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=556&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/323952/original/file-20200330-146666-opdv7s.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=699&fit=crop&dpr=1 754w, https://images.theconversation.com/files/323952/original/file-20200330-146666-opdv7s.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=699&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/323952/original/file-20200330-146666-opdv7s.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=699&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Source: Compustat/Wharton Research Data Services.</span>
<span class="attribution"><span class="source">Sandy Hager/Joseph Baines</span></span>
</figcaption>
</figure>
<p>This is different to what American corporations pay to other countries, as shown in the graph labelled “foreign” in the bottom right-hand corner. This rate has fallen dramatically for larger and smaller corporations alike, fitting the <a href="https://www.theguardian.com/business/2019/oct/07/corporate-tax-avoidance-climate-crisis-inequality">conventional wisdom</a> that tax competition has intensified with globalisation. Until as recently as the end of the 1990s, however, the foreign tax structure in the US was progressive, meaning that the largest corporations were paying more. This has now reversed, just like it did for domestic taxes several decades earlier. </p>
<h2>Concentration and inequality</h2>
<p>Why should we care if big business has a persistent tax advantage? One problem is that the tax system encourages businesses to concentrate into bigger and bigger entities. In recent years there have been growing concerns about the dominance of big business in advanced economies, including the US. <a href="https://hbr.org/2018/03/is-lack-of-competition-strangling-the-u-s-economy">Studies show</a> that as large corporations take greater shares of revenues, profits and assets, they also charge higher prices, pay lower wages, provide lower quality goods and services, and scale back innovation and investment. </p>
<p>Most <a href="https://www.economist.com/special-report/2018/11/15/across-the-west-powerful-firms-are-becoming-even-more-powerful">policy debate</a> has focused on governments rolling back antitrust legislation to remedy this concentration of businesses. Our research suggests that, at minimum, corporate tax should be part of this conversation: the global tax system rewards corporations for reaching a size that is actually bad for society. This may include impeding our ability to mitigate the spread of coronavirus.</p>
<p>Take the notoriously concentrated pharmaceuticals sector, which was already being blamed for a <a href="https://mattstoller.substack.com/p/national-champs-or-national-chumps">growing problem of drug shortages</a> well before the arrival of the pandemic – <a href="https://www.fda.gov/consumers/consumer-updates/fda-works-lessen-drug-shortage-impact">partly due to</a> business decisions to discontinue old products that wereren’t profitable enough. Lobbyists for big pharma were also <a href="https://www.politico.com/news/2020/03/05/coronavirus-drug-industry-prices-122412">successful in blocking</a> provisions in a new US$8.3 billion (£6.7 billion) coronavirus emergency spending bill that would tackle unfair pricing and thus threaten companies’ intellectual property rights over essential medicines.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/323963/original/file-20200330-146705-1cvxqhd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/323963/original/file-20200330-146705-1cvxqhd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/323963/original/file-20200330-146705-1cvxqhd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/323963/original/file-20200330-146705-1cvxqhd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/323963/original/file-20200330-146705-1cvxqhd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/323963/original/file-20200330-146705-1cvxqhd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/323963/original/file-20200330-146705-1cvxqhd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/323963/original/file-20200330-146705-1cvxqhd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Drug shortages threaten added difficulties.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/catalonia-spain-march-16-2020-pharmacist-1674056749">Daniel Farer Paez</a></span>
</figcaption>
</figure>
<p>The tax advantage of big business also helps to widen household inequality. Supporters often claim that tax savings allow business to expand productive capacity, employment and wages, and therefore create widespread prosperity. Yet <a href="https://doi.org/10.1177/0032329220911778">our research</a> shows that as the rate they effectively pay declines worldwide, large corporations scale back their capital expenditures.</p>
<p>If large corporations aren’t using their tax windfall to expand productive capacity, what are they doing with it? According to our findings, they are enriching their shareholders. </p>
<p>In the 1970s, large corporations allocated 30 cents toward dividend payments and stock buybacks for every dollar of capital expenditure. From 2010-18, the amount they spent on enriching their shareholders had jumped to 93 cents.</p>
<p>This surge wouldn’t be such a problem if share ownership was widely dispersed, but <a href="https://www.nber.org/papers/w20733">it’s not</a>. The top 1% of US households own, either directly or indirectly, 40% of all corporate shares, and the top 10% of households own 84%. </p>
<p>So the corporate tax regime has fuelled inequality, <a href="https://www.nytimes.com/2020/03/15/world/europe/coronavirus-inequality.html">which is</a> an important vector for the spread of the coronavirus. Many people on lower incomes are forced to make the wrenching choice between going into work and potentially contracting and spreading the coronavirus, or staying at home and failing to make ends meet.</p>
<p>The government measures for individuals and small businesses are a welcome - but by no means sufficient - attempt at ameliorating problems that the regressive tax regime has helped to create. Let’s also use this crisis as an opportunity to reform the tax system in ways that help tackle inequality and reduce corporate concentration.</p><img src="https://counter.theconversation.com/content/132143/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sandy Brian Hager is a member of the UK Labour Party. </span></em></p><p class="fine-print"><em><span>Joseph Baines does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Tax rates may be the same for big and small companies, but five charts show how things work out differently in practice.Sandy Brian Hager, Senior Lecturer in International Political Economy, City, University of LondonJoseph Baines, Lecturer in International Political Economy, King's College LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1014602018-09-02T20:09:46Z2018-09-02T20:09:46ZFactCheck: have the Trump tax cuts led to lower unemployment and higher wages?<blockquote>
<p>The evidence on the ground is very clear. The Trump tax cuts have led to stronger investment, stronger growth, lower unemployment rate and higher wages.</p>
<p><strong>– Minister for Finance Mathias Cormann, <a href="http://radio.abc.net.au/programitem/pgy6E8annG?play=true">interview on RN Breakfast</a>, August 13, 2018</strong></p>
</blockquote>
<p>After two years of debate and months of intense negotiation, the government’s proposal to cut the corporate tax rate from 30% to 25% for companies with turnover of more than A$50 million was <a href="https://theconversation.com/turnbull-cremates-big-business-tax-cuts-after-senate-kills-them-101980">voted down</a> in the Senate.</p>
<p>But while the government’s attempts to pass tax cuts in Australia were not fruitful, tax reform remains a significant international issue. </p>
<p>In arguing for a tax reduction for big business, Minister for Finance Mathias Cormann pointed to economic outcomes in the United States, where corporate tax rates were cut from 35% to 21% in January this year.</p>
<p>“If you look at the economic data in the US in the second quarter, of course post the Trump tax cuts, the US is recording in excess of 4% growth on an annualised basis, the unemployment rate now has a ‘three’ in front of it, and wages growth is the strongest it’s been in a very long time,” Cormann said.</p>
<p>“Massive, massive capital investment has been returned to the United States.”</p>
<p>Is that right? And if yes, are the tax cuts to thank? Let’s take a closer look. </p>
<h2>Checking the source</h2>
<p>In response to The Conversation’s request for sources and comment, a spokesperson for Cormann provided <a href="https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm">GDP</a> and <a href="https://www.bea.gov/newsreleases/national/gdp/2018/pdf/gdp2q18_adv.pdf">capital investment</a> data from the US Bureau of Economic Analysis, employment data from the US <a href="https://www.bls.gov/news.release/empsit.nr0.htm">Bureau of Labor Statistics</a>, a <a href="https://www.bloomberg.com/news/articles/2018-04-27/u-s-employment-costs-accelerate-in-sign-of-mounting-inflation">Bloomberg article</a>, and a January 2018 <a href="https://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018">World Economic Outlook</a> from the International Monetary Fund.</p>
<p>You can read the full response from Cormann’s office <a href="https://theconversation.com/full-response-from-mathias-cormann-for-a-factcheck-on-corporate-tax-cuts-and-the-us-economy-101521">here</a>. </p>
<hr>
<h2>Verdict</h2>
<p>Minister for Finance Mathias Cormann’s statement that corporate tax cuts in the US had “led to stronger investment, stronger growth, lower unemployment rate and higher wages” is not supported by evidence. </p>
<p>Cormann pointed to US economic data from the second quarter of 2018 (shortly after the US corporate tax cuts were enacted) to support his statement.</p>
<p>Cormann correctly quoted the figures about GDP growth and the unemployment rate. His statement on wage growth is debatable, and there are qualifications to be made about his interpretation of the capital investment data.</p>
<p>But the simple observation that some US economic indicators improved in the second quarter of 2018 does not imply that those improvements were caused by the tax cuts. </p>
<p>Even if causation <em>could</em> be established, one quarter of data tells us very little about the effect of tax reform. It takes time for companies and workers to adjust to changed taxation environments. These adjustments happen progressively over time, and this can lead to significant differences in the short term and long term responses. </p>
<p>It’s worth noting that the improvement in economic conditions in the US started in mid-2016, around 18 months before the tax reform.</p>
<hr>
<h2>The fundamental issues with the claim</h2>
<p>Can we really look to US economic data from the second quarter of 2018 to support (or for that matter, reject) the argument that corporate tax cuts would benefit Australia?</p>
<p>My answer is no, for two reasons.</p>
<h2>There is not evidence of causation</h2>
<p>The simple observation that some US economic indicators improved in the second quarter of 2018 (after the introduction of the corporate tax cuts) does not imply that those improvements were <em>caused</em> by the tax cuts.</p>
<p>Several other factors will determine economic dynamics in any given quarter. A sophisticated statistical analysis based on a longer string of data after the second quarter of 2018 would be needed to determine the causal contribution of corporate tax cuts.</p>
<p>The assessment of causality is further complicated by the fact that there is a lag effect of corporate tax cuts on the economy.</p>
<p>It takes time for companies and workers to adjust to changed taxation environments. These adjustments happen progressively over time, and this can lead to significant differences in the short term and long term responses. </p>
<p>It’s also important to note that the improvement in US economic conditions started in mid-2016, around 18 months before the tax reform.</p>
<h2>One quarter of data is not enough</h2>
<p>Even if we neglected the causality issue, data from the second quarter of 2018 only gives us a limited idea of the <em>very</em> short term effects of the corporate tax cuts.</p>
<p>When it comes to tax reform, long term effects are what really matters. The important difference between short term and long term effects is evident from the preliminary economic projections published by the International Monetary Fund (IMF) in August 2018.</p>
<p>According to the authors of the <a href="https://www.imf.org/en/Publications/WP/Issues/2018/08/07/The-Tax-Cuts-and-Jobs-Act-An-Appraisal-46137">IMF working paper</a>, the US corporate tax cuts are projected to have a modest impact on long term growth, but will also cause an <em>increase</em> in the US federal debt to GDP ratio by approximately five percentage points by 2023.</p>
<p>Therefore, the corporate tax cuts may, in the end, fail to sustain long term growth, and make it harder to reduce government deficits and debt. </p>
<p>Rather than focusing on what happened in the second quarter of 2018 in the US, those debating corporate tax cuts should look at the economic theory and evidence drawn from countries where tax reforms have been implemented for a longer period of time (for example, <a href="https://www.sciencedirect.com/science/article/pii/S0047272703000604">Canada</a> and <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/geer.12157">Germany</a>).</p>
<p>In general, this body of research does <a href="https://theconversation.com/there-isnt-solid-research-or-theory-to-support-cutting-corporate-taxes-to-boost-wages-92031">not provide</a> any solid theoretical or empirical evidence backing the argument that corporate tax cuts will lead to a more prosperous economy.</p>
<h2>A closer look at the economic figures</h2>
<p>As outlined above, we cannot say that the Trump tax cuts “led to” the economic outcomes quoted by Cormann. But we can take a look at the numbers, for interest’s sake. </p>
<p>Cormann pointed to four macroeconomic benchmarks:</p>
<ul>
<li><a href="https://www.investopedia.com/terms/g/gdp.asp">Gross domestic product</a> (GDP)</li>
<li>unemployment</li>
<li>wages, and</li>
<li><a href="https://www.investopedia.com/terms/c/capital-investment.asp">capital investment</a>. </li>
</ul>
<h2>US GDP growth</h2>
<p>Cormann said the US is “recording in excess of 4% growth on an annualised basis”. </p>
<p>Based on <a href="https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey">GDP data from US Bureau of Economic Analysis</a>, and with the growth rate calculated as annualised change over the previous quarter, Cormann was correct: GDP growth hit 4.1% in the second quarter of 2018.</p>
<p>The GDP growth rate can also be calculated as the change compared to the same quarter of the previous year.</p>
<p>On that measure, the growth rate was 2.8%, compared to 2.1% in the second quarter of 2017, following a steady increase from 1.3% in the second quarter of 2016.</p>
<hr>
<iframe src="https://datawrapper.dwcdn.net/d9WxG/2/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<hr>
<h2>US unemployment rate</h2>
<p>In July 2018, the US unemployment rate was <a href="https://beta.bls.gov/dataQuery/find?st=0&r=20&s=popularity%253AD&q=unemployment+rate&more=0">3.9%</a>, as Cormann correctly stated. </p>
<p>The chart below shows both the employment rate at the end of each quarter (for example, June 2018 for the second quarter of 2018) and the average rate across the three months in each quarter.</p>
<hr>
<iframe src="https://datawrapper.dwcdn.net/flC2x/1/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<hr>
<h2>US wages growth</h2>
<p>To support his statement about US wages growth, Cormann pointed to a <a href="https://www.bloomberg.com/news/articles/2018-04-27/u-s-employment-costs-accelerate-in-sign-of-mounting-inflation">Bloomberg article</a> which drew on data from the US Bureau of Labour and Statistics <a href="https://www.bls.gov/ncs/">Employment Cost Index</a>. In the second quarter of 2018, this particular index did record its highest growth since mid-2008.</p>
<p>However, measures of “wages” differ depending on which parts of employees’ salaries are included, and which are excluded.</p>
<p>Another, and perhaps more useful, definition of wages is employees’ <em>average hourly earnings</em>, also reported in the table. </p>
<p>The picture emerging from this measure quite different. These figures show that employees’ average hourly earnings actually fell in the year to the second quarter of 2018. </p>
<p>This doesn’t support the conclusion that wage growth in the second quarter of 2018 was the “strongest it’s been in a very long time”. </p>
<hr>
<iframe src="https://datawrapper.dwcdn.net/i149f/1/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<hr>
<h2>US capital investment</h2>
<p>We can measure capital investment by looking at <a href="https://www.bea.gov/data/gdp/gross-domestic-product">Nonresidential Gross Private Domestic Investment data</a>, sourced from the US Bureau of Economic Analysis. These figures show a pick up in investment in the first and, to a lesser extent, second quarters of 2018.</p>
<p>These figures are not, however, necessarily evidence of “massive capital investment” being “returned” to the US, as Cormann stated.</p>
<p>The figures Cormann quoted in his response to The Conversation measure capital expenditure on commercial real estate, factories, tools and machineries in the US – not where the investment comes from.</p>
<p>The term “nonresidential” doesn’t refer to foreign investment, but to investments in commercial (rather than residential) assets.</p>
<p>The chart below, based on data from US Bureau of Economic analysis, shows there was an increase in capital investment in the first quarter of 2018 (when the tax cuts were implemented). </p>
<p>Again, this follows a trend of increases in capital investment, with peaks and troughs, since the first quarter of 2016. </p>
<hr>
<iframe src="https://datawrapper.dwcdn.net/g2yLF/3/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<hr>
<h2>The continuation of an existing trend</h2>
<p>Overall, the data paint a rather favourable picture for the US in the second quarter of 2018. </p>
<p>However, it also seems that these macroeconomic indicators began to improve in mid-2016. This is particularly the case for GDP growth and unemployment. </p>
<p>Therefore, the positive outlook for the US in the second quarter seems to be the <em>continuation</em> of a positive cyclical phase that started before the enactment of the corporate tax cuts. <strong>– Fabrizio Carmignani</strong></p>
<h2>Blind review</h2>
<p>I concur with the verdict. </p>
<p>Senator Cormann’s assertion that the growth in business investment and wages and the decline in unemployment observed in the US over the first half of this year can be attributed, either wholly or in part, to the Trump administration’s corporate tax cuts is not supported by the evidence. </p>
<p>As this FactCheck points out, all of these trends were under way well before the corporate tax cuts took effect, and one or two quarters worth of data is not sufficient to establish that the tax cuts have made any significant or sustained change to those trends. </p>
<p>I disagree that average hourly earnings is a ‘better’ measure of US wages growth than the employment cost index (for the same reasons that most Australian economists regard the ABS wage price index as a better measure of Australian wages growth than average weekly earnings). </p>
<p>But that doesn’t undermine the conclusion that the gradual upward trend in US wages growth was well established before the Trump administration’s corporate tax cuts came into effect, and owes far more to the gradual tightening in the US labour market (which has been underway for a long time before those tax cuts came into effect) than it does to those tax cuts.</p>
<p>Indeed, over the first two quarters of 2018, the employment cost index rose by just 0.1 of a percentage point more than it did over the first two quarters of 2017, which is hardly compelling evidence of a significant impact of the corporate tax cuts.</p>
<p>It is worth noting that <a href="https://apps.bea.gov/iTable/iTable.cfm?isuri=1&reqid=19&step=2&0=survey">one-fifth</a> of the 21% annualised rate of <em>growth</em> in US real private non-residential fixed investment over the first half of this year was due to a 156% (annualised) increase in investment in “mining exploration, shafts and wells”.</p>
<p>This category that accounts for <a href="https://apps.bea.gov/iTable/iTable.cfm?isuri=1&reqid=19&step=2&0=survey">less than 4%</a> of the <em>level</em> of private non-residential fixed investment, and the spurt in this category of business investment would have owed far more to the rise in oil prices since the middle of last year than it would have to the cut in corporate tax rates.</p>
<p>Finally, it is also worth noting that the one component of the Trump administration’s corporate tax reforms which the IMF and others have acknowledged would likely have some temporary positive impact on business investment - the immediate expensing for tax purposes of capital expenditures incurred before 2023 (what we in Australia call an “instant asset write off”) - isn’t part of the measures which Senator Cormann had been asking the Senate to pass. <strong>–Saul Eslake</strong></p>
<hr>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
</figcaption>
</figure>
<p><em>The Conversation’s FactCheck unit was the first fact-checking team in Australia and one of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/101460/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani has received funding from the Australian Research Council for a project on the estimation of the piecewise continuous linear model and its macroeconomic applications.</span></em></p><p class="fine-print"><em><span>Saul Eslake does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Minister for Finance Mathias Cormann said corporate tax cuts in the US had led to ‘stronger investment, stronger growth, a lower unemployment rate and higher wages’. Let’s take a closer look.Fabrizio Carmignani, Professor, Griffith Business School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1007532018-08-08T20:11:31Z2018-08-08T20:11:31ZFactCheck: GetUp! on the impact of US corporate tax cuts on wages<figure><img src="https://images.theconversation.com/files/229765/original/file-20180730-106511-1lnwxsg.jpeg?ixlib=rb-1.1.0&rect=0%2C0%2C1917%2C1074&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">GetUp! national director Paul Oosting.</span> <span class="attribution"><a class="source" href="https://www.getup.org.au/media#downloads-anchor">GetUp!</a></span></figcaption></figure><figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/229743/original/file-20180730-106530-qy2sn5.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/229743/original/file-20180730-106530-qy2sn5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/229743/original/file-20180730-106530-qy2sn5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=597&fit=crop&dpr=1 600w, https://images.theconversation.com/files/229743/original/file-20180730-106530-qy2sn5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=597&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/229743/original/file-20180730-106530-qy2sn5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=597&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/229743/original/file-20180730-106530-qy2sn5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=751&fit=crop&dpr=1 754w, https://images.theconversation.com/files/229743/original/file-20180730-106530-qy2sn5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=751&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/229743/original/file-20180730-106530-qy2sn5.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=751&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Graph: GetUp! Australia Instagram post, July 2018.</span>
<span class="attribution"><a class="source" href="https://www.instagram.com/p/BluZvCRhADM/">Graph: GetUp! Australia, Instagram</a></span>
</figcaption>
</figure>
<blockquote>
<p><strong>Graph shared by GetUp! Australia on <a href="https://www.facebook.com/GetUpAustralia/photos/a.401481301454.178964.13527056454/10155409595396455/?type=3&theater">Facebook</a> and <a href="https://www.instagram.com/p/BluZvCRhADM/">Instagram</a>, July 2018</strong></p>
</blockquote>
<p><a href="https://www.theaustralian.com.au/national-affairs/liberal-backbencher-tony-pasin-says-time-isnt-right-for-company-tax-cuts-to-big-businesses/news-story/147a503a642b9e17aeb9cdf6a31fd8e5">Debate continues</a> over the Turnbull government’s proposal to cut the corporate tax rate from 30% to 25% for businesses with turnover of more than A$50 million. </p>
<p>One major point of contention is the possible effect of the tax cuts on Australian wages. </p>
<p>A social media post shared by lobby group <a href="https://www.getup.org.au/">GetUp! Australia</a> argued against the tax cuts, suggesting that US real wages fell after the Trump administration cut corporate tax rates from <a href="https://www.reuters.com/article/us-usa-tax-provisions-factbox/whats-in-the-final-republican-tax-bill-idUSKBN1ED27K">35% to 21%</a>.</p>
<p>Let’s take a closer look.</p>
<h2>Checking the source</h2>
<p>The Conversation requested sources and comment from GetUp! to support the data used in the graph, and the suggestion that there had been a causal relationship between the enactment of corporate tax cuts in the US and a reduction in real wages.</p>
<blockquote>
<p>We first found the graph in Bloomberg in <a href="https://www.bloomberg.com/view/articles/2018-07-18/trump-s-tax-cut-hasn-t-done-anything-for-workers">this article</a> by economics blogger and former Assistant Professor of Finance at Stony Brook University, Noah Smith.</p>
<p>The underlying data comes from the <a href="https://www.payscale.com/payscale-index/">Payscale Real Wage Index</a> – adjusted for inflation. We noted that percentage change since 2006 is an unorthodox Y axis for a wages graph, but that’s what the Payscale Index tracks.</p>
<p>We added the marker of the corporate tax rate being cut in the United States, which while passed in Q4 [the fourth quarter] of 2017, came into effect in Q1 [the first quarter] of 2018. </p>
<p>Note that in the Instagram image, we attributed Payrole.com as the source, instead of Payscale.com. This was a drafting error on our part.</p>
<p>Proponents of corporate tax cuts both in the US and Australia have asserted that there is a causal relationship between a lower corporate tax rate and higher wages (see <a href="https://www.theaustralian.com.au/news/nation/malcolm-turnbull-stresses-urgency-of-company-tax-rate-cuts/news-story/a367d37a553fda7c1641811dba63b42a">US example</a> and <a href="https://www.afr.com/news/malcolm-turnbull-says-70pc-of-company-tax-cut-benefit-will-flow-to-workers-20180222-h0wimx">Australian example</a>). The graph we posted in Instagram demonstrates that, in the US experience, that has not been the case. </p>
<p>This suggests that there is no causal relationship between a lower corporate tax rate and higher wages, and that cutting the corporate tax rate based on an expected flow on effect to wages would be a mistake.</p>
<hr>
</blockquote>
<h2>Verdict</h2>
<p>The social media post shared by GetUp! Australia, which could be read by many as suggesting that US corporate tax cuts caused wages to fall, is problematic and potentially misleading for two reasons.</p>
<p>Firstly: charts constructed with data from the US Bureau of Labor Statistics suggest that the chart used by GetUp! overestimates the drop in wage growth in the US between the first and second quarters of 2018. </p>
<p>According to the Bureau of Labor Statistics data, wage growth over that period declined slightly (rather than significantly), or was moderately positive, depending on the measure used.</p>
<p>Secondly, and most importantly: the chart used by GetUp! can’t conclusively establish any causal relationship between the enactment of US corporate tax cuts in January 2018 and any drop in wage growth.</p>
<p>While the chart does not support the argument that corporate tax cuts cause higher wages, it also cannot conclusively reject it. </p>
<hr>
<h2>What does the GetUp! chart show and suggest?</h2>
<p>The social media post shared by GetUp! has the title: “This is what happened to wages when Donald Trump cut corporate tax in America.” </p>
<p>It shows a line chart with the heading: “United States real wages.” The reference to “real wages” means the index has been adjusted for inflation. A note below the chart says the wage changes are relative to 2006 levels.</p>
<p>The line chart depicts US real wages rising from minus 8.50% of 2006 levels in Q2 2016, to minus 7.70% in Q1 2018. A vertical line marks the point in Q1 2018 when the tax cuts were enacted. The line then shows a drop to minus 9.30% of 2006 levels in Q2 2018. </p>
<p>A reader could quite easily interpret the chart as meaning the enactment of corporate tax cuts in the US had an immediate and negative effect on real wage growth.</p>
<p>The subtitle reads: “Let’s not make the same mistake here.” </p>
<h2>Are the data used in the chart appropriate?</h2>
<p>As noted by GetUp! in their response to The Conversation, the source for the data used in the chart is Payscale, not payrole.com, as stated in the post. </p>
<p>Payscale is a US commercial company that provides information about salaries. The company publishes a quarterly wage index based on its own data, which <a href="https://www.payscale.com/payscale-index/compensation-trends-methodology">it says</a> is based on more than 300,000 employee profiles in each quarter, capturing the total cash compensation of full time employees in private industry and education professionals in the US. </p>
<p>Given the commercial nature of Payscale data, I don’t have access to their primary dataset, and can only rely on the <a href="https://www.payscale.com/payscale-index/compensation-trends-methodology">description of the methodology</a> reported on their website. I have no reason to doubt the validity of the data and/or the methodology.</p>
<p>I do, however, suggest that presenting the data in the form of percentage changes from 2006 is not ideal for an assessment of wage dynamics around the time of the enactment of corporate tax cuts. </p>
<p>In their response to The Conversation, GetUp! did acknowledge that “percentage change since 2006 is an unorthodox Y axis for a wages graph”.</p>
<p>It would be more informative to present the data as percentage changes between one quarter and the same quarter of the previous year, or between two consecutive quarters. I have done this in the two charts below, using the data publicly available from Payscale. </p>
<iframe src="https://datawrapper.dwcdn.net/aGSTp/2/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<iframe src="https://datawrapper.dwcdn.net/7t2xo/3/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<p>The story is qualitatively similar to that shown in the chart presented by GetUp!. Therefore, we can say that – based on the Payscale data – real wages seem to have dropped between the first and second quarters of 2018. </p>
<h2>Is Payscale the best source for this kind of analysis?</h2>
<p>While there is no reason to believe that the Payscale data are incorrect, it is worth considering a more standard statistical source. </p>
<p>Earnings data for the US are available from a variety of institutions. The difficulty, in this case, is that there are many different statistical definitions of earnings and wages depending on which sectors, geographical areas, and types of employees are observed. </p>
<p>One of the most commonly used definitions is the “average hourly earnings of production and non-supervisory employees on private payrolls”, with monthly data supplied by the <a href="https://www.bls.gov/home.htm">US Bureau of Labor Statistics</a>. </p>
<p>Using these data, I have recomputed changes in real wages (adjusted for inflation) between one quarter to the same quarter of the previous year and between two consecutive quarters.</p>
<p>These two charts based on US Bureau of Labor Statistics data tell a different story from the charts based on the Payscale data. </p>
<p>In particular, the change in wages between the first and second quarters of 2018 is moderately <em>positive</em> (+0.4%) rather than significantly negative (minus 1.7% based on the Payscale data).</p>
<p>The drop in wages between the second quarter of 2017 and the second quarter of 2018 is also less sharp (minus 0.11%, compared to minus 1.4% from the Payscale data).</p>
<iframe src="https://datawrapper.dwcdn.net/Ta1mH/3/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<iframe src="https://datawrapper.dwcdn.net/ozccF/3/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<p>These differences may be determined by the different coverage and/or statistical definitions used by Payscale and the US Bureau of Labor Statistics to measure wages and compensation.</p>
<h2>The story the GetUp! chart suggests: is it correct?</h2>
<p>The combination of the words and the image could suggest to some that there was a causal relationship between the enactment of corporate tax cuts and a drop in real wages in the US.</p>
<p>But the chart used in the post isn’t suited to provide any evidence on causality. </p>
<p>That’s because changes in real wages can be determined by a variety of economic factors, such as changes in the makeup of the labour force and business cycle fluctuations. A chart like the one published by GetUp! can’t possibly isolate the impact of just one factor.</p>
<p>The observation that wage growth dropped around the time of the enactment of the corporate tax cuts doesn’t automatically imply that this drop was <em>caused</em> by the tax cuts. At best, a correlation between the two events can be established, not a causal effect. </p>
<p>We also need to keep in mind that the relationship between tax cuts and wages is likely to involve time lags. The effect of corporate tax cuts on wages, or any other economic variable, takes time to feed through the economic system and to show up in the data. This reinforces the argument that the chart demonstrates correlation, rather than causality.</p>
<p>Having said that, while the data used cannot provide evidence for the argument that corporate tax cuts lead to lower wages, it cannot conclusively reject the argument, either. <strong>– Fabrizio Carmignani</strong></p>
<hr>
<h2>Blind review</h2>
<p>The GetUp! chart is captioned: “This is what happened when Donald Trump cut corporate tax in America.” Strictly speaking, GetUp! don’t actually claim that the corporate tax cut caused the wage to fall, but it is certainly what the reader is led to believe. </p>
<p>The author has identified the key problem with the GetUp! chart, which is that there is no evidence that the fall in real wages was caused by the enactment of corporate tax cuts. In fact, the chart provides no evidence to either support <em>or</em> reject the premise that a corporate tax cut would have any effect on wages. </p>
<p>The alternative data sourced by the author from the US Bureau of Labor Statistics cast some doubt on the accuracy of the data used by GetUp!, yet this is a distraction from the main argument that neither chart proves causality between corporate tax cuts and wage growth.</p>
<p>As the author says, there are many factors that influence real wage growth. Some examples include changes in the skills and experience of the working population, changes in government expenditure, and of course, changes to tax policy. It would be a mistake to attribute the recent decline in US wages to any single factor, such as the cut to the corporate tax rate. </p>
<p>This is why economic modelling is so powerful. In a “laboratory”, economic modellers can build two versions of the world: one with a tax cut and one without. With all other things held equal, the only differences between these two worlds must be a consequence of the tax cut.</p>
<p><a href="http://www.copsmodels.com/elecpapr/g-260.htm">Economic modelling</a> produced by Victoria University’s Centre of Policy Studies (and of which I was an author) finds that despite stimulating growth in pre-tax real wages, a company tax cut would cause a fall in the average incomes of the Australian population.</p>
<p>So while this FactCheck shows that the wage chart from GetUp! is inconclusive, my view (based on the Victoria University modelling) is that company tax cuts here would be a “mistake” because of the negative impact on the incomes of Australians. <strong>– Janine Dixon</strong></p>
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<a href="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
</figcaption>
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<p><em>The Conversation’s FactCheck unit was the first fact-checking team in Australia and one of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/100753/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani has received funding from the Australian Research Council for a project on the estimation of the piecewise continuous linear model and its macroeconomic applications.</span></em></p><p class="fine-print"><em><span>Janine Dixon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A social media post shared by GetUp! Australia suggested US real wages had dropped significantly following the enactment of Trump’s corporate tax cuts in January. We asked the experts to check it out.Fabrizio Carmignani, Professor, Griffith Business School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/993782018-07-09T10:25:42Z2018-07-09T10:25:42ZFactCheck Q&A: did the Coalition ‘deliver more than a million jobs in the last year’?<figure><img src="https://images.theconversation.com/files/226441/original/file-20180706-122262-1fgac66.JPG?ixlib=rb-1.1.0&rect=0%2C0%2C1007%2C566&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Liberal MP Sarah Henderson, speaking on Q&A.</span> <span class="attribution"><span class="source">ABC/Q&A</span></span></figcaption></figure><p><strong>The Conversation fact-checks claims made on Q&A, broadcast Mondays on the ABC at 9.35pm. Thank you to everyone who sent us quotes for checking via <a href="http://www.twitter.com/conversationEDU">Twitter</a> using the hashtags #FactCheck and #QandA, on <a href="http://www.facebook.com/conversationEDU">Facebook</a> or by <a href="mailto:checkit@theconversation.edu.au">email</a>.</strong></p>
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<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/6ebn0JSN9cw?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Excerpt from Q&A, July 2, 2018.</span></figcaption>
</figure>
<blockquote>
<p>We’ve delivered more than a million jobs in the last year.</p>
<p>And 65,000 or so new businesses have started up.</p>
<p>Now, in Labor’s last year, 61,000 businesses closed.</p>
<p><strong>– Liberal MP Sarah Henderson, <a href="https://www.youtube.com/watch?v=6ebn0JSN9cw&feature=youtu.be">speaking on Q&A</a>, July 2, 2018</strong></p>
</blockquote>
<p>On Q&A, Liberal MP Sarah Henderson made the case for company tax cuts, saying the Coalition government’s “focus on backing business” was paying dividends. </p>
<p>“We are seeing a renewed sense of confidence because of our focus on backing business – small, medium and large – giving them the incentive to grow, to invest and to employ more people.”</p>
<p>Henderson said the Coalition had “delivered more than a million jobs in the last year, and 65,000 or so new businesses have started up”.</p>
<p>The member for Corangamite added that “in Labor’s last year, 61,000 businesses closed”. </p>
<p>Are those numbers correct?</p>
<h2>Checking the source</h2>
<p>In response to The Conversation’s request for sources, Henderson pointed to Australian Bureau of Statistics <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/8165.0">Counts of Australian Businesses data</a> that show:</p>
<ul>
<li>an increase of 66,755 businesses in the 2016-17 financial year, and</li>
<li>a decrease of 61,614 businesses in the 2012-13 financial year (the last financial year of the Labor government).</li>
</ul>
<p>Regarding the employment figures, Henderson told The Conversation she had made an error, and had meant to say that more than one million jobs had been created over nearly five years. </p>
<hr>
<h2>Verdict</h2>
<p>Liberal MP Sarah Henderson’s statement that the Coalition government “delivered more than a million jobs in the last year” was incorrect.</p>
<p>As Henderson noted in her response to The Conversation, growth in employment of “more than a million jobs” took place over more than four years.</p>
<p>Depending on which interpretation of “last year” we use – whether financial, calendar or year-to-date – the growth in the number of people employed was between 251,500 and 383,000.</p>
<p>In terms of whether the Coalition “delivered” these jobs, it’s important to remember that government policy is only one of many factors that determine employment dynamics. Changes in employment levels are never solely due to the efforts of any one government.</p>
<p>Regarding the numbers of businesses opening and closing, Henderson was correct.</p>
<p>In 2016-17 (the last financial year for which data are available), the total number of businesses in Australia increased by 66,755. </p>
<p>In the last financial year of the Labor government (2012-13), the total number of businesses decreased by 61,614.</p>
<p>It appears that the annual balance between business entrants and exits is correlated with the economic cycle.</p>
<hr>
<h2>Did the Coalition deliver ‘more than a million jobs in the last year’?</h2>
<p>No. </p>
<p>As Henderson noted in her response to The Conversation, this statement was incorrect. </p>
<p>The growth in the number of people employed in “the last year” was between 251,500 and 383,000, depending on which interpretation of “last year” we use – whether financial year, calendar year or year-to-date. </p>
<p>The latest available employment data are the <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6202.0May%202018?OpenDocument">Australian Bureau of Statistics Labour Force figures</a> ending in May 2018.</p>
<p>The labour force survey includes three different series of employment data: original, trend, and seasonally adjusted. </p>
<p>The “original” series simply counts how many people are employed at any given time. </p>
<p>The “seasonally adjusted” series adjusts the original series to account for regular fluctuations in employment due to the calendar or seasonal pattern of certain economic activities – for example, tourism.</p>
<p>The “trend” component tells the story of the underlying, longer-term dynamics of employment by smoothing out the peaks and troughs due to short-term fluctuations in economic activity.</p>
<p>Any of the three measures can be used, but trend or seasonally adjusted employment are typically more relevant when it comes to economic policy-making. So in this FactCheck, I’ll look at the trend data.</p>
<p>These show that for the 12 months from June 2017 to the end of May 2018, the number of people employed in Australia increased by 277,300. </p>
<p>If we look at the last financial year for which we have complete data, ending June 2017, trend employment increased by 251,500 people.</p>
<p>And if we look at the last completed calendar year – 2017 – then the increase in employment amounts to 383,000. </p>
<p>To count “more than a million jobs”, we need to look back around four or five years.</p>
<p>Trend employment data show an increase of one million people employed between June 2014 and May 2018, and looking a little further back, between September 2011 and June 2017.</p>
<p>In terms of whether the Coalition “delivered” these jobs, it’s important to remember that government policy is only one of many factors that determine employment dynamics in a given period of time. Changes in employment levels are never solely due to the efforts of any one government.</p>
<p>Other factors that influence employment levels include (and are certainly not limited to):</p>
<ul>
<li>federal policies</li>
<li>economic conditions in trading partner countries</li>
<li>changes in the international price of commodities, and</li>
<li>variations in the level of the interest rate and/or the exchange rate.</li>
</ul>
<p>It’s difficult to establish with certainty the relative contribution to employment growth of each of these factors.</p>
<h2>How many businesses started and closed?</h2>
<p>To test these claims, we can look to the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/8165.0">Australian Bureau of Statistics Business Register</a>. The register provides a count of actively trading Australian businesses, excluding those with turnover below $75,000 that have not registered for GST. </p>
<p>In the 2016-17 financial year – the last full year of data under this Coalition government – 328,205 new business were registered and 261,450 existing businesses were closed.</p>
<p>This leaves us with a net increase of 66,755 businesses – in line with the “65,000 or so” quoted by Henderson.</p>
<p>Labor’s last term in government ended in September 2013. In the 2012-13 financial year, 239,229 new businesses were registered and 300,843 existing businesses were closed.</p>
<p>The net balance was a loss of 61,614 businesses. Again, this figure is in line with Henderson’s statement. </p>
<p>The annual turnover rate (the sum of exits and entries in proportion to total business) between 2007 and 2017 was around 30%. </p>
<p>It appears that that the annual balance between business entrants and exits is correlated with the economic cycle. That is – the more severe economic contractions are associated with higher exits, and lower entries. <strong>– Fabrizio Carmignani</strong></p>
<hr>
<h2>Blind review</h2>
<p>The conclusions in this FactCheck are correct. </p>
<p>I would have used employment changes from the same month in the previous year.</p>
<p>The practice of politicians to claim that they have “delivered” the change in total employment over a period is erroneous.</p>
<p>Isolating the contribution of government policy to employment growth is a much more complex exercise. <strong>– Tim Robinson</strong></p>
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<a href="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
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<p><em>The Conversation’s FactCheck unit was the first fact-checking team in Australia and one of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/99378/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani has received funding from the Australian Research Council for a project on the estimation of the piecewise continuous linear model and its macroeconomic applications.</span></em></p><p class="fine-print"><em><span>Tim Robinson receives funding from the Australian Research Council.</span></em></p>In addition to the jobs claim, Liberal MP Sarah Henderson said 65,000 new businesses had started in the last year, compared to the closure of 61,000 businesses in Labor’s last year. Is that right?Fabrizio Carmignani, Professor, Griffith Business School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/956512018-05-03T02:32:13Z2018-05-03T02:32:13ZRevealing how much tax companies pay doesn’t move markets or reduce tax avoidance<p>The public disclosure of information that Australia’s largest companies give to the Australian Taxation Office (ATO) on their tax returns doesn’t sway investors’ decisions and doesn’t reduce corporate tax avoidance, our research shows.</p>
<p>We examined the first three releases of ATO tax transparency data in 2014, 2015 and 2016, along with financial statement data and share price movements for 244 listed companies. Under the <a href="https://www.legislation.gov.au/Details/C2013A00120">Tax Laws Amendment Act 2013</a> the ATO is required to disclose total revenue, taxable income, and income tax payable for these companies.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-tax-offices-transparency-reporting-is-looking-a-little-opaque-70200">The tax office's transparency reporting is looking a little opaque</a>
</strong>
</em>
</p>
<hr>
<p>When these companies first disclosed tax return data there was a significant negative reaction in stock prices for firms with lower effective tax rates. But the reaction wasn’t limited to companies that disclosed. This suggests investor concerns about either spill-over effects for other businesses, or a more aggressive stance on tax avoidance from the ATO. </p>
<p>However, for the second and third releases of ATO data, there was no reaction from the financial markets at all, not even for those firms included in the disclosures. </p>
<p>In combination, these results suggest that the ATO disclosures provide little new or useful information to investors about corporate tax strategies. It also shows the information the ATO currently discloses doesn’t lead to increased enforcement, and so, investors have little expectation of any increase in corporate tax payments.</p>
<h2>What companies have to disclose to the ATO</h2>
<p>The <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fems%2Fr5518_ems_34beb496-0eea-4137-87da-28294f7ae6b8%22">aim of the Tax Laws Amendment Act</a> was to increase public scrutiny of company tax strategies through increased transparency, and ultimately discourage tax avoidance. Although only limited to the largest firms, these disclosures are exceptional. </p>
<p>Apart from some Scandinavian countries that have public disclosure of all tax return information, Australia’s legislation is unique. For example, the information is disclosed by the ATO rather than the companies themselves, and it’s mandatory rather than voluntary. </p>
<p>The disclosed information also allows us to estimate the magnitude of corporate tax avoidance among these companies.</p>
<p>However, the tax transparency law is still yet to meet its stated aim. This may be due to the type of information disclosed. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/to-really-tackle-corporate-tax-evasion-we-need-a-public-register-64969">To really tackle corporate tax evasion we need a public register</a>
</strong>
</em>
</p>
<hr>
<p>The information disclosed under the current legislation was chosen with no public consultation, discourse or input. So it’s unclear whether the decision to include only certain information has been politically driven. Neither the government nor the ATO cite any research to support their choice of data to be released. </p>
<p>Our study demonstrates that the success of any scheme to improve company tax transparency relies on new information about corporate tax strategies being revealed. It also requires an expectation of some consequences. These could include an increase in the costs of corporate tax avoidance, such as increased scrutiny from the ATO, or additional costs to justify tax-reducing corporate structures. </p>
<p>Unfortunately, it seems Australia’s law on this doesn’t meet these hurdles, and the politics of addressing corporate tax avoidance has stifled an attempt to develop an effective policy to counter it.</p><img src="https://counter.theconversation.com/content/95651/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Mandatory tax return disclosures for large companies were designed to increase public awareness of tax avoidance - but a new study reveals they may not work.Roman Lanis, Associate Professor, Accounting, University of Technology SydneyBrett Govendir, Lecturer, Accounting Discipline Group, University of Technology SydneyPeter Wells, Professor, Accounting Discipline Group, University of Technology SydneyRoss McClure, PhD Candidate, casual academic, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/888452017-12-18T01:22:07Z2017-12-18T01:22:07ZWhy the Republican tax plan can help put American youths back to work<figure><img src="https://images.theconversation.com/files/199530/original/file-20171216-17854-1y0hwye.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">House Speaker Paul Ryan talks about the GOP tax plan.</span> <span class="attribution"><span class="source">AP Photo/Jacquelyn Martin</span></span></figcaption></figure><p>Republican lawmakers <a href="https://www.nytimes.com/2017/12/15/us/politics/republican-tax-bill.html?_r=0">are set to vote</a> this week on their tax plan after reconciling differences between the Senate and House versions and appear likely to meet their Christmas deadline of turning it into law.</p>
<p>During the ongoing debate over its merits, <a href="http://www.cnn.com/2017/12/13/politics/calculate-americans-taxes-senate-reform-bill/index.html">many have focused</a> on the <a href="http://thehill.com/business-a-lobbying/business-a-lobbying/358542-winners-and-losers-in-the-gop-tax-bill">“winners” and “losers”</a> in terms of who will have to pay more or less in taxes. I believe that is the wrong question. </p>
<p>The one that Americans should be asking is whether the bill will improve labor market opportunities for workers, especially the nation’s youth, whose careers have suffered since the turn of the century. </p>
<p>Here’s why I believe it will.</p>
<h2>A tough recovery for U.S. youth</h2>
<p>For several decades, I <a href="https://www.bls.gov/cps/data.htm">have helped collect data</a> for the Bureau of Labor Statistics’ <a href="https://stats.bls.gov/nls/home.htm">National Longitudinal Surveys</a> on the careers of tens of thousands of workers as well as examining programs aimed at improving the school-to-work transition, especially for disadvantaged youths. </p>
<p>The Great Recession hit young people particularly hard. And they haven’t quite recovered. The share of youth aged 16 to 24 who were working dropped from 59 percent in 2006 to under 43 percent in 2010, the lowest level since at least 1949. Unfortunately, seven years later, this age group’s employment rate is still only about 50 percent. While that number may not seem low given young workers don’t have the same responsibilities as older ones, it’s still well below the norm for much of the 20th century. </p>
<p>Other age groups didn’t suffer nearly as much during the recession and have since recovered most of their losses. The employment rate for “prime-age” adults 25 to 54 years old didn’t decline as much, slipping from about 81 percent in 2006 to a low of under 75 percent in 2011. Currently it’s about 78 percent, better, yet not fully recovered either.</p>
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<p>This loss of opportunity for U.S. youth and their inability to find a job delays the start of their careers, reduces the <a href="http://www.journals.uchicago.edu/doi/pdfplus/10.1086/209960">strong wage growth young workers typically experience</a> in their early work years and postpones family formation. </p>
<p>The returns on <a href="https://www.ssa.gov/retirementpolicy/research/education-earnings.html">every year of work experience</a> increase workers’ wages for their entire careers – at <a href="https://eml.berkeley.edu/%7Ecle/wp/wp62.pdf">about the same rate</a> as a year of additional education – so young people who miss out on employment opportunities will feel these effects for the rest of their lives. </p>
<p>To my mind, solving this challenge of getting these young people back to work is the most important goal of tax policy. And the key to doing that is by encouraging companies to boost investment, thereby spurring more growth and creating more jobs.</p>
<h2>What we can learn from the past</h2>
<p>So back to our main question: Is the tax plan likely to accomplish this?</p>
<p>In my view, its ability to improve the economy lies in one of its most contentious features: the <a href="http://www.cnn.com/2017/12/15/politics/republican-tax-bill/index.html">reduction in the top corporate income tax rate</a>, from 35 percent to 21 percent. </p>
<p>The current rate – <a href="https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52419-internationaltaxratecomp.pdf">among the highest in the world</a> – encourages owners of capital to move, or keep, money overseas to maximize their after-tax income. One example of this is the <a href="https://www.bloomberg.com/graphics/2017-overseas-profits/">hundreds of billions of dollars</a> in profits U.S. companies have left parked offshore in recent years. Another is the recent trend in “<a href="https://www.stlouisfed.org/publications/regional-economist/first_quarter_2017/a-look-at-corporate-inversions-inside-and-out">corporate inversions</a>,” in which U.S. corporations purchase companies overseas to shift their tax liability. The result is less investment in the U.S. and a shift in economic activity overseas.</p>
<p>So what evidence is there that a lower corporate tax rate will actually encourage investment and lead to more jobs? </p>
<p>The support for this proposition comes from two sources: economic theory and the experience in both the U.S. and other countries at different times in history. In classical economic theory, a lower tax rate on capital reduces the cost of capital, making more investments profitable. An <a href="http://www.economicsonline.co.uk/Managing_the_economy/Investment.html">uncontroversial implication</a> of this is higher national income, production and employment.</p>
<p>There are several historical examples that illustrate the impact of raising or lowering corporate taxes on investment and growth. </p>
<p>Starting in 1929, <a href="https://www.irs.gov/pub/irs-soi/02corate.pdf">Congress gradually raised</a> the top corporate rate to 15 percent in 1936 from 11 percent in 1929. <a href="https://minneapolisfed.org/research/wp/wp670.pdf">Some have blamed</a> President Franklin D. Roosevelt’s late 1930s tax increase for <a href="http://dailysignal.com/2010/10/20/hoover-fdr-and-clinton-tax-increases-a-brief-historical-lesson/">stopping the recovery</a> and sending the <a href="https://www.thebalance.com/us-gdp-by-year-3305543">U.S. back into recession</a>.</p>
<p>While there was many factors at work at the time – including the <a href="https://www.britannica.com/topic/Smoot-Hawley-Tariff-Act">Smoot-Hawley Tariff Act</a> that raised duties on hundreds of imports and a <a href="https://press.princeton.edu/titles/746.html">large decline in the money supply</a> – higher taxes and the attendant anti-business climate they created are plausible explanations for <a href="https://fee.org/articles/americas-depression-within-a-depression-193739/">why the Great Depression lasted as long as it did</a>.</p>
<p>A more recent example came in the late ‘80s, when Congress cut the top corporate rate from 46 percent in 1984 to 34 percent in 1992, in two installments. Following these changes investment as a share of GDP <a href="https://fred.stlouisfed.org/series/A006RE1Q156NBEA">grew strongly</a> beginning in the early '90s, as did <a href="https://fred.stlouisfed.org/series/A191RL1Q225SBEA">economic growth</a>. </p>
<h2>What we can learn from other countries</h2>
<p>Ireland, renowned for having a <a href="https://tradingeconomics.com/ireland/corporate-tax-rate">low corporate income tax</a> of just 12.5 percent, also boasts the <a href="https://data.oecd.org/emp/employment-rate.htm">highest level of working-age employment</a> in the developed world, at just shy of 87 percent. The U.S., by contrast, is 16th with 70 percent of its working-age population employed.</p>
<p>Other countries at various points in their history, such as the <a href="https://www.forbes.com/sites/nathanlewis/2017/09/26/britains-path-to-a-19-corporate-tax-rate/#144c3b2f772e">U.K. in the 1970s</a> and <a href="https://taxfoundation.org/economic-growth-corporate-tax-rate/">Canada in the past decade</a>, bolstered their economies at least in part by lowering corporate tax rates. </p>
<p>Another thing to consider is the international reaction to the tax plan. China, for example, <a href="https://www.wsj.com/articles/beijing-develops-plan-to-counter-trump-tax-overhaul-1513012363">is sufficiently concerned</a> that lower U.S. corporate tax rates would be effective in luring business investment that its leaders are considering a range of new policies to prevent a loss of capital. Ireland <a href="https://www.irishtimes.com/business/economy/trump-s-us-tax-reform-a-significant-challenge-for-ireland-1.3310866">also sees the bill</a> as a potential challenge to its strength in luring investment, while Germany is <a href="https://global.handelsblatt.com/finance/joining-the-race-to-the-bottom-835641">contemplating</a> lower business taxes. </p>
<h2>Getting back to work</h2>
<p>While other economists may disagree, lighter taxation and less regulation have arguably generated more growth and prosperity than the opposite, whether we look at the U.S. over time or low-tax countries internationally. And that is what creates enough jobs to ensure young Americans can begin their careers promptly after finishing their education.</p>
<p>A few weeks ago, I was skeptical that the tax bill would pass. That’s because, in my view, all too often the political calculus focuses on whose tax bills will go up or down rather than what the nation needs to secure its long-term prosperity. I figured this would jeopardize the plan’s odds of success. </p>
<p>Our long-term prosperity depends on young people getting educated, finding jobs and accumulating the work experience needed to establish remunerative careers. While we are still some distance from a labor market that offers opportunities for disadvantaged and low-skill workers, I believe the tax bill offers the nation the best chance of restoring opportunity to those who need it most.</p><img src="https://counter.theconversation.com/content/88845/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Randall Olsen receives funding from Bureau of Labor Statistics, Ohio Department of Job and Family Services, Ohio Department of Education and the Organization for Economic Cooperation and Development.</span></em></p>Unlike other age groups, 16- to 24-year-olds haven’t recovered the job losses they suffered during the Great Recession. Spurring investment and growth are key to getting them back to work.Randall Olsen, Director of the Center for Human Resource Research, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/859472017-11-01T10:16:36Z2017-11-01T10:16:36ZWhy tax cuts make us less happy<figure><img src="https://images.theconversation.com/files/192677/original/file-20171031-18689-17oyhxd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Why so grim? Oh, tax cuts.
</span> <span class="attribution"><span class="source">AP Photo/Pablo Martinez Monsivais</span></span></figcaption></figure><p>Republicans recently <a href="https://www.nytimes.com/2017/09/27/us/politics/trump-tax-cut-plan-middle-class-deficit.html">announced</a> their tax plan and are hoping to <a href="https://www.bloomberg.com/news/articles/2017-10-26/senate-gop-wants-to-pass-tax-plan-by-thanksgiving-cornyn-says">turn it into law</a> before Thanksgiving. While details are in flux, it would likely eliminate the estate tax, lower the top marginal rate and slash corporate rates, producing, in sum, what the president has dubbed a “<a href="http://nypost.com/2017/09/29/trump-touts-his-giant-beautiful-massive-tax-cut-plan/">gigantic</a>” tax cut.</p>
<p>Each of these elements, if passed, would make the tax code less progressive and reduce government revenues in ways that ultimately makes it harder to pay for programs and services. Since the purpose of public policy should be to improve citizens’ lives and well-being, the obvious question to consider in evaluating this plan is whether it does that. Or put another way, will the tax plan make most Americans happier?</p>
<p>Research on <a href="http://www.nber.org/reporter/2008number2/blanchflower.html">happiness economics</a> suggests two vantage points to use in considering this question. </p>
<p>The first concerns how progressive a tax system is. Simply put, are societies happier when the wealthy bear a proportionately higher share of taxes? The second is the total level of taxation. That is, whether higher taxes make people more or less happy because the government takes more of their earnings and spends it on services like health care or infrastructure. </p>
<p>Let us consider each in turn.</p>
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<img alt="" src="https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/192715/original/file-20171031-18738-12v1p4j.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">While everyone hates filing their taxes, research suggests paying more (if well spent) can make us happier.</span>
<span class="attribution"><span class="source">a katz/Shutterstock.com</span></span>
</figcaption>
</figure>
<h2>The importance of ‘tax morale’</h2>
<p>A <a href="http://journals.sagepub.com/doi/abs/10.1177/0956797611420882">recent article</a> in the peer-reviewed journal Psychological Science suggests that countries with a more progressive tax system are in fact happier than those where tax rates are flatter.</p>
<p>In this piece, three psychologists compare the progressiveness of a nation’s tax system with various measures of happiness. They find clear and unequivocal evidence that progressive taxes “are positively associated with subjective well-being.” In other words, a country’s citizens are happier when the wealthy bear a larger share of the taxes. </p>
<p>This conclusion holds not just when using simple correlations. It also holds under sophisticated statistical analyses that control for other national factors, such as GDP per capita and income inequality, as well as for individual factors like income, gender, age and marital status.</p>
<p>One reason for this is that the link between income and happiness is strongest for the poor and middle class. Nobel Laureates Angus Deaton and Daniel Kahneman demonstrated that happiness increases with income until a certain threshold is reached at which the returns in terms of well-being <a href="http://time.com/money/4070041/angus-deaton-nobel-winner-money-happiness/">progressively diminish</a>. That means that while income lost to taxes harms the poor and middle class – who tend to spend most of what they earn – it does not trouble the affluent – whose satisfaction with life is much less affected by a marginal increase in tax burden.</p>
<p>Another reason might be what scholars call “tax morale.” This refers to the extent to which people accept a moral obligation to pay taxes as their contribution to society. In turn, this implies a belief that a tax system is fair.</p>
<p>Existing research clearly indicates, and <a href="https://www.vox.com/2017/4/14/15297488/tax-poll-rich-pay-more">common sense suggests</a>, that <a href="https://link.springer.com/article/10.1007/s11127-011-9848-1">tax morale is higher the more progressive a system is</a> – that is, a <a href="https://www.washingtonpost.com/news/wonk/wp/2017/03/29/even-republicans-think-the-rich-arent-paying-their-fair-share-in-taxes-but/?utm_term=.6800249d70ed">“fair” system</a> is one in which the rich pay a disproportionate share – and that <a href="http://kie.vse.cz/wp-content/uploads/Lubian-Zarri-2011.pdf">people with greater tax morale are happier</a>. So, logically, if progressive taxation increases tax morale, and tax morale increases happiness, more progressive taxes mean higher levels of happiness.</p>
<p>This is not good news for Americans, however. </p>
<p>The U.S. tax system is <a href="http://journals.sagepub.com/doi/abs/10.1177/0956797611420882">one of the least progressive</a> in the Western world and is <a href="https://www.brookings.edu/blog/up-front/2012/04/13/just-how-progressive-is-the-u-s-tax-code/">considerably less so</a> than it was just a few decades ago.</p>
<p>And this is also bad news for the Republican tax plan – if the GOP and President Donald Trump want to make Americans happier. </p>
<p>The highly respected Tax Policy Center’s <a href="http://www.taxpolicycenter.org/publications/preliminary-analysis-unified-framework">detailed analysis of the plan</a> shows that benefits are heavily skewed toward the wealthiest. The current proposal will benefit the 1 percent handsomely, increasing their incomes by <a href="https://www.forbes.com/sites/anthonynitti/2017/09/29/despite-promises-to-the-contrary-trump-tax-plan-heaps-biggest-benefits-on-the-rich/#36929c7555eb">more than 8 percent</a>. Meanwhile the working and middle classes receive minimal benefits, if any – and they <a href="http://www.businessinsider.com/trump-tax-reform-plan-analysis-study-rich-rates-2017-9">may even see their taxes increase</a>. </p>
<p>While nothing is certain until the ink is dry, their bill most likely will result in a more regressive tax system that likely will make most Americans less happy.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/192682/original/file-20171031-18686-1xaxlwl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">No one likes paying taxes, including the president.</span>
<span class="attribution"><span class="source">AP Photo/Mary Altaffer</span></span>
</figcaption>
</figure>
<h2>What taxes do</h2>
<p>But what about connection between the total tax burden and the national level of happiness?</p>
<p>Surely no one likes being taxed, but taxation is the mechanism by which society provides a great many things that people do like, such as Medicare, Medicaid and Social Security, not to mention good schools, good roads and safe neighborhoods.</p>
<p>“Big government” programs <a href="https://www.psychologytoday.com/blog/the-economy-happiness/201511/why-is-denmark-the-happiest-country-in-the-world">benefit everyone</a> for the obvious reason that <a href="https://academic.oup.com/sf/article/77/3/1119/2233857/Do-Social-Welfare-Policies-Reduce-Poverty-A-Cross">they reduce poverty</a> and alienation, thus lowering the social problems such as <a href="https://books.google.com/books?id=7RouAgAAQBAJ&dq=crime+rates+welfare+state+messner&source=gbs_navlinks_s">crime</a> and <a href="https://link.springer.com/article/10.1007/s11205-008-9252-5">suicide</a> that these conditions produce. </p>
<p>In turn, it seems obvious that virtually all people, regardless of social class or political ideology, are happier when there is less poverty and less insecurity. <a href="https://www.psychologytoday.com/blog/the-economy-happiness/201511/why-is-denmark-the-happiest-country-in-the-world">Much peer-reviewed academic research</a> has documented just that. </p>
<p>Whether <a href="https://www-cambridge-org.proxy.library.nd.edu/core/journals/perspectives-on-politics/article/assessing-the-welfare-state-the-politics-of-happiness/25B7F407E09233323C46106F2EB75AF4">looking across countries</a> or <a href="http://www.journals.uchicago.edu.proxy.library.nd.edu/doi/abs/10.1017/S0022381610000241">across U.S. states</a>, people – both rich and poor – tend to be happier in places where government provides a greater array of social protections and services. Hence, the closer we approach what Europeans call social democracy – and Americans call New Deal programs – the more people <a href="https://academic-oup-com.proxy.library.nd.edu/sf/article-lookup/doi/10.1093/sf/sou010">tend to find life satisfying</a>.</p>
<p>If taxpayer-funded government programs make people happy, then we should find a link between the level of tax burden and happiness. And in fact, that’s what we find by <a href="http://www.oecd.org/tax/tax-policy/tax-database.htm">examining a wide range of countries</a> in the Western world.</p>
<p>For example, Denmark, generally considered <a href="http://worldhappiness.report/ed/2017">the world’s happiest country</a>, also has the highest tax burden of any of industrial democracy, with about <a href="http://www.oecd.org/tax/tax-policy/tax-database.htm">half of all income</a> going to the tax man in 2014. Conversely, the <a href="http://worldhappiness.report/ed/2017/">least happy</a> are also the least taxed, namely South Korea and Turkey, which pay 25 percent and 15 percent, respectively. Yet, despite their low taxes, <a href="http://worldhappiness.report/ed/2017/">South Korea</a> ranks just 58th in happiness, between Moldova and Romania, while Turkey ranks even lower at 69th, just below Libya.</p>
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<p>We cannot of course generalize from a few examples, nor can we assume that taxation (and the spending taxation allows) are the only causes of happiness. To make strong claims about the nexus between taxation and well-being requires the rigorous and systematic analysis found in the peer-reviewed academic literature.</p>
<p>In “<a href="http://www.cambridge.org/us/academic/subjects/politics-international-relations/political-economy/political-economy-human-happiness-how-voters-choices-determine-quality-life?format=PB#02kj7KOTYZtHu66G.97">The Political Economy of Human Happiness</a>,” one of us (Radcliff) examined individual-level data on 21 countries over three decades and found that people are happier as tax burden increases.</p>
<p>This held even when accounting for other factors known to affect happiness such as income, health, employment status, gender, age, race, education, religion and so on. Similarly, the national or aggregate level of happiness went up or down with the level of taxation (again, controlling for other factors). </p>
<p>The same positive connection between tax burden and happiness was reported in <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1747-1346.2011.00290.x/abstract">a 2011 paper</a>, while <a href="https://academic.oup.com/sf/article/92/4/1241/2235843/Assessing-the-Impact-of-the-Size-and-Scope-of">another article</a> found that life satisfaction varies positively with the total amount of governmental “consumption” of the economy, that is the level of taxation.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=464&fit=crop&dpr=1 600w, https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=464&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=464&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=583&fit=crop&dpr=1 754w, https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=583&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/192735/original/file-20171031-18735-1aw355v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=583&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Supreme Court Justice and Republican Oliver Wendell Holmes argued taxes were necessary to keep society civilized.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Justice_Oliver_Wendell_Holmes_at_desk.jpg">Library of Congress</a></span>
</figcaption>
</figure>
<h2>The price of a ‘civilized society’</h2>
<p>While details of the Republican tax plan could change drastically, it is certain to reflect core Republican values like lowering tax rates and smaller government.</p>
<p>Republicans tend to <a href="https://www.nytimes.com/2015/05/16/business/economy/republican-presidential-candidates-rally-around-flat-tax.html?_r=0">favor a flat tax</a> because they argue it’s fairer. And they want to reduce the tax burden overall because they think people are better off with more money in their pockets and fewer government services. Scholarly research by us and others suggest they are wrong on both counts, at least in so far as human happiness is concerned.</p>
<p>The familiar aphorism, usually attributed to Justice Oliver Wendell Holmes, notes that “<a href="https://en.wikiquote.org/wiki/Oliver_Wendell_Holmes_Jr.">taxes are the price we pay</a> for a civilized society,” a sentiment chiseled into the side of the IRS building. </p>
<p>We believe research into the economics of happiness would take this sentiment one step farther: Taxes are the price we pay for a happy society.</p><img src="https://counter.theconversation.com/content/85947/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Republican tax plan would ultimately make the current system less progressive while reducing the overall burden, two things research shows make countries less happy.Michael Krassa, Chair, Human Dimensions of Environmental Systems and Professor Emeritus of Political Science, University of Illinois at Urbana-ChampaignBenjamin Radcliff, Professor of Political Science, University of Notre DameLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/848712017-09-29T02:33:04Z2017-09-29T02:33:04ZTax ‘reform’ for the rich: Trump’s plan abandons his working-class supporters<figure><img src="https://images.theconversation.com/files/188102/original/file-20170929-1449-1apbja0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Trump's tax plan will cost trillions. </span> <span class="attribution"><span class="source">AP Photo/Pavel Golovkin</span></span></figcaption></figure><p>President Donald Trump heralded his new tax plan as <a href="http://www.foxnews.com/politics/2017/09/26/trump-vows-tremendous-middle-class-tax-cuts-millions-jobs-with-new-tax-plan.htm">relief for the middle class</a>, revenue-neutral and a “<a href="http://www.nydailynews.com/news/national/trump-promises-middle-class-miracle-tax-plan-detail-article-1.3525658">middle-class miracle</a>.”</p>
<p>Yet the <a href="https://www.nytimes.com/2017/09/27/us/politics/trump-tax-cut-plan-middle-class-deficit.html?mcubz=1">proposal</a>, announced on Sept. 27, does none of these things. Instead, it is a scam not fit to become law of the land because it will enrich the rich, explode the deficit and hurt many middle-class Americans. This may sound like strong language, particularly for an economist, but I’m going to show you why this is no exaggeration.</p>
<p>While some details remain up in the air, <a href="https://www.washingtonpost.com/business/economy/gop-tax-document-reveals-plan-for-massive-tax-cuts-preserves-key-deductions/2017/09/27/684ea40e-a387-11e7-ade1-76d061d56efa_story.html?hpid=hp_no-name_no-name%3Apage%2Fbreaking-news-bar&tid=a_breakingnews&utm_term=.c03437517557">Trump has proposed</a> three main changes to our tax code. He wants to repeal the estate tax, simplify the individual tax code and slash the rates corporations pay. Let’s consider each in turn. </p>
<h2>Killing the ‘death tax’</h2>
<p>The estate tax <a href="http://www.thefiscaltimes.com/2017/08/25/Trump-Wants-Eliminate-Estate-Tax-Here-s-Who-Would-Benefit">currently exempts</a> the first US$5.5 million of wealth for individuals and $11 million for married couples. It is paid by only the <a href="http://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax">wealthiest 0.2 percent</a> of Americans, or fewer than 15,000 people in 2016.</p>
<p>While some dub it the “death tax” resulting in “double taxation,” <a href="https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax">about 55 percent of the wealth subject to it</a> has never before been taxed. It is assets, like stocks and homes, that have appreciated in value but not sold. </p>
<p>While <a href="https://www.washingtonpost.com/news/fact-checker/wp/2017/09/28/fact-checking-president-trumps-tax-speech-in-indianapolis/?utm_term=.69e09e39b23d">Trump falsely claimed</a> its repeal will “protect millions of small businesses and the American farmer,” the reality is that these small firms do not have to pay the estate tax. Eliminating it would allow a small fraction of very wealthy Americans to accumulate even more wealth, widening the chasm between rich and poor.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=376&fit=crop&dpr=1 600w, https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=376&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=376&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=472&fit=crop&dpr=1 754w, https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=472&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=472&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Bernie Sanders is a strong opponent of repealing the estate tax, arguing too much wealth already goes to the top 0.01 percent.</span>
<span class="attribution"><span class="source">AP Photo/Manuel Balce Ceneta</span></span>
</figcaption>
</figure>
<h2>‘Relief’ for the middle class</h2>
<p>A second key element of the plan overhauls how individuals pay taxes by shrinking the number of tax brackets, doubling the standard deduction and eliminating personal exemptions. This is the part that is supposed to provide tax relief for the middle class.</p>
<p>Currently, the first $10,400 a single person earns goes tax-free (the standard deduction plus a personal exemption). For a married couple, it’s $20,800, plus $4,050 for each child.</p>
<p>By increasing the standard deduction and eliminating exemptions, Trump’s proposal would increase the earnings that escape taxation to $12,000 for single people and $24,000 for couples (with or without kids). After that the new tax brackets would kick in, starting at 12 percent (up from the current 10 percent).</p>
<p>But what Trump giveth with one hand, he taketh away with the other. That’s because any gains the middle class reaps from a higher standard deduction will be minuscule at best because of the loss of personal exemptions and the elimination of certain itemized deductions like state and local taxes and medical expenses. Many middle-class households will end up being worse off under this new tax regime.</p>
<p>With some details, like the mortgage deduction and charitable contributions, still unknown, we can’t be certain of all the winners and losers – except one: The rich will be much better off because the top tax rate will be cut from 39.6 percent to 35 percent.</p>
<h2>Corporate cuts</h2>
<p>The proposal’s third key component is a big tax cut for corporations to 20 percent from 35 percent. While Trump claims it primarily will benefit workers and create jobs, I see it as another bonanza for the wealthy. </p>
<p>Publicly traded companies don’t really pay income taxes. Their <a href="https://www.forbes.com/sites/timworstall/2011/09/22/corporations-do-not-pay-taxes-they-cant-theyre-not-people/#5acd50796222">shareholders, consumers and workers do</a>. And <a href="https://www.cbpp.org/research/federal-tax/corporate-tax-cuts-skew-to-shareholders-and-ceos-not-workers-as-administration">shareholders foot more than three-quarters of the bill</a>. That means if taxes are reduced, companies will make more money and pass most of that along to shareholders, who will benefit from bigger dividends and higher share prices. </p>
<p>This will primarily enrich the richest 1 percent because they <a href="http://www2.ucsc.edu/whorulesamerica/power/wealth.html">own half of all corporate stock</a>. Senior executives – also among the 1 percent – will be big winners as well because their pay and bonuses are <a href="https://hbr.org/2016/02/stop-paying-executives-for-performance">usually tied</a> to the value of their company’s stock. </p>
<p>Trump has tried to sell this tax cut by claiming U.S. corporate rates are the highest in the world, <a href="https://www.vox.com/policy-and-politics/2017/8/31/16228766/trump-us-corporate-business-tax-reform-world">making the U.S. less competitive</a>. While it is true that the statutory rates on corporate profits are greater in the U.S. than in other G-20 nations, effective rates in the U.S. are not the highest and <a href="https://www.cbo.gov/sites/default/files/115th-congress-2017-2018/reports/52419-internationaltaxratecomp.pdf">not that different</a> from these other developed countries .</p>
<h2>Paying for it</h2>
<p>Estimates of the cost of the Trump tax cuts vary, but <a href="http://www.crfb.org/blogs/big-6-tax-framework-could-cost-22-trillion">one reliable estimate</a> puts it at $2.7 trillion over 10 years, or $270 billion a year.</p>
<p><a href="https://www.cnbc.com/2017/09/28/trump-advisor-gary-cohn-says-we-can-pay-for-the-entire-tax-cut-through-economic-growth.html">Trump administration officials claim</a> the tax cuts will pay for themselves by generating economic growth. Neither history nor math bears this out.</p>
<p>Historically, large tax cuts have failed to produce the needed and promised growth. This is true of individual states like Kansas, <a href="http://www.kansascity.com/opinion/readers-opinion/guest-commentary/article156418934.html">which rescinded several tax cuts</a> after they failed to stimulate economic growth and created big deficits. It is also true of President Reagan’s 1981 tax cut, which, as <a href="https://www.washingtonpost.com/news/posteverything/wp/2017/09/28/i-helped-create-the-gop-tax-myth-trump-is-wrong-tax-cuts-dont-equal-growth/?utm_term=.25792e9857b4">one of its key architects noted</a>, failed to spur faster economic growth than the U.S. experienced during the 1970s.</p>
<p>Furthermore, even if Trump’s tax cuts did manage to achieve the 3 percent growth his treasury secretary <a href="https://www.reuters.com/article/us-milken-conference-usa-mnuchin-idUSKBN17X1XR?il=0">is currently touting</a>, this would not nearly be enough to offset the cost of the tax cuts. By my calculations, growth would have to be double that to result in enough additional revenue to offset the Trump tax cuts. </p>
<p>Given that economic growth at <a href="https://tradingeconomics.com/united-states/gdp-growth">its best sustained level</a> over the past 75 years averaged only 4 percent (from the 1950s to the 1970s), getting to 6 percent (from the current 2 percent) <a href="http://thegreatrecession.info/blog/us-2016-recession">is unlikely</a>.</p>
<p>That leaves spending cuts and borrowing to pay for a large tax giveaway to the wealthy – both of which would come at the expense of the middle class, a group <a href="http://thehill.com/homenews/administration/352745-trump-on-middle-class-tax-plan-its-not-good-for-me">Trump promised</a> to protect. </p>
<p>If Trump were to choose to cut spending to pay for some or all of it, he would inevitably have to take the money from programs like subsidized student loans and children’s health insurance programs that benefit middle-class Americans. And if he were to borrow the money, the increased debt levels would likely drive up borrowing costs on everything from car loans to mortgages, which would also <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4707673/">hurt the middle class</a>. </p>
<p>Just as a few brave Republicans prevented the repeal of the Affordable Care Act, will some say no to this reverse Robin Hood tax reform?</p><img src="https://counter.theconversation.com/content/84871/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Pressman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>President Trump released details of his tax plan, which would essentially benefit the wealthiest Americans by repealing the estate tax and other changes at the expense of the middle class.Steven Pressman, Professor of Economics, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/848672017-09-28T21:12:08Z2017-09-28T21:12:08ZTrump’s tax plan would weaken faith in fairness of US tax system<figure><img src="https://images.theconversation.com/files/188074/original/file-20170928-1460-5zew90.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Trump unveiled his tax cut in Indianapolis.</span> <span class="attribution"><span class="source">AP Photo/Michael Conroy</span></span></figcaption></figure><p>President Donald Trump and GOP leaders <a href="https://www.nytimes.com/2017/09/27/us/politics/trump-tax-cut-plan-middle-class-deficit.html?mcubz=1">just released a plan</a> to significantly change the taxation of individuals and businesses in what would be the biggest overhaul of the tax code in decades. </p>
<p>Among its many elements is a proposal to change the way the government taxes so-called pass-through entities, something <a href="https://www.wsj.com/articles/trump-tax-cut-for-pass-through-businesses-spurs-debate-1493249166?tesla=y">first suggested in April</a>. </p>
<p>In a nutshell, the Trump proposal would dramatically lower the rates this category of filers pays. While the cut would not be as large as first proposed, it would still lead to very creative tax planning at best and outright evasion at worst, while <a href="https://www.bloomberg.com/politics/articles/2017-04-28/trump-plan-seen-turning-everyone-and-their-dog-into-an-llc">prompting more companies</a> to adopt this type of business structure to gain the huge benefits. </p>
<p>More fundamentally, we argue, this would cause faith in the fairness of the tax system – a <a href="https://books.google.com/books/about/The_Economic_Psychology_of_Tax_Behaviour.html?id=dh0qhqTOtb0C">cornerstone of our voluntary method of taxation</a> – to falter. The consequences of that could be dire.</p>
<h2>Just passing through?</h2>
<p>The universe of pass-throughs is very large, including anything from freelancers and corner grocery stores to medical partnerships and hedge funds that file under legal categories like sole proprietorships, partnerships and S corporations. </p>
<p>The name “pass-through” refers to how income “passes through” to owners. Pass-throughs avoid the <a href="https://ct.wolterskluwer.com/resource-center/articles/how-are-c-corporations-taxed">double taxation</a> that hits regular C corporations. More of U.S. business income <a href="https://www.amazon.com/Pass-Through-Business-Income-Analysis-Individual-ebook/dp/B007FRFC8Q">is actually generated by pass-through entities</a> than conventional corporations like Apple and General Electric. </p>
<p>Currently, owners of pass-throughs report both compensation and business income on their personal tax returns and pay the same tax rates on both.</p>
<p>To illustrate how this works, imagine a doctor’s sole proprietorship generates US$1 million of taxable earnings. Let’s say half of that would be considered reasonable compensation for the owner’s work, while the other half would be deemed ordinary business income. On her tax return, the doctor would report an income of $1 million, all of which would be taxed at personal income tax rates, for a federal levy of <a href="https://smartasset.com/taxes/income-taxes#vx3l58rVis">$396,000</a> (assuming a flat rate of 39.6 percent). </p>
<p>Under <a href="https://www.nbcnews.com/business/economy/trump-s-tax-cuts-would-boost-wealthy-s-pass-through-n805171">Trump’s proposal</a>, the tax rates on compensation and business income would no longer be the same. A new top rate of 35 percent would apply to compensation, and a proposed rate of 25 percent would apply to business income (the original proposal targeted 15 percent). Going back to our example, the doctor’s federal tax bill would be reduced to about $300,000, assuming she followed the rules. Not bad. </p>
<p>But she now has a very strong incentive to characterize her compensation as business income. If she reported her compensation as $0 and business income as $1 million, her tax bill would be reduced still further, to $250,000. Put differently, for every dollar of compensation she reports as business income instead of compensation, she saves 10 cents in tax. </p>
<p>Clearly, the potential tax savings are huge. Many owners of pass-throughs are going to be tempted to report reasonable compensation as business income.</p>
<p>And who wouldn’t be? The reward for cheating is just too large. And the likelihood of getting away with cheating is as high as it’s ever been because of the <a href="http://www.latimes.com/politics/washington/la-na-essential-washington-updates-trump-budget-to-slash-irs-funding-1489665882-htmlstory.html">reductions in enforcement in recent years</a>, a trend Trump <a href="https://www.atr.org/trump-budget-cuts-irs-funding-239-million">has shown no intention of reversing</a>. </p>
<h2>Defining reasonable compensation</h2>
<p>The history of taxation bears this out: If taxpayers are given flexibility in how to report their income, many will do what they can to lower their tax as much as possible. </p>
<p>For example, <a href="https://www.kitces.com/blog/s-corporation-to-reduce-self-employment-taxes-and-social-security-fica/">S corporation owners</a> have long tried to reduce their Social Security and Medicare taxes by calling their compensation business income. Unlike partnership earnings, the earnings of S corporations that are not paid to shareholders as “compensation” are not subject to Social Security and Medicare taxes. </p>
<p>This clearly creates a strong incentive to characterize as much “compensation” as possible as regular business income. The challenge for the Internal Revenue Service has been defining what constitutes “reasonable compensation” for S corporation shareholders. </p>
<p>The issue has been well-litigated over the years, resulting in a 2012 circuit court ruling that was <a href="http://www.lexology.com/library/detail.aspx?g=96c08c5a-486d-4c38-b71a-0c5b04d90ba3">deemed a win</a> for tax evaders. The court’s <a href="http://media.ca8.uscourts.gov/opndir/12/02/111589P.pdf">guidance</a> boiled down to saying each case is unique and offered no ready recipe for the income allocation problem.</p>
<h2>What happened in Kansas</h2>
<p>The state of Kansas offers a ready example of what happens when you change how pass-throughs are taxed.</p>
<p>In 2012, <a href="http://www.kansascity.com/opinion/readers-opinion/guest-commentary/article156418934.html">Kansas eliminated</a> its income tax on pass-through companies, whose owners previously had to report any earnings on their personal state returns. The response to this change, which took effect in 2013, was quick and large. </p>
<p>The center-right Tax Foundation <a href="https://taxfoundation.org/testimony-reexamining-kansas-pass-through-carve-out/">estimated</a> that it caused the number of pass-through companies in the state to double and resulted in $589 million in lost revenue in 2015 alone, based on an analysis of <a href="http://www.ksrevenue.org/pdf/taxexpreport15.pdf">Kansas tax expenditure reports</a>. A <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2958353">recent paper</a> examining the impact of the change concluded it resulted in “overwhelmingly” more tax avoidance. Kansas <a href="http://www.slate.com/blogs/moneybox/2017/06/07/kansas_reverses_the_disastrous_tax_cuts_donald_trump_wants_to_imitate.html">abandoned this experiment</a> earlier this year. </p>
<p>The reasonable inference from the S corporation history and Kansas’ experiment is what everyone is taught in their first economics class: People are rational and self-interested. They recognize and exploit opportunities to enrich themselves. </p>
<p>And the Trump administration’s proposed changes to pass-through rules would create a huge opportunity and greater incentives to recharacterize income. </p>
<h2>A blow against fairness</h2>
<p>Just as worrisome as the significant loss in revenue, however, is that Trump’s proposed change and the potential evasion could undermine the perceived fairness of the tax system. </p>
<p>The effectiveness of the U.S. system depends on voluntary compliance, and voluntary compliance, in part, depends on the belief by taxpayers that they’re not being treated like chumps. That belief is already being strained. </p>
<p>An <a href="http://www.cbsnews.com/news/poll-do-americans-think-their-tax-system-is-fair/">April CBS News poll</a> found that 56 percent of Americans think the income tax system is “somewhat” or “quite” unfair. And a 2011 Pew survey noted that 57 percent of respondents said their biggest complaint about the system is that the wealthy don’t pay their fair share. </p>
<p>Trump’s tax proposal would likely worsen the problem as more people try to game the system. <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.474.4504&rep=rep1&type=pdf">Research suggests</a> that this would create a growing perception of structural unfairness and lead more taxpayers to collectively challenge the system. If that happens, our tax system’s effectiveness would decline, and the consequences of that could be devastating.</p>
<p>Back in 2016, <a href="http://www.reuters.com/article/us-election-trump-hedgefunds-idUSKCN0QS0P120150823">Trump said</a> “hedge fund guys are getting away with murder” because of their use of the “carried interest loophole,” which allows them to significantly lower the taxes they pay.</p>
<p>Trump’s pass-through proposal amounts to encouraging more companies to do exactly the same thing. In our view, this is the manifestation of unfairness. </p>
<p><em>This is an updated version of an article originally published on May 1, 2017. Tim Gray, a freelance business writer and editor, co-authored the original piece.</em></p><img src="https://counter.theconversation.com/content/84867/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gil B. Manzon Jr. does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The administration wants to cut the tax rate on so-called pass-through entities, which is likely to lead to creative tax planning and outright evasion, damaging faith in the system.Gil B. Manzon Jr., Associate Professor of Accounting, Boston CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/795552017-07-24T09:01:26Z2017-07-24T09:01:26ZThese five countries are conduits for the world’s biggest tax havens<figure><img src="https://images.theconversation.com/files/179159/original/file-20170721-14731-musxiw.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Tax sheltering is not just the domain of exotic Caribbean isles. Major world powers, including the United Kingdom, play a critical and previously undisclosed role in global tax avoidance.</span> <span class="attribution"><span class="source">CORPNET</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>First came the <a href="https://panamapapers.icij.org">Panama Papers</a>, then the <a href="https://www.icij.org/tags/bahamas-leaks">BahamasLeaks</a>, and now it’s the <a href="https://www.icij.org/investigations/paradise-papers/">Paradise Papers</a>. Journalists continue to shed light on and raise a public outcry over the offshore financial centres that corporations use to reduce their tax bill – something that <a href="https://www.ft.com/content/de228b90-3632-11e7-99bd-13beb0903fa3">is still being challenged in court</a>.</p>
<p>A <a href="https://www.nature.com/articles/s41598-017-06322-9">recent study</a> has now uncovered all the world’s corporate tax havens and, for the first time, revealed the intermediary countries that companies use to funnel their money into these places. </p>
<p>Published on July 24 in the academic journal <a href="https://www.nature.com/srep/">Scientific Reports</a>, the paper Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network shows that offshore finance is not the exclusive business of exotic, far-flung places such as the Cayman Islands and Bermuda.</p>
<p>The Netherlands and the United Kingdom also play a crucial – although a heretofore obscure – role in the tax-avoidance game, acting as conduits for corporate profits as they make their way to tax havens. </p>
<h2>What makes a tax shelter</h2>
<p>Tax havens are a popular, legal and often secret instrument for multinational corporations to move capital across borders. By taking advantage of loopholes in various national legislations and placing operations in countries with low taxes, companies can reduce their tax rate from around 35% to 25% to 15% or lower.</p>
<p><strong>Figure 1: The United States Effective Corporate Tax Rate (1947-2011)</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/179256/original/file-20170721-28478-yjy3wy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/179256/original/file-20170721-28478-yjy3wy.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=306&fit=crop&dpr=1 600w, https://images.theconversation.com/files/179256/original/file-20170721-28478-yjy3wy.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=306&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/179256/original/file-20170721-28478-yjy3wy.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=306&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/179256/original/file-20170721-28478-yjy3wy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=385&fit=crop&dpr=1 754w, https://images.theconversation.com/files/179256/original/file-20170721-28478-yjy3wy.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=385&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/179256/original/file-20170721-28478-yjy3wy.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=385&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">American companies use clever (and legal) tactics to offshore profits and reduce their tax burden.</span>
<span class="attribution"><span class="source">US Federal Reserve via Wikimedia</span></span>
</figcaption>
</figure>
<p>Silicon Valley companies <a href="https://www.wired.com/2016/08/apple-rest-silicon-valley-avoids-tax-man">have become expert at this tactic</a>. Using a combination of subsidiaries in Ireland, the Netherlands and Bermuda to reduce its tax burden, Apple paid just 0.005% tax on its European profits in 2014, <a href="http://europa.eu/rapid/press-release_IP-16-2923_en.htm">the European Comission reported</a>.</p>
<p>If multinationals’ profits were accounted for where the economic activity takes place, they would pay a combined US$500 to US$650 billion more on taxes each year, according to estimates by the <a href="https://www.wider.unu.edu/publication/global-distribution-revenue-loss-tax-avoidance">Tax Justice Network</a> and the <a href="https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Base-Erosion-Profit-Shifting-and-Developing-Countries-42973">International Monetary Fund</a>. Of this, around US$200 billion a year would go to developing countries, which is more than they receive annually in development aid (<a href="http://www.oecd.org/dac/development-aid-rises-again-in-2016-but-flows-to-poorest-countries-dip.htm">US$142.6 billion</a>).</p>
<p>Findings like this have put tax havens on the radar of US and European regulators, but there’s no broadly accepted definition of what makes a country an offshore financial centre.</p>
<p>Lists published by the <a href="http://www.oecd.org/ctp/harmful/2090192.pdf">Organisation of Economic Cooperation and Development</a> (OECD) and the <a href="http://www.imf.org/external/np/pp/eng/2008/050808.pdf">International Monetary Fund</a> use different criteria to define tax shelters, and their outcomes are highly politicised.</p>
<p>The Tax Justice Network’s <a href="http://www.financialsecrecyindex.com">Financial Secrecy Index</a>, Oxfam’s <a href="https://www.oxfam.org/en/research/tax-battles-dangerous-global-race-bottom-corporate-tax">list of the worst corporate tax havens</a> and Jan Fichtner’s 2015 <a href="https://ssrn.com/abstract=2928027">Offshore-Intensity Ratio</a> have proven to be more useful. </p>
<p>Fichtner (a co-author of this article) provides a rough yardstick for judging OFC jurisdictions by examining the proportion between foreign capital, such as <a href="http://unctad.org/en/Pages/DIAE/Foreign-Direct-Investment-(FDI).aspx">FDI</a>, and the size of the domestic economy. </p>
<p>What none of these measures can tell us, though, is the origin of the foreign investment reported by these tax havens. How does Apple’s money get from California to Bermuda anyway?</p>
<h2>Big data and network analysis</h2>
<p>By bringing together political economists and computer scientists in the <a href="http://corpnet.uva.nl">CORPNET</a> research group at the University of Amsterdam, it became possible to study how corporations make use of particular countries and jurisdictions in their international ownership structures. The novel, data-driven network approach of our study shed light on how offshore finance flows across the globe.</p>
<p>We looked not at country-level statistics but at detailed company data. By asking which countries and jurisdictions play a role in corporate ownership chains that is <a href="https://www.imf.org/external/pubs/ft/wp/2007/wp0787.pdf">incommensurate with the size of their domestic economies</a>, we were able to identify, for the first time, a complex global web of offshore financial centres.</p>
<p>We analysed the entire massive global network of ownership relations, with information of over 98 million firms and 71 million ownership relations. This granular firm-level network data helped us to distinguish two kinds of tax havens: sinks and conduits.</p>
<h2>Introducing sinks and conduits</h2>
<p>“Sink OFCs” attract and retain foreign capital. We identified 24 sink OFCs, including well-known tax havens such as <a href="https://www.theguardian.com/world/2015/jun/17/luxembourg-tax-haven-blacklist-brussels-european-commission">Luxembourg</a>, <a href="http://www.scmp.com/comment/insight-opinion/article/2095852/how-hong-kong-can-shed-its-reputation-tax-haven">Hong Kong</a>, the
<a href="https://www.thestar.com/news/world/2016/04/04/british-virgin-islands-portrait-of-a-tax-haven.html">British Virgin Islands</a>, <a href="https://www.theguardian.com/world/2016/dec/12/bermuda-is-worlds-worst-corporate-tax-haven-says-oxfam">Bermuda</a>, and the <a href="http://dx.doi.org/10.1080/09692290.2016.1243143">Cayman Islands</a>, but also Taiwan, a heretofore <a href="http://www.taxjustice.net/2016/02/10/taiwan-the-un-noticed-asian-tax-haven">unnoticed tax haven</a>.</p>
<p>Using our method, we can now investigate which jurisdictions are used by corporations en route to sinks. These “conduit OFCs” are attractive intermediate destinations because their numerous tax treaties, low or zero withholding taxes, strong legal systems and good reputations for enabling the quiet transfer of capital without taxation.</p>
<p><strong>Figure 2: Mapping equity flows</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/178803/original/file-20170719-13539-1cfnbt8.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/178803/original/file-20170719-13539-1cfnbt8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/178803/original/file-20170719-13539-1cfnbt8.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=599&fit=crop&dpr=1 600w, https://images.theconversation.com/files/178803/original/file-20170719-13539-1cfnbt8.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=599&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/178803/original/file-20170719-13539-1cfnbt8.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=599&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/178803/original/file-20170719-13539-1cfnbt8.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=752&fit=crop&dpr=1 754w, https://images.theconversation.com/files/178803/original/file-20170719-13539-1cfnbt8.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=752&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/178803/original/file-20170719-13539-1cfnbt8.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=752&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The size of conduits (green) and sinks (red) reflects the investment that flows through the country. The colour refers to its position as a sink (blue = no sink, red = sink). The size of the arrows is proportional to the investment between two countries and the colour to its importance (blue = lower flow than expected, red = higher flow than expected).</span>
<span class="attribution"><span class="source">CORPNET</span></span>
</figcaption>
</figure>
<p>We found that a handful of big countries – the Netherlands, the UK, Switzerland, Singapore and Ireland – serve as the world’s conduit OFCs. Together, these five conduits channel 47% of corporate offshore investment from tax havens, according to the data we analysed. </p>
<p>The Netherlands leads the pack with 23%, followed by the UK (14%), Switzerland (6%), Singapore (2%) and Ireland (1%).</p>
<p>Each conduit jurisdiction is specialised both geographically and in industrial sectors. The Netherlands excels in holding companies, for example, while Luxembourg favours “administrative services”. Hong Kong’s geographic speciality lies in connecting to the British Virgin Islands and Taiwan.</p>
<h2>New targets</h2>
<p>Our findings debunk the myth of tax shelters as exotic far-flung islands that are difficult, if not impossible, to regulate. Many offshore financial centres are highly developed countries with strong regulatory environments.</p>
<p>That means that targeting conduit OFCs rather than sinks could prove more effective in stemming tax avoidance. This realisation may help European Union and the OECD officials, who <a href="http://www.oecd.org/tax/beps/">have increased pressure on cracking down on tax avoidance</a> since the 2008-2009 financial crisis (to modest effect), by helping regulators better tailor their policies. </p>
<p>British Finance Minister Philip Hammond has speculated that the UK could become a European tax haven <a href="http://www.independent.co.uk/news/uk/politics/brexit-eu-chancellor-philip-hammond-welt-am-sonntag-uk-tax-haven-europe-a7527961.html">if the EU fails to offer it a good Brexit deal</a>. But, in practice, <a href="https://www.versobooks.com/books/2103-the-city">the City of London</a> is already a major offshore financial centre. </p>
<p><strong>Figure 3: Sink Offshore Financial Centres</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/179155/original/file-20170721-14712-1iebebp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/179155/original/file-20170721-14712-1iebebp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=310&fit=crop&dpr=1 600w, https://images.theconversation.com/files/179155/original/file-20170721-14712-1iebebp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=310&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/179155/original/file-20170721-14712-1iebebp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=310&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/179155/original/file-20170721-14712-1iebebp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=389&fit=crop&dpr=1 754w, https://images.theconversation.com/files/179155/original/file-20170721-14712-1iebebp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=389&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/179155/original/file-20170721-14712-1iebebp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=389&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Jurisdictions in blue have been under British sovereignty in the past or are still UK dependencies.</span>
<span class="attribution"><span class="source">CORPNET</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Of 24 sink OFCs, 18 have a current or past dependence to the UK, including major tax havens such as the Cayman Islands, Bermuda, British Virgin Islands and Jersey. New territories with low or no corporate taxes are continuously emerging as sink OFCs, but, as our study shows, there are just a handful of conduit OFCs.</p>
<p><em>Results and details are available on the dedicated website <a href="https://www.ofcmeter.org">www.ofcmeter.org</a></em></p><img src="https://counter.theconversation.com/content/79555/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Javier Garcia-Bernardo receives funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant no. 638946).</span></em></p><p class="fine-print"><em><span>Eelke Heemskerk receives funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant no. 638946).</span></em></p><p class="fine-print"><em><span>Frank Takes receives funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant no. 638946).
</span></em></p><p class="fine-print"><em><span>Jan Fichtner receives funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant no. 638946).</span></em></p>The Netherlands, Switzerland, the United Kingdom, Singapore and Ireland are among the rich countries that funnel major corporate money into secret offshore tax shelters, according to a new study.Javier Garcia-Bernardo, PhD Candidate, University of AmsterdamEelke Heemskerk, Associate Professor Political Science, University of AmsterdamFrank Takes, Postdoctoral Researcher, University of Amsterdam, Leiden UniversityJan Fichtner, Postdoctoral Researcher in Political Science, University of AmsterdamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/809612017-07-13T06:45:56Z2017-07-13T06:45:56ZGilead and the billion-dollar odyssey<figure><img src="https://images.theconversation.com/files/178009/original/file-20170713-9462-6z59kg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Despite global outrage at the cost of its Hepatitis C cure, Gilead reaps huge profits – aided by Australian taxpayer subsidies.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/nickstcharles/12492466274">Nick St Charles/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Like its Big Pharma peers, Gilead Sciences enjoys lavish taxpayer subsidies via the Pharmaceutical Benefits Scheme (PBS). It also makes large profits, but it pays little in the way of income tax in this country. So, like its peers, Gilead is doubly subsidised by Australian taxpayers: low income tax, high PBS.</p>
<p>Yet this US drug company has surpassed its peers in the pursuit of corporate welfare. It has set prices so high for <a href="https://theconversation.com/weekly-dose-sofosbuvir-whats-the-price-of-a-hepatitis-c-cure-63208">Sofosbuvir</a>, its “blockbuster” treatment for hepatitis C, that very few people in the world can afford to pay for the drug without monumental government subsidies.</p>
<p>Global Justice Now, a UK activist group, estimates somebody dies of hepatitis C every 79 seconds; in that time Gilead makes US$26,068 selling Sofosbuvir. More than 1.4 million people have died since Gilead took its hep C cure to market in 2014.</p>
<p>But what a cure it is. The success rate is 95%. Sufferers don’t need to take the drug for their whole life, just for a 12-week course of pills. This drug is capable of eradicating a disease that kills nearly 500,000 people a year and infects more than 150 million people worldwide … were it not for the money.</p>
<p>Only wealthy patients and wealthy countries like Australia have the wherewithal to pay for it. And Australia, with its “soft-touch” PBS scheme which is unsustainable and skewed heavily in favour of drug companies, is a prime target for Gilead.</p>
<h2>The high cost of a cure</h2>
<p>The Australian government forked out A$1 billion in just four months last year to subsidise hep C cures Ledipasvir and Sofosbuvir. These were the two most costly items on the PBS. This A$1 billion paid for just 43,000 prescriptions, prescriptions that would have cost the customer A$1,000 a pill had taxpayers not picked up the bill.</p>
<p>The extreme price of Gilead’s hep C cure led Dr John Freeman to set up a buyers’ club, <a href="https://fixhepc.com.au/">FixHepC</a>, so his patients could import a generic hep C treatment from Asia and pay $US2,000 rather than the $US84,000 Gilead was charging for the treatment in America.</p>
<p>Freeman’s son, Dr James Freeman, said this week he was apprehensive at first about importing a far cheaper generic from Asia but felt, as a doctor, he first owed a duty to heal his patients. It was the patients who imported the drug and the results were stunning, at a fraction of the price.</p>
<p>Patients of the Freemans were able get around patent laws on a personal use basis. Gilead, which has a 20-year IP stranglehold on the drug, is not happy about generic interlopers in its hep C market – though the company declined to respond to questions for this column.</p>
<h2>A takeover windfall</h2>
<p>The rationale for keeping drug prices high while allowing those who can’t afford to pay to die is primarily one of risk, capital and markets. Unless there is a significant financial reward for developing pharmaceuticals, companies will not invest and therefore cures will not be found. But where is the line to be drawn between profits and peoples’ lives?</p>
<p>James Freeman says, in the case of Gilead and its hep C drug, Gilead has overstepped that line. It didn’t develop the drugs, it acquired them in a takeover bid and then jacked up the prices.</p>
<p>Typically, a new drug costs between $US90 million and $US300 million to develop. Instead of developing the drug itself, Gilead acquired Nasdaq-listed stock Pharmasset for $US11 billion. It was framed as a “high-risk” acquisition at the time as Pharmasset had steered its drug through Phase II clinical trials but was yet to get approval from the US Food and Drug Administration.</p>
<p>“Patent laws are supposed to help incentivise research and development by ensuring profits for new drugs. But Gilead did not invent Sofosbuvir,” wrote Freeman in a paper on the hep C cure. “The research for the drug was partly funded by American taxpayers and the investment that Gilead made in buying the rights for the drug was more than made back in their first year of its sale. So most of the money you pay for the drug now goes to marketing and to paying dividends to the shareholders gathering in California right now.”</p>
<p>Gilead got Phase III trials done, had the drug approved, and the rest is history.</p>
<p>“In the third quarter of 2013, Gilead had US$2.36 billion in cash and convertibles on its balance sheet,” says James Freeman. “Now they have US$32 billion. They only have one blockbuster so they have US$30 billion in cash profit.”</p>
<h2>Huge profits, little transparency</h2>
<p>This sort of astronomical profit – a profit heavily subsidised by Australian taxpayers via the PBS – suggest Gilead should be accountable for its corporate activities in this country.</p>
<p>Like many Big Pharma multinationals that operate in Australia, however, Gilead produces only “Special Purpose” financial statements, a statutory report that relies on the assumption that there is only one stakeholder interested in Gilead’s financials.</p>
<p>This is wrong. It is a narrow and arguably erroneous view of accounting standards; creditors, taxpayers, patients, myriad parties are interested in Gilead’s financial statements.</p>
<p>The reason for producing Special Purpose reports is reduced disclosure, secrecy. There is zero disclosure, for instance, of Gilead’s related party transactions with its parent company in Ireland – likely there are IP or service charges to Ireland – or with the ultimate parent company in the US. The accounts fail to provide a “true and fair” picture of Gilead’s financial position as required by accounting standards and the Corporations Act.</p>
<p>An analysis of its financial statements shows that although Gilead booked A$2.3 billion in cash receipts from its customers in Australia last year, it paid just A$2.8 million in income tax over the past six years. Tax as a percentage of revenue is 0.82% – less than 1% of sales – after billion-dollar subsidies via the PBS.</p>
<p>Further, deep in the intestines of the notes to the financial statements is a provision to pay the Department of Health A$1 billion. Never mind that this provision does not show up in “provisions” on the balance sheet – we have come to expect this sort of lousy accounting – but there is no explanation of the group’s arrangements with the government.</p>
<p>On the face of it, Gilead owes the government A$1 billion but does not deem that the government is entitled to an interest in its financial statements, ergo Special Purpose reporting.</p>
<p>Gilead’s revenue last year was A$483 million – it had soared from $186 million the year before – but it booked A$2.3 billion of cash receipts from Australian customers. How is it that cash of A$2.3 billion amounts to five times disclosed revenue? No doubt there are complex rebate arrangements, though these are not explained by Gilead or its auditor EY.</p>
<p>Neither is the government’s reporting of its PBS arrangements adequate. Again, cloaked in secrecy. The PBS spend has almost doubled in a decade from A$6 billion to A$11.5 billion and is headed higher. The long-term cost of health care appears crushing and a first step to averting this impending crisis in funding is transparency and disclosure.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/178006/original/file-20170713-11517-vyrse4.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/178006/original/file-20170713-11517-vyrse4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/178006/original/file-20170713-11517-vyrse4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=458&fit=crop&dpr=1 600w, https://images.theconversation.com/files/178006/original/file-20170713-11517-vyrse4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=458&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/178006/original/file-20170713-11517-vyrse4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=458&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/178006/original/file-20170713-11517-vyrse4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=576&fit=crop&dpr=1 754w, https://images.theconversation.com/files/178006/original/file-20170713-11517-vyrse4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=576&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/178006/original/file-20170713-11517-vyrse4.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=576&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Gilead revenue, tax paid and cash receipts, and government PBS spending (in A$ million – note break in Y axis)</span>
<span class="attribution"><span class="source">David Balcombe/ASIC company extract and www.pbs.gov.au</span></span>
</figcaption>
</figure>
<p>As for Gilead’s social licence to operate in Australia, it hangs by a thread. This is a company that should be deemed an agent of its foreign parent and taxed as such. </p>
<p>The case of Gilead and Sofosbuvir is far from unique, says Dr James Freeman. “Across the world, hundreds of millions of people are priced out of accessing the medicines they need by big pharmaceutical companies with monopolies over essential medicines.</p>
<p>"It’s estimated that 10 million people across the global south died from AIDS-related diseases while big drug companies tried to block the production of ‘generic’ versions of drugs that could be used to cheaply treat patients. In the UK the annual NHS drug spending has gone up by £3.8 billion in the last five years and the NHS increasingly has to reject or ration new drugs because of their costs, leaving patients without access to new treatments.”</p>
<hr>
<p><em>This column, co-published by The Conversation with <a href="http://www.michaelwest.com.au/">michaelwest.com.au</a>, is part of the <a href="https://theconversation.com/au/topics/democracy-futures">Democracy Futures</a> series, a <a href="http://sydneydemocracynetwork.org/democracy-futures/">joint global initiative</a> between The Conversation and the <a href="http://sydneydemocracynetwork.org/">Sydney Democracy Network</a>. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.</em></p><img src="https://counter.theconversation.com/content/80961/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Michael West has been paid by GetUp! and the Tax Justice Network to conduct an analysis of the tax affairs of 20 multinational companies.</span></em></p>How much can a multinational take before its social licence to operate in this country expires? How much corporate welfare is too much?Michael West, Adjunct Associate Professor, School of Social and Political Sciences, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/768532017-04-28T07:30:11Z2017-04-28T07:30:11ZHow Australia should react to the Trump tax cuts<p>President Donald Trump <a href="https://www.nytimes.com/2017/04/26/us/politics/trump-tax-cut-plan.html?_r=0&mtrref=theconversation.com&gwh=B8657AB38E1077F3E05F5231408D1CBF&gwt=pay">has proposed</a> cutting the US corporate tax rate from 35% to 15% and ending the practice of taxing the foreign income of US businesses. Trump may be hoping that such a massive corporate tax cut will result in new investment. Indeed, historical data suggests companies will respond by shifting profits to where the tax is low.</p>
<p>This profit shifting will hurt investment in Australia, as companies move their profits to America rather than reinvesting in Australia. If the tax cut goes ahead, Australia and other countries will have to respond by either cutting taxes as well, or totally reforming the way we tax corporate income. </p>
<p>Alternative ways of taxing corporate income exist. The US Republican Party, for example, recently proposed a “<a href="https://taxfoundation.org/understanding-house-gop-border-adjustment/">destination-based cash flow tax</a>”. Under this system, companies would be taxed on their revenues in the US minus labour costs. </p>
<p>The European Union is currently proposing a <a href="http://europa.eu/rapid/press-release_IP-16-3471_en.htm">formula apportionment taxing system</a> within its member countries. With this system, profit is allocated to be taxed by member countries based on how much activity (i.e. sales, employment and assets) occurs in each country. </p>
<p>Both of these tax activity rather than income, and thus are less prone to manipulation and profit shifting. </p>
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<p>As you can see from the chart above, during the last three decades corporate tax rates have <a href="http://stats.oecd.org/viewhtml.aspx?datasetcode=REV&lang=en">fallen across the OECD</a>. But at the same time the amount of money raised through corporate taxes, both as a percentage of total tax revenues and as a percentage of GDP, <a href="http://stats.oecd.org//Index.aspx?QueryId=58204">has remained almost constant</a>. </p>
<p>This is not because changes in total tax revenues or GDP have exactly matched the changes in corporate tax. The story is more complicated than that. With total tax revenues and GDP increasing, the amount of money raised through corporate taxes has actually been increasing at the same time as the rates have been cut. </p>
<p>Companies have simply been declaring more of their existing profits.</p>
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<p>To understand why this has happened, you have to understand how firms react to tax rate changes. There are <a href="https://www.jstor.org/stable/1344772?seq=1#page_scan_tab_contents">three general guidelines</a>:</p>
<ol>
<li> The statutory tax rate (the headline 15% or 35%) affects where firms report their profits</li>
<li> The average effective tax rate (the percentage paid by the firm after taking deductions) affects where firms locate their new plants - whether domestically or abroad</li>
<li> The marginal effective tax rate (the percentage paid by the firms on their marginal investment) affects where the firms make new investments in existing plants.</li>
</ol>
<p>Given these guidelines, one explanation for the increase in corporate tax revenues over the last thirty years is that the average and marginal tax rates have not fallen, i.e. even if corporate tax rates have fallen, the effective taxes have risen due to reductions in tax deductions. </p>
<p>But <a href="https://www.jstor.org/stable/1344772?seq=1#page_scan_tab_contents">studies</a> have shown this is not the case. Both average and marginal effective tax rates have fallen in this period, but not as dramatically as the statutory rates. </p>
<p>Another explanation could be that lower taxes remove a burden from firms, who are then able to create more activity and thus profits. This is <a href="https://www.whitehouse.gov/blog/2017/04/26/president-trump-proposed-massive-tax-cut-heres-what-you-need-know">the narrative</a> behind President Trump’s tax plan. </p>
<p>If this is true, then we should see that periods with tax reductions lead to periods with higher economic activity and thus growth. But, again, <a href="https://www.brookings.edu/wp-content/uploads/2016/07/09_Effects_Income_Tax_Changes_Economic_Growth_Gale_Samwick_.pdf">studies show</a> this is not the case. </p>
<p>A third, more plausible explanation is that lower taxes induce firms to report more profits to the tax authorities. In other words, they declare already existing profits from other countries.</p>
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<p>We don’t yet have details about whether Trump will eliminate tax deductions along with lowering the rate, but the signal is clear. With the US willing to compete with a low tax country like Ireland, we in Australia will have to react. </p>
<p>There is no doubt that if a large country like the US lowers tax so much, it will divert investment from other countries such as Australia, along with profits (and hence Australia’s tax revenue). </p>
<p>It is a textbook “beggar thy neighbor” tax policy. Australia, and any other country that has high tax rates, will have to react by either reducing its corporate tax rate as well, or by totally reforming the way we tax corporate income.</p><img src="https://counter.theconversation.com/content/76853/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Trump tax cut will create new investment in America, but at the expense of countries like AustraliaPascalis Raimondos, Professor of Economics, Head of School, Queensland University of TechnologySara L. McGaughey, Professor of International Business, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/754552017-04-10T04:47:36Z2017-04-10T04:47:36ZFactCheck: do 679 of Australia’s biggest corporations pay ‘not one cent’ of tax?<blockquote>
<p>… 679 of our biggest corporations pay not one cent of tax. <strong>– Australian Council of Trade Unions (ACTU) Secretary Sally McManus, <a href="http://www.actu.org.au/actu-media/speeches-and-opinion/speech-by-actu-secretary-sally-mcmanus-at-the-national-press-club">address</a> to the National Press Club, Canberra, March 29, 2017.</strong></p>
</blockquote>
<p>Speaking at the National Press Club in Canberra, Australian Council of Trade Unions (ACTU) Secretary Sally McManus called for an increase to Australia’s minimum wage and criticised the Fair Work Commission’s recommendation to cut Sunday and public holiday penalty rates. </p>
<p>McManus said that “679 of our biggest corporations pay not one cent of tax”.</p>
<p>Was that claim correct?</p>
<h2>Checking the source</h2>
<p>When asked for sources to support McManus’ statement, a spokesman for the ACTU pointed The Conversation to a <a href="http://www.abc.net.au/news/2016-12-09/tax-data-transparency-ato/8106178">media report</a> and to the Australian Taxation Office (ATO) <a href="https://data.gov.au/dataset/corporate-transparency/resource/1e8c8ae0-81d1-4780-a669-9e4a2a6ba1a4">Report of Entity Tax Information</a> for 2014-15, and provided this response from McManus:</p>
<blockquote>
<p>According to the most recent ATO Tax Transparency Report, 679 companies with more than $100 million in income paid no tax in Australia in 2014-15.</p>
<p>The list includes such household names as Walt Disney, Sydney Airport, Qantas, Origin Energy and News Australia.</p>
<p>These companies can collectively be considered to be amongst the biggest operating in Australia – both in terms of income, and the prominent position they enjoy in the public eye.</p>
<p>Some of them are not Australian owned, and they may pay tax in other jurisdictions. However, they all operate in Australia, generate revenue from the spending of Australians and utilise existing infrastructure – like roads and ports – that were paid for by Australians.</p>
<p>So there’s something deeply unfair about a system which allows them to not pay any tax in Australia.</p>
</blockquote>
<p>The ACTU also provided The Conversation with a <a href="https://cdn.theconversation.com/static_files/files/27/75455-2017-04-10-tax-paid-by-companies-tax-paid-by-companies-ato-data.xlsx?1518654879">spreadsheet</a> listing the corporations it said had paid no tax. </p>
<h2>Is that figure right?</h2>
<p>The best source for information on how much tax Australia’s biggest corporations pay every financial year is the ATO. The ATO’s <a href="https://data.gov.au/dataset/corporate-transparency">Report of Entity Tax Information</a> – the same report the ACTU referred to in their response – is produced annually and shares information taken from the tax returns of:</p>
<ul>
<li>Australian public and foreign-owned corporate entities with total income of A$100 million or more</li>
<li>Australian-owned resident private companies with total income of A$200 million or more</li>
<li>entities with tax payable under the petroleum resource rent tax, and</li>
<li>entities with tax payable under the minerals resource rent tax. </li>
</ul>
<p>The report includes each company’s name, total income, taxable income, and tax payable.</p>
<p>For the purpose of this FactCheck, the relevant information is the <em>tax payable</em> by each of these companies. By looking at this data, we can see which companies didn’t pay tax in 2014-15, the most recent financial year for which this information is available.</p>
<h2>How many companies don’t pay tax?</h2>
<p>There are 1,904 companies included in the ATO’s 2014-15 report. Of those, 678 – or 36% of the companies listed – had no tax payable.</p>
<p>My count – 678 – is slightly different to McManus’s count of 679, and to the figure the ATO quoted on its pie chart <a href="https://www.ato.gov.au/Business/Large-business/In-detail/Tax-transparency/Corporate-tax-transparency-report-for-the-2014-15-income-year/?anchor=Netlossesandniltaxpayable#Netlossesandniltaxpayable">here</a> (the ATO has since corrected its report to reduce the number of nil tax payable taxpayers by one to 678).</p>
<p>The ACTU provided The Conversation with a spreadsheet listing the 679 companies that, in their view, paid no taxes. When I compared my count with the ACTU’s, I noted the ACTU included a company that I did not, a company named Tal Dai-Ichi Life Australia. </p>
<p>In the <a href="https://data.gov.au/dataset/corporate-transparency">report</a> I downloaded from the ATO website, Tal Dai-Ichi Life Australia is recorded as having total tax payable of A$56,171,148 for the 2014-15 financial year, so it shouldn’t be included in the count of companies that paid no tax. </p>
<p>Nevertheless, the difference is obviously minor. McManus was essentially correct.</p>
<h2>Why do some companies pay no tax?</h2>
<p>In general, there are two reasons why corporate companies pay no tax in Australia.</p>
<p>The first is that some companies are not making any profit. The concept of “total income”, which is used to identify the companies included in the ATO report, relates to revenue – not profit.</p>
<p>So, a company can have income (or revenue) of more than A$200 million, but that doesn’t automatically mean it has made a profit. Its losses or outgoings may outweigh its income. Only companies making a profit have to pay taxes.</p>
<p>Many of the companies that didn’t pay tax in 2014-15 were those in the energy/natural resources and manufacturing sectors – two sectors that were <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/8155.0">experiencing a downturn</a> in that year and where profit margins were shrinking.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/164634/original/image-20170410-29403-1pbfxrs.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Proportion of entities with nil tax payable, by industry segment, 2013–14 and 2014–15.</span>
<span class="attribution"><a class="source" href="https://www.ato.gov.au/Business/Large-business/In-detail/Tax-transparency/Corporate-tax-transparency-report-for-the-2014-15-income-year/?anchor=Netlossesandniltaxpayable#Netlossesandniltaxpayable">ATO corporate tax transparency report for 2014-15</a></span>
</figcaption>
</figure>
<p>The second reason could be tax avoidance or profit shifting. These situations arise when companies take advantage of the international tax system to reduce the amount of tax to be paid. For instance, companies may set up complex ownership arrangements that allow them to redirect profit to countries with lower tax rates.</p>
<p>While not necessarily illegal, these situations are <a href="https://www.ato.gov.au/Business/Large-business/In-detail/Tax-transparency/Tax-transparency--reporting-of-entity-tax-information/?anchor=Ensuringcorporatetaxpayerspaythecorrecta#Ensuringcorporatetaxpayerspaythecorrecta">closely monitored by the ATO</a> to ensure that Australia receives its correct share of tax under international tax rules. </p>
<h2>Verdict</h2>
<p>Sally McManus’ claim that “679 of our biggest corporations pay not one cent of tax” was essentially correct. According to ATO records, 678 of Australia’s biggest corporations didn’t pay tax in Australia in 2014-15.</p>
<p>McManus’s figure of 679 included one company that did have tax payable in that financial year. But in percentage terms, the difference between 678 and 679 is negligible.</p>
<p>It’s important to note that when a company doesn’t pay tax, it doesn’t necessarily imply tax avoidance or profit shifting. A company might not be paying tax because it isn’t making a profit, even if its total income (that is, revenue) amounts to more than A$100 million or A$200 million. <strong>– Fabrizio Carmignani</strong></p>
<hr>
<h1>Review</h1>
<p>This is a sound FactCheck.</p>
<p>The ATO’s annual corporate tax transparency <a href="https://www.ato.gov.au/Business/Large-business/In-detail/Tax-transparency/Corporate-tax-transparency-report-for-the-2014-15-income-year/?anchor=Netlossesandniltaxpayable#Netlossesandniltaxpayable">reports</a> can provide useful insights to inform public debate regarding how effectively our tax system is working. </p>
<p>As the author rightly points out, the information must be used with caution. There are legitimate reasons why a company with substantial income does not have to pay income tax. For instance, it may make a loss in that particular year, or has substantial carried forward losses from previous years.</p>
<p>Or, as the author has also rightly noted, tax avoidance may be the reason why a large company is not paying any income tax. <strong>– Antony Ting</strong></p>
<hr>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
</figcaption>
</figure>
<p><em>The Conversation’s FactCheck unit is the first fact-checking team in Australia and one of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/75455/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its macroeconomic applications.</span></em></p><p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In a speech to the National Press Club in Canberra, ACTU Secretary Sally McManus said 679 of Australia’s biggest corporations pay “not one cent of tax”. Is that right?Fabrizio Carmignani, Professor, Griffith Business School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/716392017-01-30T14:25:29Z2017-01-30T14:25:29ZAn original Republican tax plan offers Trump a radical tool for corporate tax reform<figure><img src="https://images.theconversation.com/files/154525/original/image-20170127-30424-1yrhxfm.jpg?ixlib=rb-1.1.0&rect=73%2C9%2C5987%2C3798&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/dollars-rolled-closeup-american-cash-money-557486395?src=4uAmTRJFtRzOLu4kVsZL1A-2-98">Marian Weyo/Shutterstock</a></span></figcaption></figure><p>Major US companies <a href="http://www.bbc.co.uk/news/magazine-20560359">have long been known</a> to specialise in profit shifting to tax havens to reduce their tax bill. This <a href="http://www.oecd.org/ctp/beps/">erosion of the corporate tax base</a> is thought to lead to <a href="http://www.vox.com/2016/4/8/11371712/panama-papers-tax-haven-zucman">rising inequality</a> and deprives countries of important revenues to spend on public services. </p>
<p>So what can be done? Donald Trump is being encouraged by leading House Republicans – led by Kevin Brady, chairman of Washington’s tax-writing <a href="https://waysandmeans.house.gov/">Ways & Means committee</a>, and speaker Paul Ryan – to introduce a Destination-Based Cash Flow Tax, or DBCFT. This tax plan has been pushed forward by leading Berkeley <a href="https://www.americanactionforum.org/research/14344/">economist Alan Auerbach</a> and scholars at the Oxford Centre for Business Taxation.</p>
<p>It sounds <a href="http://www.wsj.com/articles/trump-warns-on-house-republican-tax-plan-1484613766">complicated</a> – and has an awful acronym – but there is something in this plan that offers an alternative. </p>
<p>The <a href="https://cdn.americanprogress.org/wp-content/uploads/issues/2010/12/pdf/auerbachpaper.pdf">DBCFT</a> doesn’t go after a firm’s profits in the normal sense, as the current corporate tax regime does. Instead of taxing corporate income (revenue minus costs) it taxes sales at their point of destination or consumption.</p>
<p>Another key part of the new tax is that monetary flows across a multinational corporation’s international network of subsidiaries (that would include tax haven locations) are border-adjusted. This means that export sales, for example Ford selling cars overseas, would be excluded from a firm’s tax base, but imports, such as the purchase of raw materials from abroad, would be included. What this boils down to is that the tax looks like an export subsidy, and at the same time, an import tax. In many ways therefore it looks like a backdoor attempt to improve the US’ large current account deficit – which formed a major part of Trump’s presidential campaign. </p>
<h2>Radical Change</h2>
<p>The House Republicans highlight several <a href="http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/Series-16/WP1604a.pdf">key attractions</a> of this new and radical tax. </p>
<p>They argue that it would allow the US to reduce its federal corporate tax rate to around 15-25% – from 35% currently – which would bring it in line with China and much closer to the UK. The hope is also that it will deter firms from stashing profits in tax havens, and minimise the role of aggressive transfer pricing manipulation – the practice of buying and selling goods between divisions of the same multinational as a means to reduce the corporate tax bill. It should also deter firms from relocating their legal domicile to countries like Ireland and Bermuda – <a href="http://www.investopedia.com/terms/c/corporateinversion.asp">so called corporate inversions</a>. </p>
<p>Current tax arrangements offer companies an advantage if they raise money through debt. However the DBCFT would have the effect of removing that incentive by eliminating deductions for interest payments. This means in theory that firms would be more likely to favour stock markets when raising capital. There is a potential twin advantage here: lower debt ratios would make the US economy more resilient in the face of external shocks, while equity markets are given a further boost. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/154527/original/image-20170127-30419-rpl3vg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bullish for Wall Street?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/numenor65/12021995355/in/photolist-jjkSnZ-8rtYc7-js6GoP-js78bq-3rha7g-rk5Xpa-9L9ZMT-eWK4WV-js59kV-arN6FG-7DkeCp-9vGxVA-9yvS7M-4kDf4c-8rqP6v-6NFSGu-7du5F9-5wdjob-5ckuLg-5wdjku-5w8YvX-5w8Yuz-5ZYRYn-5wdjmY-tQYbaL-PX4rpj-QWaBUV-QWaDs4-PDQ9gE-QWaCQH-aac3UD-b5cUBV-b5cUCg-bES9zm-js59oR-tV1WT-js6GxB-js6GgK-b5cUDH-5zVbow-9sU6F9-sLty6-65HHZk-9zr8He-8qwXur-iVUi1-gMYRt-8rqM7v-aFD9rR-5yUSYZ">Numenor1965/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span>
</figcaption>
</figure>
<p>The theory seems appealing, but the truth is, nobody really knows if it will work. It might not even be compliant with the World Trade Organisation (WTO). This is a step in to the unknown; there could be multiple unintended consequences. Not since the early 20th century, when bilateral tax treaties between countries were introduced, has there been such <a href="http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1001&context=dlj">sweeping reform to international taxation</a> as this policy change would initiate. </p>
<h2>Progressive?</h2>
<p>There is an argument that the new tax could have a progressive outcome. Because payroll costs could also be deducted from its calculation, this should shift the tax burden more firmly on to shareholders, and away from workers. Concerns with the existing system are that workers end up paying a fair chunk of the corporate tax bill, through lower wages and benefits.</p>
<p>However, consumers might not get off lightly. The DBCFT may well have the effect of increasing consumer prices on imported goods, leading to higher energy and food prices. This would disproportionately hurt the poor, meaning the tax’s progressive credentials might not bear scrutiny.</p>
<p>In order for the tax to work, proponents argue that the dollar will have to <a href="http://app.info.pwc.com/e/es?s=714248197&e=103954&elqTrackId=e81dae056ec749c58bf06fe6fc2f5f47&elq=b1e9fa67493c4bd5b003791f0cef3017&elqaid=4557&elqat=1">appreciate in value</a> to offset the effects of the border-adjustment. This is because exports are tax free but imports incur tax. Hence US exports will appear more attractive to foreign consumers and imports will appear more expensive to US consumers. But whether exchange rates will move is an open question, as ever.</p>
<p>This really is a highly contentious and ambitious proposal for tax reform. The US’ international competitors – and of course tax haven locations – may see it as a hostile move. It will encourage firms from abroad to locate their production in the US. On the other hand, proponents argue that the policy is “incentive compatible” – in simpler terms, it will force other countries to adopt a similar policy. This would, in effect, dismantle the standard tax haven business model and send shockwaves throughout an industry that specialises in tax avoidance.</p>
<p>That is an intriguing prospect, but interest groups such as the Tax Justice Network in the UK would argue that the key to a better functioning corporate tax regime is for countries to be more open with one another in terms of information exchange for tax purposes. This would include multinational companies reporting their financial statements on a <a href="http://www.taxjustice.net/topics/corporate-tax/country-by-country/">country by country basis</a> instead of consolidating them. Countries would then be able to clearly define their corporate tax base and decide themselves what tax rate to levy. </p>
<p>The EU is currently discussing the introduction of a <a href="https://ec.europa.eu/taxation_customs/consultations-get-involved/tax-consultations/relaunch-common-consolidated-corporate-tax-base-ccctb_en">Common Consolidated Corporate Tax Base</a> to partially achieve this. This would not eliminate the tax havens, but it may go a long way towards enhancing transparency, leading to greater scrutiny of the world’s biggest multinational enterprises and changing their behaviour in terms of profit shifting. </p>
<p>In some ways this is the longer, harder road. The appeal of the Republican proposal would be to force the issue, but it is desperately hard to predict, or manage, the consequences if this tax is enacted.</p><img src="https://counter.theconversation.com/content/71639/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chris Jones has received funding from the British Academy.</span></em></p>The GOP has a proposal on the table that could send shockwaves through the tax avoidance industry.Chris Jones, Senior Lecturer in Economics, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/693872016-11-25T14:24:45Z2016-11-25T14:24:45ZCould an end to corporate tax help Britain’s Brexit-burdened finances?<figure><img src="https://images.theconversation.com/files/147440/original/image-20161124-15344-j4fqp9.jpg?ixlib=rb-1.1.0&rect=62%2C59%2C937%2C567&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/rajue/14281288764/in/photolist-nKZkAC-a3FHC7-6T18EB-97TcL-5bTCU-abDH5-5Pvp3e-5BwtM4-6ni7Dz-6fAAok-87WUzU-jTu1U2-pvbh-cGmnco-9z2pw7-odrbbs-Hq2bXZ-96hNh5-HyZkPt-a9Thxn-dJJ1bY-6iektN-qSoPsE-2bSkz-bd3ft4-7WC9x9-8hjibn-D6VeT5-cGmnaY-8UCrwN-8xLH8s-4f2eWA-cye5Tb-cGoXAU-a7n3ey-cGmneJ-9MazHF-f5sapZ-5J4yn5-4fWSm-4UUrtR-r9XFH4-5HZrvK-cyWZqE-cyWZnE-jt1VSN-5HZneT-cyWZsy-7sfoBM-4v5zR">Ralf-Juergen/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>For many of us small government liberals who thought that, however flawed the European project is, the UK was better off staying inside it, there was one <a href="https://theconversation.com/uk/eu-referendum-2016">Brexit</a> argument that resonated. This was the promise that once it had removed itself from <a href="https://theconversation.com/4-300-to-quit-the-eu-bring-me-my-cheque-book-59699">the shackles of Brussels</a>, with its penchant for interference, overregulation, and general <em>dirigisme</em>, the UK would be free to return to the halcyon days of the mid Victorian era. A time of low regulation, low tax and free trade.</p>
<p>What remains of these promises? As I suspected at the time of the referendum campaign, not much. There will be no North Atlantic version of Hong Kong – during its heyday, a free-wheeling haven from overbearing regulation and punitive taxes. My guess is that all the heavy-handed, overweening (and vaguely French) interventionism of the European Union will merely be replaced by good old British red tape. I for one will struggle to appreciate the difference.</p>
<p>On the bright side, it could have been worse. Though there was some additional spending on housing, infrastructure and R&D in the <a href="https://theconversation.com/autumn-statement-2016-tories-shift-to-growth-strategy-in-an-ed-balls-style-pirouette-66531">recent Autumn Statement</a> from chancellor Philip Hammond, we thankfully heard no more of the rhetoric about industrial policy that first <a href="http://uk.reuters.com/article/us-britain-eu-industry-idUKKCN10C3CR">accompanied prime minister Theresa May’s ascension to office</a> in the summer. Perhaps we can thank Hammond for that, or maybe it returns in the spring? </p>
<p>Economic theory as well as historical experience has taught us that best way to fix an ailing economy – and maintain popular faith in liberal democracy – might not be the method we have become used to. In the familiar scenario, we empower our social betters (politicians and Whitehall mandarins) to manage the nation’s resources (other people’s money) to the benefit of the most deserving firms (those that contribute most to the party in government) in areas of the country most in need of investment (marginal constituencies). </p>
<h2>Rising debt</h2>
<p>What we do know for sure is that the aforementioned small increases in government spending on R&D, infrastructure and housing – along with the freeze on fuel duty and the decision not to implement changes <a href="https://www.gov.uk/pip/overview">to the “PIP” payments</a> for those with disabilities or long-term ill-health – will play only a small part in preventing the UK from achieving a budget surplus by the end of this parliament. </p>
<p>More significant is the <a href="http://www.bbc.co.uk/news/uk-politics-38087110">revision downward in forecast growth</a>, accompanied by lower government revenue. By the end of the next fiscal year, the debt burden will have reached 90.2% of GDP. These are the sorts of numbers we normally expect to observe only in the aftermath of a fairly large war – the UK went from 24% to 127% <a href="http://www.res.org.uk/view/article5jan12Correspondence.html">over the course of World War I</a>. </p>
<p>And it gets worse, because any decline that follows will almost certainly be reversed by the end of the next decade due to the costs associated with the UK’s ageing population. This is a problem likely to be exacerbated by any steep reduction in immigration because most immigrants arrive at the beginning of their working lives and often pay more in taxes <a href="http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12181/abstract">than they receive in benefits</a>.</p>
<p>There is a view, promoted by Carmen Reinhart and Kenneth Rogoff at Harvard, based on <a href="https://www.aeaweb.org/articles?id=10.1257/aer.100.2.573">their own empirical research</a>, that a 90% debt burden represents a singular threshold – borrow beyond that and a country suffers particularly low growth. This is a result that deserves to be treated with scepticism – it is generated by throwing into one dataset lots of very different countries across different time periods. Nonetheless, ever higher debts will need to be financed by ever higher tax rates. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/147444/original/image-20161124-15365-6f915k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/147444/original/image-20161124-15365-6f915k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/147444/original/image-20161124-15365-6f915k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/147444/original/image-20161124-15365-6f915k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/147444/original/image-20161124-15365-6f915k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/147444/original/image-20161124-15365-6f915k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/147444/original/image-20161124-15365-6f915k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/147444/original/image-20161124-15365-6f915k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A new model for pensions?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/bugmonkey/5051453089/in/photolist-8Go21M-kQpL4Q-ekHvpL-og5vk6-f2eU7s-og4UJy-8faxV5-orcGqY-9yyKsa-qLTVMD-fHy59G-6Y9PX-LuopP-dY4CGP-cmNJLW-seUGVq-iD1EvW-4HvnYB-jwzhXx-iCYmEs-4HaVvG-cswyyf-ps2Gjn-cswyr3-49NRmr-kQnQbn-5VXzE6-5W2Uff-JnwJBX-ozd6nb-ozftip-afK9pD-7YiQv-cSpYzo-kQnWGZ-fYdYPL-oR8g66-oR8jtt-oR8QqJ-fxHST2-D7YxQ-kQoNQn-cUbABA-guBEKy-5odLFi-ba31xi-p6ArtQ-p8CFJX-5cRi2z-ajqmzt">Neil Wilkie/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span>
</figcaption>
</figure>
<p>Doubling a tax rate does not double the amount of revenue a government collects. The distortions and disincentives the tax creates suppress economic activity at an ever increasing rate, shrinking the tax base. Beyond a certain point a debt becomes unsustainable, when taxes can no longer rise enough to service debt interest payments. Though the UK and other western countries may still be far from this Greek scenario, they will suffer, particularly once interest rates begin to rise and refinancing the debt being accumulated becomes more difficult.</p>
<h2>Corporation tax</h2>
<p>So more spending and lower taxes would be a recipe for disaster. That does not mean that the present way the UK spends or taxes is in any way efficient. Hammond did announce that corporation tax cuts planned by his predecessor George Osborne would be implemented. A bolder move, and one more in keeping with the anarchic, anti-bureaucratic spirit of Brexit, would be to abolish corporation tax completely. </p>
<p>Why? Because this is a singularly distortionary tax, and I would argue, deeply unjust as well. It only generates <a href="https://www.ifs.org.uk/uploads/publications/bns/BN163.pdf">about 6% of UK government revenue</a>, but collecting it imposes vastly more administrative costs on UK businesses. Abolish it and armies of intelligent people working as lawyers and accountants could be repurposed to more productive activities in place of their current function of paying (or avoiding) this tax. Justice too would be served.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/147446/original/image-20161124-15359-xtjg3p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/147446/original/image-20161124-15359-xtjg3p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/147446/original/image-20161124-15359-xtjg3p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/147446/original/image-20161124-15359-xtjg3p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/147446/original/image-20161124-15359-xtjg3p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/147446/original/image-20161124-15359-xtjg3p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/147446/original/image-20161124-15359-xtjg3p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/147446/original/image-20161124-15359-xtjg3p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Reflecting on new tax arrangements for business.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/powerbooktrance/465016782/in/photolist-H6khJ-p65J8c-bAEga1-2E4oz-ePdA2r-4EG82G-4qQTFK-ePpYMQ-fjPkMm-yweWc-6r6g8o-6JuV2v-6gceBv-4FZHmd-AMqJ-H6kiJ-9ZVjnr-H6kg5-8MnN24-4sWK41-nfa8r6-pTk24-ePpYPN-aN8wPF-aZirqa-b5uDgr-ePpYNJ-4EDQCx-5Zgh4b-adSjfV-kzKr8V-sfKi-9r44TS-ePpYYC-8Per87-4CqzEC-9iFBeM-nd7qoQ-oa9e9-yweWg-9oPzzs-8xYGnN-5kt1fX-j6rDos-9BKSHD-fiLCfS-2an28V-cT6ujf-89xyPL-7wiRNK">Terry Johnston/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Personally, I am not bothered that Amazon or Starbucks do not <a href="https://www.theguardian.com/technology/2016/sep/02/multinationals-amazon-starbucks-austria-says">“pay their fair share”</a>. Indeed, I believe they have a fiduciary responsibility to their shareholders to pay only what the law requires and not a penny more. Demanding they do otherwise is an assault on the very concept of the rule of law and seems vaguely fascistic. </p>
<p>What does irk, is that their smaller competitors or new firms that might compete against these incumbents cannot shift their profits to Luxembourg or avail themselves of the services of lobbyists that would ensure that tax regulations are written in a way that benefits them. </p>
<p>Ultimately, shareholders pay this tax and unlike the income tax, everyone, whether a millionaire or a destitute pensioner pays here the same rate. Shifting the burden to income tax would yield less waste and would actually be more progressive. It would also support the creation of a more entrepreneurial society, one with more competition and fewer large monopolies.</p><img src="https://counter.theconversation.com/content/69387/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Ben-Gad does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A zero rate for business could actually be a progressive move and would reflect the anti-bureaucratic spirit of Brexit.Michael Ben-Gad, Professor of Economics, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/673862016-10-23T18:18:23Z2016-10-23T18:18:23ZBreaking the university impasse: time to put plans and research into action<figure><img src="https://images.theconversation.com/files/142484/original/image-20161020-8845-vju83s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Kim Ludbrook/EPA</span></span></figcaption></figure><p>Task teams, ministerial committees, <a href="http://www.justice.gov.za/commissions/FeesHET/">judicial commissions</a>: these are just some of the bodies that have been set up to tackle South Africa’s higher education funding crisis since 2011. They’re headed by vice chancellors, retired judges, leading business people and in <a href="http://www.dhet.gov.za/SiteAssets/Latest%20News/Report%20of%20the%20Ministerial%20Committee%20for%20the%20Review%20of%20the%20Funding%20of%20Universities.pdf">one instance</a>, South Africa’s deputy president, Cyril Ramaphosa.</p>
<p>Independent researchers, civil society groups, the country’s National Student Financial Aid Scheme (NSFAS) and individual universities have contributed to a significant body of knowledge through economic models and scenarios designed to fix higher education funding.</p>
<p>But the crisis is deepening. All of the talking and planning has not led to any firm resolutions and universities are on the verge of paralysis. <a href="https://www.theguardian.com/higher-education-network/2016/mar/03/south-africas-student-protests-have-lessons-for-all-universities">Students are protesting</a>. Classes have been suspended at some institutions and there are fears that the 2016 academic year may not be completed. Students have put into sharp focus the deepening inequalities in South African society, their dissatisfaction with inconclusive review processes, and governance, corruption and wastage.</p>
<p>Action is needed. Proposals must be translated into firm commitments, in a scenario which maps out what will be available in the short, medium and long term. The time frames have to be clarified.</p>
<p>Ahead of the Medium Term Budget Policy Statement on October 26 2016, Finance Minister Pravin Gordhan has invited “<a href="http://www.gov.za/speeches/tips-medium-term-budget-policy-statement-2016-9-oct-2016-0000">tips</a>” from the public. In response, here is a compilation of some of the substantive proposals that have emerged from research and committees over the past five years. There’s also an outline of which of these can be put quickly into practice to end the impasse.</p>
<h2>Consensus on key proposals</h2>
<p>Several proposals have been made to address two issues: chronic underfunding of higher education, and calls for fee-free higher education. These include:</p>
<ul>
<li>an overhaul of the NSFAS funding model;</li>
<li>an increase in the tax base to include a graduate tax or a notional loan scheme payable on employment;</li>
<li>a corporate tax;</li>
<li>a wealth tax; and</li>
<li>an increase in the <a href="http://www.labour.gov.za/DOL/legislation/acts/basic-guides/basic-guide-to-skills-development-levies">skills development levy</a>. This is a contribution made by the business sector to education and training for the post schooling sector.</li>
</ul>
<p>The detail of these proposals may differ, but there are important common points of agreement.</p>
<p>There’s been nearly unequivocal consensus that any revised funding model must be based on a social justice approach. Simply put, no academically achieving and deserving student must be excluded from university because they cannot afford it. Publicly funded tertiary education for the poorest in South Africa, who meet the criteria for academic merit, must be available as soon as possible.</p>
<p>There is also broad agreement that the neediest students require a full cost provision. This would include accommodation, food and books. There is agreement, too, that “<a href="https://theconversation.com/in-south-africa-university-is-open-to-rich-and-poor-but-what-about-the-missing-middle-36801">missing middle</a>” students – who fall outside the existing NSFAS criteria but whose families simply can’t afford university tuition – must be supported through a combination of grant and loans to guarantee their access.</p>
<p>There is agreement that funding for higher education must increase, with a possible revision of the GDP contribution from 0.7 % to at least 1% in line with the global norm. Research <a href="http://www.justice.gov.za/commissions/FeesHET/submissions/ihl/2016-FHETC-Sub-UJ.pdf">has shown</a> this would immediately release a further R11 billion for the university sector.</p>
<p>This is crucial. Research evidence points to a higher education system <a href="http://www.che.ac.za/sites/default/files/publications/Kagisano%20Number%2010%20-%20Student%20Funding%202016%20-%20electronic.pdf">under severe strain</a>: rising enrolments, low degree completion rates, high staff to student ratios, an unsustainable funding base and poor NSFAS loan recovery.</p>
<p>Student enrolments <a href="http://www.che.ac.za/sites/default/files/publications/Kagisano%20Number%2010%20-%20Student%20Funding%202016%20-%20electronic.pdf">grew by 67%</a> between 2002 and 2014. In the same period, the growth of permanent academic staff was 20%. Fewer than half of the students who enter a three year degree complete their studies.</p>
<p>And government funding to universities declined from 49% to 40% in the same period. The shortfall was made up by student fees. These increased by 9% per annum, in contrast to the country’s 5% to 6% inflation rate.</p>
<h2>Moving forward urgently</h2>
<p>Here, then, are a few steps that can be taken quickly to ease the crisis.</p>
<ul>
<li><p>For 2017, the current NSFAS loan scheme should be converted to a grant scheme for students whose parents are in the income bracket of R120 000 (around US $8,600) per annum. This must be available to all students who are eligible in terms of academic merit.</p></li>
<li><p>Between 2017 and 2018, the grant and loan scheme for the “missing middle” (whose parents earn between R120 000 and R600 000 a year) should be implemented progressively, based on parental income.</p></li>
</ul>
<p>The <a href="http://mg.co.za/article/2016-06-20-00-student-help-on-the-way-with-new-scheme-to-let-citizens-assist-with-funding-study-cost/">Ikusasa Student Financial Aid Scheme</a>, championed by the NSFAS board chairperson, is an interesting approach to this particular issue. It’s a public-private partnership model and seeks to raise funding from the public, private and business sectors for such students.</p>
<ul>
<li><p>Those who earn above this threshold of R600 000 should continue to pay fees and increases. This would release more resources for poor and less affluent students.</p></li>
<li><p>It’s crucial to ensure that their historic debt does not financially exclude students from entering the academic studies in 2017, as long as they have succeeded academically in 2016.</p></li>
<li><p>By June 2017, conclude the medium to long term plan for the equitable funding of quality higher education through identifying additional revenue streams. This includes reviewing the tax regime, skills levy, GDP allocation and improvement of NSFAS loan recovery, against the backdrop of these reforms’ potential economic impact.</p></li>
<li><p>Improve efficiency and quality enhancement in universities so that the increased inputs result in the desired outputs and outcomes.</p></li>
</ul>
<h2>For the good of all</h2>
<p>There are a few macro funding principles embedded in these commitments: cost sharing, efficiency and quality, and education as a public good.</p>
<p>Given the degree of consensus on the above, there’s a mandate for Treasury, the Department of Higher Education and Training and all key stakeholders to apply innovative and new thinking to the funding of higher education. And all can claim the victory for the provision of publicly funded higher education for the most needy in South Africa’s society.</p>
<p>This will go a long way to contributing to the much needed stability required in the increasingly fragile higher education sector – and to restoring hope for future generations of young people.</p><img src="https://counter.theconversation.com/content/67386/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shireen Motala does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There has been a great deal of research, planning and talking to come up with solutions to South Africa’s higher education funding crisis. Some of these plans must now be put into action.Shireen Motala, Professor of Education, Postgraduate School, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/620112016-07-08T07:32:50Z2016-07-08T07:32:50ZCould a corporation tax rate of 15% work for the UK?<figure><img src="https://images.theconversation.com/files/129587/original/image-20160706-12746-1gupg20.jpg?ixlib=rb-1.1.0&rect=0%2C44%2C1024%2C665&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Do the Chancellor's sums add up.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/fairtomiddling/4388010872/in/photolist-7FKGKS-tNqSoR-4dTchT-4dTcb2-69yHQa-4dXbJG-3gi5Xo-4dTcex-ngcnDG-wEXhf-6XgqcB-bjA1qz-5eXXH-bjA1jF-7Fikp7-fmeAzJ-4dXbFL-8noDKP-7JiyY-5rhwgv-bjA1h2-aDGgn8-5TumkC-bjzX4g-4KD6HV-E5MPx9-awz6oL-dzHdMu-FpToUL-bjzXbZ-bjzX9Z-bjzX8P-bjzX6c-bjA1bX-6dv6AX-6HRCJD-9ejWzz-8Y2j5w-7DmLiG-bjzWNM-5aUurf-7HNZ3n-fboCKM-bjA1NT-eC1X7-bjzWQi-cHAH1d-bjA1RP-5mzkHd-5EE5Vq">Sean McGee Hicks/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Britain’s chancellor of the exchequer, George Osborne, has proposed a significant <a href="https://next.ft.com/content/d5aedda0-412e-11e6-9b66-0712b3873ae1">cut in the main rate of corporation tax</a>. The move has largely been seen as an attempt to soothe the concerns of UK businesses struggling to understand the implications of the EU referendum vote and has been <a href="http://www.independent.co.uk/news/world/europe/corporation-tax-cut-george-osborne-brexit-eu-leaders-uk-economy-a7124386.html">met with some scepticism</a>.</p>
<p>A tax cut for companies is sometimes perceived as something that only helps the businesses directly affected, but the economic reality is that it has a far greater impact. With all taxes, regardless of whether they are charged on an organisation, it is only individuals that bear the burden. A company is not a living entity; it cannot be made worse off. </p>
<p>Setting aside the benefits of public spending for a moment, there are three groups that bear the burden of corporation tax: employees (in the form of reduced wages and layoffs), customers (in the form of higher prices), and the shareholders (due to reduced dividends). Cutting the headline rate of corporation tax will not only increase the incomes of these three groups, the subsequent effect on behaviour should increase revenues in other taxes. The hope will be that those changes offset any revenues lost through a cut in the main rate. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/129580/original/image-20160706-12753-1sfimgo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/129580/original/image-20160706-12753-1sfimgo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/129580/original/image-20160706-12753-1sfimgo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/129580/original/image-20160706-12753-1sfimgo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/129580/original/image-20160706-12753-1sfimgo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/129580/original/image-20160706-12753-1sfimgo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/129580/original/image-20160706-12753-1sfimgo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/129580/original/image-20160706-12753-1sfimgo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The economics works, in theory.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/jaimelondonboy/4211613257/in/photolist-7qaBTF-9Tjrgs-9Tjro7-94ECPR-9TgCar-7g7Yh2-8gAR9-7qewBN-hnn5My-CQw8sZ-qC1iKh-94ECt4-7qewfj-7XDDD-7xLz8m-grtEd-4ignkL-4pHT4j-C1K9EX-7qexzy-8MjrPZ-vs61A-8amXDB-7qexcY-7qazrB-7qexo7-7qaABz-7qaBtB-7qevaU-7qeCHj-7qaC7p-8aqcqS-7qaCUt-7qazDV-7qew4j-7qaAqz-7qaA3B-7qazRg-7g7WRV-dH18hq-7gbTf9-7XDDA-dEGuYD-7XDpJ-7gbSrN-7XDDB-8aqcu7-g2bY-7XDDz-uYMajv">Jai'me/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Put simply, if you get higher wages after your company factors in a tax cut, you will pay income tax and national insurance on the increase, but will still be better off than before. You might then choose to use the net increase to buy that slightly-too-expensive toaster you’ve had your eye on alongside other goods which incur sales taxes such as VAT and other duties. If it all works unhindered, then this subsequently increases the income of the business producing the goods – and the cycle continues. </p>
<p>So, as well as potentially raising revenues through other taxes, the reduction in the corporation tax rate could help stimulate enough growth to raise revenues of corporation tax revenues in the medium-to-long term to the same levels as before the cut. </p>
<h2>Investment case</h2>
<p>This has certainly been the case for the UK over the past 35 years. Since 1983, the main rate of corporation tax has decreased from 52% to its current rate of 20%, but revenues have remained generally buoyant – corporation tax receipts consistently <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/532373/May16_Receipts_NS_Bulletin_Final2.pdf">make up about 9-10% of all HMRC receipts</a>. The <a href="http://www.ifs.org.uk/wps/wp0404.pdf">Institute for Fiscal Studies</a> has explained this by pointing out other changes in tax law which offset the cuts, an increase in the size of the corporate sector and economic conditions which have boosted profitability.</p>
<p>However, it is not known at this stage whether changes in the main rate will be accompanied by other measures. These may include reductions in the annual investment allowance, which lets a company deduct its spending on fixed assets like machinery or vehicles from its taxable profits. This is a great help to smaller firms considering investment in new equipment. </p>
<p>The government has changed the level of the allowance <a href="https://www.gov.uk/capital-allowances/annual-investment-allowance">several times over the last six years</a> and could conceivably do so again. Any reduction in allowances increases the tax base (the revenues liable for taxation) and therefore increases revenue for the Treasury. Before the merits of any corporation tax rate change can be fully analysed, issues such as this need to be taken into account. </p>
<h2>Growth fears</h2>
<p>While there is an economic argument to reduce the corporation tax rate, it is less certain how much this could boost the damaged confidence in the UK as a marketplace. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/129591/original/image-20160706-12727-zuvg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/129591/original/image-20160706-12727-zuvg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/129591/original/image-20160706-12727-zuvg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/129591/original/image-20160706-12727-zuvg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/129591/original/image-20160706-12727-zuvg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/129591/original/image-20160706-12727-zuvg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/129591/original/image-20160706-12727-zuvg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/129591/original/image-20160706-12727-zuvg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The pound’s decline is a continuing risk.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/59937401@N07/5474185981/in/photolist-9kJCLV-9VAgWk-9VDM5N-7W8QqN-9VzJ8p-9VyHut-9VAQQG-9VByc5-9VAnRw-9VDaWY-9VBzSG-9VC3iE-9VAwVp-9VCzps-9VBgGi-9kNZEL-6Nfq1h-9VBaMr-9VCwLq-9VB7jC-9Vzk46-9VALmE-9VwzJV-9VAQ4b-9kP1zQ-9VAuME-bRAZ3H-9kP2U7-9kJE8x-9VAub5-9kMGKG-9VxCXn-9VzHe8-9VAn7m-9VxFgX-9VAMK9-9VAF9B-9VDxpf-9Vy2Q6-9VANzf-9VzeFx-bACF1-in6yLn-9VxWEK-6SF8Ar-9VxN1g-6SKbxo-9VDwno-9VD4DS-c9g7k1">Images Money/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Financial markets have largely stabilised after the immediate post-Brexit fluctuations – with the exception of sterling’s <a href="http://www.telegraph.co.uk/business/2016/07/06/what-does-a-falling-pound-mean-for-the-british-economy/">worrying downward trajectory</a>. The prime fear now is a short-term reduction in growth resulting from cautious markets. This week, Bank of England governor <a href="https://twitter.com/BBCNews/status/750270078889828352">Mark Carney pointed to</a>: </p>
<blockquote>
<p>…growing evidence that uncertainty about the referendum has delayed major economic decisions such as business investment, construction and housing market activity.</p>
</blockquote>
<p>Should there be a substantial short-term decline in growth resulting from a “wait-and-see” policy, this may cause a recession in itself and the negative consequences that brings. </p>
<h2>Tax lag</h2>
<p>To assess whether a corporation tax cut would help offset this, it is worth looking at a hypothetical example. Suppose a multinational company currently posts a pre-tax annual profit of £100m. The current corporate tax rate of 20% would give the company a net profit of £80m. Now let’s assume a future tax rate of 15%. In order to achieve the same net profit of £80m the company would have to post a pre-tax profit of just over £94m (with the tax liability at £14m). So if a recession dented that company’s profits by just 6%, that would immediately negatively offset the benefits of a reduction in the tax rate for both the company and the government. </p>
<p>Should a further recession occur, a corporation tax cut could prove to be something of a reckless gamble. Some economists argue that it would be possible to build a robust and equitable tax system without corporate taxes – where the increase in incomes of the three groups mentioned above create increased revenues in other taxes. But defenders of corporation tax highlight the timing benefits. Simply put, the treasury gets the money sooner rather than waiting for it to trickle down through the three groups. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/129684/original/image-20160707-30685-1ln3qip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/129684/original/image-20160707-30685-1ln3qip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/129684/original/image-20160707-30685-1ln3qip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/129684/original/image-20160707-30685-1ln3qip.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/129684/original/image-20160707-30685-1ln3qip.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/129684/original/image-20160707-30685-1ln3qip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/129684/original/image-20160707-30685-1ln3qip.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/129684/original/image-20160707-30685-1ln3qip.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A question of timing.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/hyku/3632644702/in/photolist-6x1fHd-4c5Wcy-6NcytT-nQhoxb-7NVqen-hcu5v-7tHPnq-aoGKZj-JnUSkL-eJ8Y5c-dGaWcW-enVRfk-5Wg1ZW-6zVvbt-df5oWz-6kScb9-pTq9J7-4GwdmZ-7sNZob-a23E8y-8Tv4Nj-GB9Ze5-u5MgD-6qmvxQ-6wW5Lc-7UbYc7-89gSq-5gpork-51NmPZ-bvp63w-6Fmkka-521cip-4sFE4v-8fvPqs-y7dxCu-ydcr5P-qCnVkS-dD5P2R-cXe3v9-egmRk6-reT6Yr-4YuiuM-q5aDH2-4f3RNr-6WSFR4-pMtmJX-nvbKHq-pdGqQA-aEzGnw-huX3Lt">Josh Hallett/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>This is a key reason why, in a recession, corporation tax revenues are usually the first to be negatively affected and the last to recover. When the economy does improve, companies could still offset any losses incurred during a recession while the economy recovers. Reducing the rate of tax could jeopardise any immediate, much-needed revenue for the government.</p>
<p>As well as the economic argument for reducing corporation tax, the government will have to tackle the political argument. The example given earlier highlighted the three groups affected by corporation tax, but most people still look on corporation tax as something paid by wealthy companies, rather than passed on to employees, consumers and pension fund holders.</p>
<p>At the same time as proposing this tax cut, Osborne also warned of further austerity measures – and it would be easy for political opponents to draw parallels between the two issues to highlight wealth inequality. It risks being a debate about “haves” and the “have nots”, so great care will need to be taken over how proposed cuts are framed to the public.</p><img src="https://counter.theconversation.com/content/62011/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gavin Midgley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Rates of corporation tax have a very human impact.Gavin Midgley, Teaching Fellow in Accounting, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/592292016-05-12T22:58:08Z2016-05-12T22:58:08ZElection FactCheck Q&A: is Australia among the lowest-taxing countries in the OECD?<p><strong>The Conversation is fact-checking claims made on Q&A, broadcast Mondays on the ABC at 9:35pm. Thank you to everyone who sent us quotes for checking via <a href="http://www.twitter.com/conversationEDU">Twitter</a> using hashtags #FactCheck and #QandA, on <a href="http://www.facebook.com/conversationEDU">Facebook</a> or by <a href="mailto:checkit@theconversation.edu.au">email</a>.</strong></p>
<hr>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/1lcN-rZIxOg?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Excerpt from Q&A, May 9, 2016.</span></figcaption>
</figure>
<blockquote>
<p>One of the first facts, and it comes from the <a href="http://bettertax.gov.au/publications/discussion-paper/chart-data/chpt2/">Treasury’s own tax discussion paper</a>, is that we are one of the lowest-taxing countries in the OECD. – Australian Council of Social Service CEO Cassandra Goldie, <a href="http://www.abc.net.au/tv/qanda/txt/s4432624.htm">speaking</a> on Q&A, May 9, 2016.</p>
</blockquote>
<p>Voters will hear plenty of seemingly contradictory claims on tax in the lead-up to the federal election. Is Australia a <a href="http://www.smh.com.au/business/federal-budget/budget-2016-treasurer-scott-morrisons-budget-speech-in-full-20160502-gojvs0.html">high-taxing country</a> or was ACOSS chief Cassandra Goldie right to say that Australia is one of the lowest-taxing countries in the Organisation for Economic Co-operation and Development (OECD)?</p>
<p>Let’s unpack the facts on tax.</p>
<h2>Checking the data</h2>
<p>A spokesperson for ACOSS told The Conversation that Goldie’s statement was based on Treasury <a href="http://bettertax.gov.au/publications/discussion-paper/">documents</a> and OECD data. (You can read their full response <a href="http://theconversation.com/full-reply-from-acoss-59306">here</a>.) </p>
<p>The most recent OECD data for Australia, for the year 2013, lists Australia as having a tax-to-GDP ratio of 27.5%. This is the sixth lowest in the OECD after Mexico, Chile, Korea, United States and Switzerland.</p>
<iframe src="https://datawrapper.dwcdn.net/TV48k/3/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="580"></iframe>
<p>This ratio is based on tax as a proportion of GDP.</p>
<h2>Australia is above average for some taxes; below average for others</h2>
<p>The data above show us Australia’s total tax revenue as a proportion of GDP. However, within Australia’s tax mix are a range of taxes, including corporate tax, personal income tax, GST and many more.</p>
<p>A closer look at the breakdown reveals that Australia is above the OECD average for some tax categories, such as corporate tax.</p>
<p>Australia also has relatively high collections from income tax, but lower levels of consumption taxes than the average in the OECD. </p>
<p>The following table compares the OECD average tax rates with Australia for the most common taxes:</p>
<iframe src="https://datawrapper.dwcdn.net/GtUXQ/3/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="300"></iframe>
<p>The table shows that Australia collects more income tax and corporate tax as a proportion of GDP than the OECD average, but less tax on goods and services. </p>
<p>This is reflected in the relevant tax rates, which are higher than the OECD average for income tax and corporate tax, but lower for goods and services.</p>
<p>Here’s how Australia’s top marginal tax rates compared with the OECD average in 2013.</p>
<iframe src="https://datawrapper.dwcdn.net/K9iKv/4/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="300"></iframe>
<p>Analysis of the tax mix must be treated with caution: for example, Australia is one of two countries in the OECD that does not impose a Social Security Tax, which averages 9.1% across OECD countries.</p>
<p>And any <a href="https://theconversation.com/factcheck-is-australias-corporate-tax-rate-not-competitive-with-the-rest-of-the-region-37226">discussion of the corporate tax rate</a> should take into account that Australia and New Zealand are unusual in adopting a full dividend franking system in respect of dividends paid to resident shareholders.</p>
<p>The ACOSS spokesperson <a href="http://theconversation.com/full-reply-from-acoss-59306">told</a> The Conversation that: </p>
<blockquote>
<p>The Australian corporate tax rate is above the OECD average, though comparisons are complicated by our dividend imputation system, which means that company tax is refunded to domestic shareholders.</p>
</blockquote>
<h2>Verdict</h2>
<p>Cassandra Goldie’s statement that Australia is the sixth-lowest-taxing country in the OECD is true for total tax revenue as a percentage of GDP. </p>
<p>However, Australia does rank higher than the OECD average on income tax and corporate tax collections, and lower than average on goods and services tax collections. <strong>– Helen Hodgson</strong></p>
<hr>
<h2>Review</h2>
<p>This looks like a fair analysis of the data. The OECD also <a>publishes</a> data showing total tax paid on corporate income <a href="http://www.australiancentre.com.au/sites/default/files/FAFF%20imputation.pdf">distributed as dividends</a> (taking into account imputation), which suggests a lower ranking for Australia. <strong>– Kevin Davis</strong></p>
<p><em>CLARIFICATION: On May 16, 2016, a category in the table titled “OECD average tax rates vs Australian tax rates for most common taxes (2013)” was changed from “GST as a % of GDP” to “Tax on Goods & Services as a % of GDP.”</em></p>
<hr>
<p><div class="callout"> Have you ever seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.</div></p><img src="https://counter.theconversation.com/content/59229/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson receives funding from AHURI. Helen Hodgson is a member of the Tax Policy Working Group of ACOSS and the Social Policy Committee of NFAW. Helen was a member of the WA Legislative Council as an Australian Democrat from 1997 to 2001, but has no current affiliation with any political party.</span></em></p><p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australian Council of Social Service chief Cassandra Goldie told Q&A that Australia is among the lowest-taxing countries in the OECD. Is that accurate?Helen Hodgson, Associate Professor, Curtin Law School and Curtin Business School, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/581442016-05-04T02:36:05Z2016-05-04T02:36:05ZThree critical tests for Budget 2016: how does it fare?<p>There are three critical tests for this year’s budget. Is it serious about repairing Australia’s ongoing structural budget deficits? Does it make much of a difference to economic growth? And is it fair?</p>
<h2>Budget repair</h2>
<p>Over the last year, the bottom line got worse. The long-promised return to surplus receded another year over the horizon. This is the seventh time a budget has forecast a drift back to surplus over the following four years while the outcome for the current year showed minimal improvement over the year before.</p>
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<p>Also consistent with the history of the last seven years, most of the damage was done by “parameter variations” – changes in the economy that meant the budget didn’t live up to previous expectations. </p>
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<p>The government has made much of the need to repair the budget through spending reductions rather than tax increases. Overall, however, forecasts assume that most of budget repair will be the result of increasing revenues as a share of GDP. A large component is that nominal wages are expected to rise, leading to higher income tax collections, known by budget nerds as “fiscal drag”, and commonly referred to as “bracket creep”. </p>
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<img alt="" src="https://images.theconversation.com/files/121042/original/image-20160503-19868-15bl2i4.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121042/original/image-20160503-19868-15bl2i4.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121042/original/image-20160503-19868-15bl2i4.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121042/original/image-20160503-19868-15bl2i4.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121042/original/image-20160503-19868-15bl2i4.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121042/original/image-20160503-19868-15bl2i4.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121042/original/image-20160503-19868-15bl2i4.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>There’s plenty of room for things to keep going wrong. The largest risk is that nominal wages may be lower than forecast. </p>
<p>Last week the Australian Bureau of Statistics reported much lower inflation than expected. On the day of the federal budget the Reserve Bank responded by cutting interest rates, implying a real risk that unusually low inflation will persist. If it does, then income tax collections will be hit, hurting the budget bottom line, particularly in the last year or two of the budget estimates.</p>
<p>This presents an interesting challenge for Treasury. If an election is called towards the end of this week, then it must release PEFO – the Pre-election Economic and Fiscal Outlook – by around May 20. With inflation lurching south, PEFO may significantly revise the budget bottom line, which will inevitably raise perceptions – probably unfairly – that the government is not firmly in control of economic management.</p>
<p>The other big risk is that export prices fall short of forecasts. The budget assumes an iron ore price of US$55 per tonne. This is close to recent prices, but they were US$40 a tonne just six months ago. If the price drops back US$10 to US$45 per tonne, budget balances are expected to be A$4 billion a year worse off.</p>
<p>Specific measures don’t do much collectively to improve the budget bottom line. As with each of the last seven years, there are substantial gross tax increases and spending reductions, but other decisions largely offset these. Overall, specific measures drag on the budget outcome by $5 billion for the coming year, but improve the last estimated year (2019-20) by $6 billion. </p>
<h2>Jobs and growth</h2>
<p>The key selling point for the budget is “jobs and growth”. However, there are questions about whether the budget initiatives will matter much to the economy within the next four years.</p>
<p>The largest single initiative is a cut to the corporate tax rate, particularly for small-to-medium businesses. The tax rate will be cut from 28.5% to 27.5%, and by 2019-20 this will apply to businesses with up to $10 million in turnover, up from the current limit of $2 million. </p>
<p>This will doubtless be popular with hundreds of thousands of small businesses. However, given Australia’s dividend imputation scheme, the tax change makes no difference to the amount of tax levied on profits paid out to Australian business owners. A lower tax rate only matters to the budget and the economy when businesses re-invest retained earnings. </p>
<p>However, the overall effect will be small. The tax changes are supposed to reduce tax collected in 2019-20 by A$2 billion – by definition, money retained in businesses and re-invested. This compares with total corporate investment in capital of about <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5625.0">A$120 billion a year</a>, and much more in paying for additional staff. The tax change is small beer in comparison.</p>
<p>There may be a larger tankard of beer in reducing tax rates for foreign corporates. But they will receive no benefit until after 2020-21 – well after the next two elections. And recent work has cast doubt on <a href="https://theconversation.com/big-business-doesnt-want-to-talk-about-it-but-smes-lose-from-a-company-tax-cut-57965">how much of the economic benefit will ultimately benefit Australians</a>.</p>
<p>It is stretching things to believe that other measures will turbo-charge the economy. The budget contains relatively little new infrastructure spending. </p>
<p>Instead there are a lot of plans to do more planning. The most promising economic feature may be a new <a href="http://www.abc.net.au/news/2016-05-03/federal-budget-rural-youth-job-plan/7376562">Youth Jobs PaTH package</a>. This replaces work for the dole with a training, internship and subsidised employment pathway that is at least a little closer to <a href="https://theconversation.com/four-ways-to-get-people-back-into-work-1157">what the literature recognises as best practice</a>.</p>
<h2>Fairness</h2>
<p>Despite its jobs and growth packaging, the boldest moves in the budget were about fairness. Wide-ranging reforms to superannuation are a big move in the right direction. The <a href="https://theconversation.com/catch-up-super-contributions-a-tax-break-for-rich-old-men-51116">current system is poorly targeted</a>, with most of the tax concessions going to the top 20% of taxpayers who need the least help in saving for retirement. </p>
<p>Under the reforms, the top 4% will pay about A$2.6 billion more tax in 2019-20, offset by an additional A$1.8 billion tax concessions for the bottom 28%. These are material changes very different from the tinkering at the edges that has characterised superannuation reform over the last decade.</p>
<p>More controversially, the budget raises the 37% income tax threshold from $80,000 to $87,000. This gives the top 20% of income earners an extra $315 a year. </p>
<p>The fairness of concentrating tax relief on this group depends on the date of comparison. Genuinely middle-income earners (on $45,000 a year) have lost a greater percentage of their income in tax because of bracket creep since the Coalition took office. However, the change in percentage of income paid in tax is more or less the same for all income groups since 2011-12, because lower-income groups received more benefit from carbon tax compensation.</p>
<h2>Conclusion</h2>
<p>Budget 2016 was much like many of its predecessors over the last seven years. Budget repair was put off till later, and the net impact of budget decisions was small. </p>
<p>Although much was made of individual initiatives, these are unlikely to make much difference to economic growth in the next four years. </p>
<p>Although fairness, like beauty, is in the eye of the beholder, this budget will be easier to defend than some others in recent times.</p><img src="https://counter.theconversation.com/content/58144/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.</span></em></p><p class="fine-print"><em><span>Danielle Wood does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Budget repair was put off till later, and the net impact of decisions in the budget was small, but it will be easier to defend in the coming election campaign than some other recent efforts.John Daley, Chief Executive Officer, Grattan InstituteDanielle Wood, Fellow, Australian Perspectives, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/575402016-04-20T10:05:22Z2016-04-20T10:05:22ZCrackdown on corporate inversions highlights monstrosity of U.S. tax code<p>Companies such as drugmaker Pfizer and medical device maker Medtronic that have used a technique called an inversion to reduce their tax bill recently got a <a href="https://www.whitehouse.gov/the-press-office/2016/04/05/remarks-president-economy-0">smackdown from President Barack Obama</a>:</p>
<blockquote>
<p>I am very pleased that the Treasury Department has taken new action to prevent more corporations from taking advantage of one of the most insidious tax loopholes out there, and fleeing the country just to get out of paying their taxes… They benefit from our research and our development and our patents. They benefit from American workers, who are the best in the world. But they effectively renounce their citizenship. </p>
</blockquote>
<p>That new action, <a href="https://www.treasury.gov/press-center/press-releases/Pages/jl0404.aspx">announced on April 4</a>, involves tightening the rules by which which a U.S. company acquires or merges with a foreign business in order to change its corporate headquarters and enjoy lower taxes. The aim is to make these so-called corporate inversions harder.</p>
<p>The new rules immediately scored a victory by <a href="http://www.nytimes.com/2016/04/06/business/dealbook/tax-inversion-obama-treasury.html">torpedoing</a> the planned US$152 billion merger between New York-based Pfizer and Dublin-based Allergan because one of the Treasury changes would have severely limited the tieup’s tax benefits. Had it gone through, it would have been the biggest inversion ever, overtaking the $50 billion Medtronic deal completed in 2015. </p>
<p>But it <a href="http://www.tax-news.com/features/A_Farewell_To_Corporate_Inversions__573493.html">won’t stop them altogether</a> – especially in high-tech sectors like pharmaceuticals – because the underlying reason U.S. companies invert is that the corporate tax rate here (35 percent) is so much higher than in countries like Ireland (12.5 percent). </p>
<p>The issue has received <a href="http://fortune.com/2015/11/25/why-republicans-democrats-tax-plans-inversion-problem/">tons of attention </a>this year as candidates from all sides declare inversions “disgusting” (<a href="http://fortune.com/2015/11/25/why-republicans-democrats-tax-plans-inversion-problem/">Donald Trump</a>) and “nothing less than a tax scam” (<a href="http://www.commondreams.org/news/2016/03/18/enough-enough-sanders-demands-treasury-block-pfizer-tax-dodging-deal">Bernie Sanders</a>). </p>
<p>Perhaps the most important lesson we should draw from all the attention inversions are getting, however, is that the powerful incentive to relocate abroad to pay less tax will remain until Congress and the president can agree to reform and rationalize the U.S. tax code. Until then, companies will continue to do whatever they can within the law to lower their tax bills, and that includes inverting. </p>
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<h2>How to invert</h2>
<p>In simple terms, an inversion involves a company shifting its corporate headquarters to a lower-tax jurisdiction. For large multinational companies like Pfizer, the annual savings <a href="http://www.bloomberg.com/politics/articles/2016-02-25/pfizer-seen-as-avoiding-35-billion-in-tax-via-allergan-merger">can be in the billions</a>.</p>
<p>But it is not just a matter of declaring a new address and printing new stationery. The U.S. company has to acquire a foreign business large enough to qualify for the inversion so that the combined entity can get all the tax perks. If the target company is too small, the tax savings are diminished, making it less worth it. </p>
<p>Under one of the new Treasury rules, meeting that threshold became a lot harder because now the foreign company cannot itself have bulked up its equity base with serial acquisitions in the prior 36 months. In other words, recent purchases won’t count toward the company’s size for tax purposes, making it potentially not large enough to qualify for all the benefits of inverting. <a href="http://www.businessinsider.com/allergan-history-since-1948-founding-2015-11">That’s exactly what Botox-maker Allergan had done</a> and why the deal was killed. </p>
<p>Overall, inversions aren’t that numerous, though they have increased substantially in the past couple decades. Just six were completed in 2015, up from four in each of the previous two years, <a href="http://www.bloombergview.com/quicktake/tax-inversion">according to Bloomberg</a>. </p>
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<h2>Why companies invert</h2>
<p>Here is the gist of the arguments in favor of inversions: </p>
<p>The U.S. federal corporate tax rate is the <a href="https://stats.oecd.org/Index.aspx?DataSetCode=TABLE_II1">highest in the developed world</a>. Not only that, but unlike most major countries, U.S. tax is applicable not only to a company’s American operations but to its activities across the globe. </p>
<p><a href="http://taxfoundation.org/blog/us-has-highest-corporate-income-tax-rate-oecd">Some argue</a> this creates a comparative disadvantage relative to companies in lower-tax nations because higher taxes mean less money left over for dividends for shareholders or investment in research and development, undermining the competitiveness of American companies. </p>
<p>And since inversions are technically legal, it’s a company’s fiduciary duty to its shareholders to do all it can (legally) to reduce its tax burden.</p>
<p>To counter arguments that it’s unpatriotic because it costs U.S. jobs, inversion backers say that it generally changes very little in terms of operations and employment levels in each jurisdiction. </p>
<h2>Who has to ‘foot the bill’?</h2>
<p>Critics of inversions, however, contend it’s more than just jobs at stake. Shifting a company’s tax bill overseas means the rest of us are left to “foot the bill,” in the <a href="http://www.grassley.senate.gov/news/news-releases/grassley-tax-inversions-finance-committee-hearing-statement">words of Republican Senator Charles Grassley</a>.</p>
<p>Congress’ nonpartisan <a href="http://democrats.waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/JCT%20memo%20on%20inversion%2012-2-14.pdf">Joint Committee on Taxation estimated</a> in 2014 that the U.S. government will forgo $33.6 billion in corporate tax revenue over the next 10 years as a result of inversions. </p>
<p>This helps explain why inversions have enemies among both Democrats and Republicans. If U.S. multinationals pay less tax, the difference has to be made up by individual taxpayers and companies (who would otherwise pay less). </p>
<p>In addition, critics argue that the tax rate companies actually pay isn’t that high once loopholes and other deductions are taken into account. That rate is much lower but varies according to who’s doing the analysis (19.4 percent, according to <a href="http://www.ctj.org/corporatetaxdodgers/sorrystateofcorptaxes.php">Citizens for Tax Justice</a>, and 27 percent, according to <a href="http://www.doingbusiness.org/%7E/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdf">PricewaterhouseCoopers</a>). What they actually pay only the Internal Revenue Service knows. </p>
<p>In that same vein, companies already have many ways to avoid a large U.S. tax bite, from leaving their foreign profits overseas (and out of the reach of the IRS) or by using various <a href="http://globalbusiness.me/2015/10/09/international-tax-avoidance-clarifying-multinational-company-tax-issues/">tax avoidance</a> schemes. </p>
<h2>Why all the hullabaloo?</h2>
<p>As noted earlier, inversions aren’t that numerous and, despite the new rules, won’t be stopped entirely. So why do they draw so much ire? </p>
<p>Primarily, the point is that they appear unpatriotic, particularly in an election year, making them an easy target for politicians. As Obama put it, companies that do inversions are essentially renouncing their U.S. citizenship yet still benefiting from all the things taxpayers pay for such as infrastructure and education.</p>
<p>More fundamentally, however, they highlight the bloated monstrosity that is the U.S. corporate tax code, with thousands of arcane provisions and loopholes that require an army of accountants to take advantage of. That leaves them out of reach of the majority of small business owners. </p>
<p>These small businesses cannot take advantage of international tax loopholes, making them resentful of large multinational firms that can shift operations, earnings and tax payments across countries. Hence, the issue of inversions highlights fundamental tensions between domestic and multinational businesses as well as between single-jurisdiction governments and companies that operate beyond borders.</p>
<p>These issues have been building steam over the past two decades but have been ignored by a political establishment content to “kick the can down the road” and avoid making the hard decisions.</p>
<p>Despite the <a href="http://www.realclearpolicy.com/blog/2016/02/26/whats_holding_back_corporate_tax_reform_1565.html">virtually unanimous opinion</a> that we need to rationalize the tax code, nothing is done, in my view, because of the concentrated vested interest on the part of international tax experts, lobbyists, lawyers and the large firms that can afford to hire them with generous professional fees in Washington, D.C. </p>
<p>Ironically, Obama’s speech introducing the new Treasury rules used virtually the same words as that of Senator Grassley, suggesting perhaps that a bipartisan effort to rationalize the U.S. tax code may be possible.</p><img src="https://counter.theconversation.com/content/57540/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Farok J. Contractor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Obama calls them insidious and others have described inversions as unpatriotic, but what they really do is show just how much of a mess the corporate tax code is.Farok J. Contractor, Distinguished Professor of Management & Global Business, Rutgers UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/560382016-03-18T04:28:54Z2016-03-18T04:28:54ZCorporate tax: why conflict between firms and states is hard to crack<figure><img src="https://images.theconversation.com/files/115256/original/image-20160316-30227-12tz0vb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Apple, Google and Facebook are in a row over taxes in Europe. </span> <span class="attribution"><span class="source">Reuters/Robert Galbraith</span></span></figcaption></figure><p><a href="http://www.bbc.co.uk/history/historic_figures/franklin_benjamin.shtml">Benjamin Franklin</a>, one of the founding fathers of the US, is reported to have said:</p>
<blockquote>
<p>In this world nothing can be said to be certain, except death and taxes.</p>
</blockquote>
<p>This statement couldn’t be more true today. The recent row over <a href="http://www.bbc.co.uk/news/uk-35390692">Google</a>, <a href="http://www.theguardian.com/technology/2016/jan/15/apple-european-commission-ruling-back-taxes-ireland">Apple</a> and now <a href="http://www.theguardian.com/technology/2016/mar/04/facebook-pay-millions-more-uk-tax-reports">Facebook’s</a> tax deals in Europe is reinforcing the dogged certainty of taxes and their challenges to big businesses. </p>
<p>Corporate taxation has always been a vexing concern for both businesses and governments. This is because it is often driven by different and frequently divergent interests. While businesses are profit driven, governments pursue social welfare. </p>
<p>As such, most firms tend to distance themselves from the social welfare maximisation agenda, believing that it is the responsibility of governments and NGOs. Google’s European public affairs chief, Peter Barron, strongly captured this view in a recent <a href="http://www.ft.com/cms/s/57b5d40e-c4eb-11e5-b3b1-7b2481276e45,Authorised=false.html?siteedition=uk&_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F57b5d40e-c4eb-11e5-b3b1-7b2481276e45.html%3Fsiteedition%3Duk&_i_referer=&classification=conditional_standard&iab=barrier-app%20-%20axzz3yXTd3p75">letter</a> to the <em>Financial Times</em>: </p>
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<p>Governments make tax law, the tax authorities independently enforce the law and Google complies with the law. </p>
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<p>This belief by firms and the attempt at a neat separation of the roles of business and government is epitomised in the phrase: the <a href="http://www.press.uchicago.edu/ucp/books/book/chicago/C/bo18146821.html">business of business</a> is business. </p>
<p>But such an approach would hit African and other developing countries hardest. They have limited financial resources, weak governments, and the greatest development challenges.</p>
<p>So is there a way of managing the tension between the profit-driven interests of firms and social welfare obligations of states when it comes to taxation? </p>
<h2>More regulations, more problems</h2>
<p>In some cases, interests of businesses and governments can be reconciled through regulation. However, there is no watertight regulation and many regulatory systems are dotted with loopholes. </p>
<p>Some of these systems could be exploited through creative and efficient corporate tax planning and avoidance schemes. Again, this is where African and developing countries with weak regulatory institutions, including tax authorities, will be severely disadvantaged. </p>
<p>Corporate taxation is also a controversial issue often exacerbated through politics and corporate lobbying. Given that corporate responses to taxation are largely influenced by their need to compete and keep costs as low as possible, countries with <a href="http://www.sciencedirect.com/science/article/pii/S0047272707001351">tough corporate taxation regulations</a> may not be favoured destinations for businesses, especially for multinational corporations.</p>
<p>As such, taxation provides an arena for games and contestation. Set up as a game, it becomes a source of corporate innovation and competitiveness. This is at the heart of most corporate tax planning activities.</p>
<p>A soothing name for this, which is often appealing to the business community, is “strategic regulatory <a href="http://heinonline.org/HOL/LandingPage?handle=hein.journals/tlr89&div=16&id=&page=">arbitrage</a>”. The actors in this innovative space often include tax consultants, lawyers and financial analysts.</p>
<h2>Confronting the moral question</h2>
<p>The exploitation of loopholes in a regulatory system, while often legal, raises an important question about the essence of a regulation and the purpose of the law – that is, what should count most: the spirit of the law or the technicalities surrounding its interpretation and implementation?</p>
<p>If the spirit of a law is to be taken seriously, then the arrangement of one’s tax affairs to pay as little tax as possible is <a href="http://www.sciencedirect.com/science/article/pii/S1053535705000399">inimical</a> to revenues accruable to the government through taxation. Since corporate taxation is always on profits, it is difficult to argue that it constitutes an input cost to businesses. Although on the face of it, it appears to do so. </p>
<p>Instead, tax avoidance could suggest an irresponsible practice of denying broader society its share of profits from a firm’s economic activities. This is despite the fact that the firm would have used some critical resources from society to achieve profits. Some of these may include natural, human and physical resources. Tax avoidance in this case becomes a free ride.</p>
<h2>Is self-regulation the middle ground?</h2>
<p>The string of incessant corporate tax cases suggests that government regulation, alone, is obviously grossly inadequate in tackling the impact of corporate tax avoidance strategies. This is mainly due to information asymmetry between governments and businesses. </p>
<p>In other words, businesses have better understanding of their operations and the regulatory loopholes they can take advantage of in the course of their operations than governments do. Given the endemic information asymmetry involved, <a href="http://www.cbr.cam.ac.uk/fileadmin/user_upload/centre-for-business-research/downloads/working-papers/wp294.pdf">reflexive law</a> (or self-regulation) is being acknowledged as a useful complement to public regulation.</p>
<p>Self-regulation is at the heart of the corporate social responsibility agenda. As an alternative business paradigm, it operates from a viewpoint that fostering a better society and enhancing human development is a collective project between business, government and society. This alternative paradigm suggests that businesses can also constitute a force for good. They control large resources, wield power and have expertise.</p>
<p>Self-regulation can be useful in many ways. First, it saves the government the cost of designing and enforcing regulatory measures. Second, it empowers firms and offers them the opportunity to adopt efficient and effective measures. In other words, business policy should complement public regulation and not undermine it. This is <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/497539/16-113-ethical-business-regulation.pdf">ethical</a> business regulation, which has been endorsed by the UK government.</p>
<p>But to what extent should self-regulation be trusted? Despite the advantages of self-regulation, it also sometimes <a href="https://global.oup.com/academic/product/making-global-self-regulation-effective-in-developing-countries-9780199234639?cc=gb&lang=en&">fails</a> when employed in isolation.</p>
<p>After all is said and done, it is obvious that corporate tax avoidance is not going away any time soon. It is impossible to eliminate it as long as there are creative and innovative people to unravel tax systems and regulations. Maybe it is a necessary evil – a tolerable act of irresponsibility – and a price for the benefits of entrepreneurial capitalism.</p><img src="https://counter.theconversation.com/content/56038/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kenneth Amaeshi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Corporate taxation is a concern for governments and businesses because of their divergent interests.Kenneth Amaeshi, Associate Professor of Strategy and International Business, The University of EdinburghLicensed as Creative Commons – attribution, no derivatives.