Revisiting the uneasy case for corporate taxation in an uneasy world
The dynamics of tax policy in a world of mobile corporations has become considerably more complex. There is a view that firms have become increasingly aggressive in seeking tax advantages, while there has been growing popular discontent about the apparent ability of corporations to relocate activity in response to tax differences.
These trends are thought to be manifest in declines in corporate tax rates around the world. The paper shows how this applies to four groups of countries where corporate tax rates have declined by an average of over 40% in 1980 to around 25% today. The authors suggest that the erosion of corporate tax also poses challenges for the sustainability of personal income tax systems.
Company tax no longer fits the realities of the contemporary world and must either be abandoned or thoroughly transformed to accord with global realities, the authors argue. Such issues are a manifestation of deep tension between nation states and firms, and also serve as a prism through which to consider the responsibilities of a corporation to a ‘home’ country.
Corporate tax makes the government (and by extension society at large) one of the principals of a corporation because of its interest in receiving revenue. Tax avoidance by corporations imposes a fiscal externality on other taxpayers -- but whether society should be viewed as the ultimate principal of corporate entities is a matter for normative judgement.
The paper addresses how corporate taxation needs to change in an increasingly digital and global setting. It examines existing scholarly literature on company taxation in the global economy, providing a framework for future debate. It offers three alternatives for corporate tax and assess them with respect to various policy objectives, including efficiency, administrability, corporate responsibility, the perceived legitimacy of tax systems, and equity.
One option involves the development of multilateral taxing authorities, matching the global reach of corporations, which would mitigate against tax competition between countries, even at the risk of increased efficiency costs.
If the world is heading towards a dystopian future of de-globalisation, among the implications are increasing frictions for cross-border mobility and reductions in tax competition. This might make a corporation easier to tax but is also likely to reverse the substantial growth in global prosperity enjoyed in recent decades.
If income taxation of individuals and corporations is closely tied together, another alternative may be to jettison both personal and corporate income taxation, in favour of various forms of consumption taxation, implemented through the familiar VAT (Value added tax) system or other mechanisms. While this approach offers considerable efficiency gains, the degree of progressivity achieved by income taxation could be affected.
The authors note that the absence or erosion of company tax has created tax planning opportunities for individuals, who may use corporations as vehicles for the deferral of taxes. This can be eliminated by imposing personal income tax on an accrual basis, abolishing the realisation requirement that has long been an integral element of income tax.
This approach, which has been considered by previous studies, would render income tax viable even in the absence of a company tax. Accrual-based taxation faces substantial challenges, but the authors argue that it eliminate entity-level company tax while achieving any desired degree of progressivity through an accrual-based personal income tax.
Mihir A. Desai and Dhammika Dharmapala