Last week the AFR ran several pieces talking about so-called profit shifting and base erosion – basically that large multinational corporations like Apple, Google, Microsoft, Starbucks etc. don’t pay their “fair share” of tax. This morning I have an op-ed in the AFR responding to those stories (ungated version here). Cats would recognise the arguments – I’ve been making them here for some time.
Since the G20 finance meeting there has been a lot of chest beating and bleating about multinational corporations not paying much tax in Australia. Joe Hockey even threatened to create a tax hurdle when deciding on foreign investment. The phrasing of that hurdle would have to go something like, “Do you commit to paying more tax than the law of the land actually requires?”
So there are two things going on:
Tax laws are written that allow firms to deduct legitimate expenditure incurred in the production of taxable income. Tax treaties are written so that firms and individuals don’t face double taxation on the same economic activity, and so on. These laws are written by governments, enforced by government officials, and disputes adjudicated by judges. In short, the odds are stacked against the taxpayer.
So that’s the tax system.
Some nations have realised that they can generate more revenue if they protect intellectual property than if they try to tax it at exorbitant rates. Those that haven’t bleat about base erosion. A question for the Australian government is why don’t multinational corporations like Apple and Google and Microsoft and Starbucks feel comfortable enough to locate their intellectual property in Australia? The answer to that question is both damning and embarrassing.
That’s the issue for Joe Hockey. Countries like Ireland and Singapore are eating your lunch. So you going to cry about it, or get off your bum and compete for the business like they have? In the meantime:
The real problem isn’t that some firms don’t pay enough tax; rather that governments have been routinely and systematically living beyond their means. There is no evidence to support the notion that the corporate income tax base is being eroded. What is happening, however, is that the corporate tax isn’t raising as much money as the government would like.
The solution to that “problem” is to cut spending.