Companies do tend to structure their affairs in such a manner as to minimise the amount of tax that they pay. This perfectly legal strategy has led UK Prime Minister David Cameron to argue that he was opposed to “aggressive” tax avoidance, and he favoured “tax transparency”. The problem with Cameron’s position is that it isn’t clear that any of the companies usually singled out as engaging in “aggressive tax avoidance” are being non-transparent. The famed “Double Irish Dutch Sandwich” tax strategy does not rely on bank secrecy to operate. Capital mobility, national investment incentives and the existing international tax architecture all contribute to what is now labelled “profit shifting”.
A telling fact is that those nations that do have general anti-avoidance or anti-abuse provisions in their tax law seldom use those provisions against large multinationals or, as happened recently in Australia, lose in the courts. While claiming that aggressive tax avoidance occurs, governments don’t take action under existing laws to curb that behaviour. Although that could change, it is yet another sign that the corporate-tax system raises as much revenue as it is designed to raise.
What is really happening is that governments don’t like competition. In particular, they don’t like the competition that manifests itself within their own international tax cartel. The fact is that companies around the world are subject to the laws that governments have written themselves. Governments have also voluntarily entered into tax agreements with other nations that bind international transactions and multinational corporations. In establishing an international tax cartel, governments have both written the rules and divided up the global income-tax share amongst themselves. As economists have long known, cartels are as unstable as participants have incentives to cheat. Some members may lower their prices to gain market share.
So it is with taxation. Some governments have lowered their tax rates to gain economic activity. The UK, for example, is itself lowering corporate-tax rates in order to attract multinational corporations. In responding to those incentives, many law-abiding tax-paying citizens and companies get to be labelled “tax cheats”. As if being fully compliant with the law of the land were somehow immoral.
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