Updated with new IMF data, June 22, 2015; and with Philip Baker comments; June 29, 2015
Update 2: from Reuters, Dec 22, 2015:
“Seven of the biggest investment banks operating in London paid little or no tax in Britain last year, despite reporting billions of dollars in profits, a Reuters analysis of corporate filings shows.”
How tax wars may affect UK small and big business
So-called “competition” between countries on tax (which some of us think is generally better known as “Tax Wars”) is a process that has nothing to do with what people normally understand competition to be. (To get a first sense of the differences, ponder the differences between a failed company and a failed state. Or look at this.)
The process produces a range of harms, which stem from basic operating principles. Capital can shift easily across borders, but workers generally can’t. So governments try to lure mobile capital by cutting taxes on it — then make up for the lost tax revenues by taxing ordinary people and workers more — since it’s far tougher for workers to rip their kids out of school and move when tax rates change.
The end result is that taxes on capital fall, and workers suffer higher taxes. Among other things, this increases inequality.
But it’s a subtle thing. Tax wars don’t just shift the tax charge away from capital owners to workers. The process also tends to shift taxes away from large corporations, which are generally mobile and can shuffle bits of themselves around between jurisdictions, and potentially increase the tax burden on smaller firms, which tend to be more locally rooted, and are often tapped to make up the difference.
And there’s a political dimension, of course, as noted by Philip Baker QC at a tax conference in Oxford, via The Guardian:
“I don’t think in the last 20 years or so one can say that governments have driven corporation tax policy. It’s the large companies that have driven the direction of corporate tax policy.”
Anyway: what does this process look like, in the real world?
Well, the standard response from defenders of this process is this: corporate tax revenues as a share of GDP haven’t fallen over time: according to official data, corporate income tax revenues in OECD countries have even risen, from an average 2.3 percent of GDP in 1965 to 2.9 percent in 2013.
So where is the problem?
A couple of graphs, based on UK corporate tax data, suggest some areas where the problems emerge. (We won’t be commenting on the more fine-grained reasons behind these trends: we’ll do that later; we’ll also make this a permanent exhibit, on our Reports & Data section.)
Essentially, corporate profits have been soaring, and corporations are shielding an ever greater proportion of this bonanza. The result of soaring profits and falling tax rates has led to stagnant corporate tax revenues. This represents a tremendous missed opportunity: among other things, it means that corporations are building up huge uninvested cash piles, while governments are cutting back on essential investment in things like education or infrastructure.
Our graphs look at a much shorter time-scale, but they show some quite dramatic trends nevertheless.
Exhibit 1: Big Companies’ tax payments, as a share of profits. Look at that steady decline.
That’s the tax revenue pot shrinking, as a share of what’s possible. Note that this is just an illustrative trend: we aren’t quite comparing apples with apples here (big company tax receipts divided by all company surpluses), but it’s still a trend. (See definitions here.) The post-crisis years clearly have been impacted by reduced bank profitability.
But there’s more. Exhibit 2, showing another striking trend.
Exhibit 3 shows this same data in starker terms: one, as a share of the other.
(If that rise from 17ish percent to nearly 60 percent in 13 years seems amazing, go and check the data for yourself.)
Now, Exhibit 4 looks at how the financial sector has fared, relative to the non-financial industrial sector, in terms of tax payments.
Not all of what you see here is the fruit of tax wars, but a lot of it is. The blue stuff is, again, affected by lower post-crisis profitability of the financial sector.
Fine-grained reasons for all this? More on this in due course. Please contact us if you wish to discuss this further.
(The source for most of these graphs is Table 11A here; the data on gross operating surpluses were emailed to us by the Office for National Statistics a few days ago.)
Endnote: some international context, to show that this process isn’t limited to the UK.
See this, from the US Center on Policy and Budget Policies. Look at the decline in corporate income tax revenues, and the rise in payroll taxes. (For more on the general importance of the corporate income tax, see this.)
Now see this, with a further graph, from the IMF, June 2015: another benchmark against which to set corporate tax revenue data. (We’ll contact the IMF to find out more, since the sourcing is a big vague.)