With all the recent scandals involving internet companies, it seems quite reasonable to assert that corporation tax as we know it is in a crisis, and it’s time for fundamental reform of the way we tax multinational companies. The very low overall effective tax rates of the internet giants do suggest that today’s biggest companies are paying less corporation tax than did their equivalents in previous eras. But how bad are the numbers?
While most corporate taxpayers are small and medum-sized businesses, multinational groups are responsible for almost 90% of UK corporate tax revenue [pdf]. So what happens if we look at the historical trends in corporation tax receipts as a whole?
Interestingly, corporation tax as a share of GDP has enjoyed a modest rise in OECD countries over the past 40 years, all be it with a dip at the moment due to the crisis and recession. The lines are volatile but fairly flat for the countries I picked out, except for Australia, which saw a big rise, and Japan, which saw a big fall. As you might expect, peaks and troughs in the corporation tax take tend to track equivalent fluctuations in GDP growth (which might also explain the trends in Australia and Japan).
What to take from this? Should corporation tax receipts have been rising as a share of GDP over this time? You could possibly argue that countries such as the UK and US, which taxed their multinationals on profits made overseas during this period, should have seen a growth in tax receipts because of the expansion in this overseas activity (which is not captured in GDP figures).
I’m not saying that corporation tax doesn’t face a crisis. Plummeting rates in the face of tax competition, the challenges facing transfer pricing in a services-led economy, and the apparent fall in effective tax rates are all clearly problematic for it.
But based on this data, the counterfactual to the ‘crisis’ narrative would have to be rising corporation tax rates as a share of GDP. Can any economists out there explain why we would expect this?
Martin Hearson 