The row between the EU, Apple and US has, in the view of many, highlighted the case for doing away with corporation tax altogether.
If you want to be a capitalism purist, you would say ‘tax the creation of wealth as little as possible, but tax the hoarding of wealth instead’. In a nutshell, this means tax land, maybe property, and most certainly inheritance as much as possible, and use the proceeds to cut income, corporation and capital gains tax.
You may agree, or disagree with this, but in an era of globalisation, some say that corporation tax is an anachronism. That the world’s truly big companies – the multinationals – can avoid this tax, affording them an unfair advantage over smaller firms – so why not abolish the tax?
The argument continues: what do companies do with their profits? They either pay them out as dividends, which are then taxed, or they are reinvested as investment – which we need to encourage. So why should we tax profit, which after all, is the reward, and indeed the incentive, for wealth creation?
But, there is, of course, a quite different point of view
US companies are sitting on around $1.2 trillion in cash. Apple holds around $187 billion of this. This money is neither being paid out as dividends or funding investment – instead, it sloshes around the global economy, helping to deflate global demand, ultimately pushing down on interest rates, and is re-introduced into the economy via debt.
In recent years, US corporate profits to GDP have hit an all-time high. This chart taken from the book iDisrupted illustrates the problem.
You might say, so what, rising profits are good aren’t they?
But the flip side to rising profits is falling wages. Just as US profits to GDP recently hit an all-time high, wages to US GDP fell to an all-time low.
The greatest irony of rising corporate profits is that they may not be in the interest of the companies making the profits. The rationale goes like this. When wages rise across the economy, aggregated demand rises, the economy grows, and thus, so does profits. See it this way: if profits have a smaller slice of the GDP cake, the cake is more likely to expand, and thus the absolute size of the slice taken by profits may grow. The exception to this is if companies use profits to fund investment. But this has not been happening at the moment.
So if anything, a case can be made for why corporate tax across the world should rise.
But, as the dispute between Apple and the EU demonstrates, in the era of globalisation, multinationals can shop around reducing their corporation tax bill.
The solution may lie with some kind of international harmonisation of corporation tax, this could take the money currently lying idle on corporate balance sheets, and pump it into the economy. But can you imagine the furore if there really were efforts to create a global minimum corporate tax rate? It may be a solution, but is likely to be about as popular with those who believe in the primacy of sovereignty as a tax on oxygen.
