Politicians are powerless to curb our shrinking corporate tax base
IT IS shocking, isn’t it? Despite UK sales of £7.6bn between 2009 and 2012, Amazon paid almost no corporation tax to the UK Treasury. Starbucks has not paid UK corporation tax in 14 of the past 15 years.
Big corporate interests, it seems, are not paying their fair share of tax. An open and shut case of corporate greed, you might think. Both the chancellor and the Public Accounts Committee seem to agree. Such “immoral” and “unacceptable” tax avoidance by multinational companies must be stopped. And when all the politicians agree, they must be right? Yes?
Well actually, no. When everyone in Westminster agrees about something, it usually means that the rest of us should think again.
Are the low rates of tax that big corporations are paying evidence of corporate wickedness on an industrial scale? There are plenty of government officials happy for us to think so, and plenty in the UK Uncut mob quick to shout about the need to “make corporations pay”.
But what we are witnessing is not merely a matter of clever corporate lawyers exploiting tax loopholes. If it was, then ask yourself why no government has shut them.
Politicians still see this problem in terms of tax rules that need changing. But it’s actually a case of a changing tax base. The tax base, once so solid and dependable, is becoming more fluid.
A generation or two ago, wealth was made when things were manufactured or mined. If the state wanted to raise revenue, it needed to tax factories – what they produced and those who worked in them.
But in the digital economy, added value increasingly comes not merely from making things, but from the added intellectual value.
In 1980, the Ford Motor Company had half a million employees in the US paying tax; Bethlehem Steel over 100,000. Today Google, with a market capitalisation five times that of Ford, has a mere 17,000 on the payroll. Bethlehem Steel does not exist.
Not much of a tax “base”, is it?
In the modern economy, the high-value bit, to put in crudely, lies in intellectual property rights. Supposed tax avoidance is really a debate over which tax jurisdiction intellectual property is being exploited in. Holland or the UK? Europe or the US?
As tax officials soon discover, when trying to close those mythical loopholes, intellectual property is mobile. You might struggle to move a mining operation or factory from one tax regime to another. Intellectual property can move as quickly as an email.
Louis XIV’s tax minister, Jean Baptiste Colbert, once described taxation as the art of “plucking the goose to obtain the largest amount of feathers with the smallest amount of hissing”. The trouble for latter day Colberts is that, in the modern economy, more and more geese are able to take flight.
What the politicians would like us to see as evidence of tax avoidance is in fact evidence of tax migration. In the digital economy, it will happen more and more – no matter what the tax rules say.
Blaming those who move intellectual property from one jurisdiction to another for not paying enough tax is a bit like blaming migrating birds for wanting to avoid winter. Only an oddball might hold it against them.
Of course tax officials feel frustrated. Treasury officials would like a general anti-tax avoidance rule. Instead of taxing businesses on the basis of pre-defined rules, which specify how much tax is payable and under what circumstances, this kind of arbitrary arrangement would enable tax collectors to bill firms what they think they ought to be paying.
Perhaps this draconian and ill-considered measure merely underlines how no set of tax rules, however complex, can get to grips with the fact that the source of wealth in the digital world – intellectual property – can move.
Unless governments are prepared to embrace 1950s Albania-style isolation, businesses will inevitably find it easier to transact business in a way that reduces their tax bill.
“But if the tax base turns out to be a river that can flow away,” you ask, “how are governments going to manage to raise revenue to pay for all the things that governments do?”
How indeed. Perhaps they won’t. Without a dependable tax base, maybe the era of Big Government is over.
Douglas Carswell is Conservative MP for Clacton.