Written evidence submitted by The Institute of Economic Affairs (TAX0021)

 

 

About the author

Diego Zuluaga is Financial Services Research Fellow at the IEA, and Head of Research for EPICENTER, the pan-European think tank network.

 

A full list of references for this response is available from the author

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DISCLAIMER: As part of its educational objectives the IEA facilitates responses to public policy consultations by academics and others. However, the views expressed, whilst generally consistent with the IEA’s mission, are those of the authors and not those of the IEA (which has no corporate view), its managing Trustees, senior staff or Academic Advisory Council. If these views are quoted then we ask they are quoted as the views of the author(s).

 

  1. Summary


  1. Introduction

The Treasury Select Committee has called for submissions on the subject of tax base erosion, multinational avoidance, and corporation tax reform. The below seeks to contribute to the discussion by describing the problems associated with the current system for taxing corporate income, shedding light on the issue of corporate tax avoidance, and assessing various different proposals for reform.

It is argued that most of the reform proposals currently under discussion are likely to result in new distortions and unintended consequences. On the other hand, it is found that the replacement of corporation tax by a tax on distributed profits would simplify the tax code, address the problem of corporate tax avoidance, reduce many of the distortions inherent in the current system and be aligned with other public policy goals such as growth promotion and the proportionality of the tax burden.

While it is the author’s view that such a reform ought ideally to be coupled with a more general reduction of the tax burden, it is important to recognise that this discussion relates to the structure of the tax system, and not necessarily the overall level of taxation. One can confidently predict that even those who wish the tax burden to remain at current levels will be able to raise revenue more efficiently under the reforms proposed, with benefits to the wider economy.

  1. The trouble with corporation tax

Taxes on corporate profits are highly inefficient

There are four efficiency costs (cf. Tideman and Plassmann, 2015) of taxation in addition to their direct burden[1]:

All of these costs are disproportionately high in the case of taxes on corporate income. Administration costs are high because taxable profits are hard to define and subject to discretion and therefore dispute. This is especially the case for multinational enterprises with operations and value chains in a number of different jurisdictions. The complexity and variety of activities in which MNEs engage make tax assessments time- and resource-intensive.

Compliance costs are high for similar reasons. A typical domestic firm in the UK expends the equivalent of 37 hours every year complying with corporation tax,[3] out of a total of 110 hours devoted to compliance with all taxation (PWC, 2016). This burden is especially high for multinational firms, whether headquartered or with a subsidiary in the UK. Furthermore, the potential gains from tax avoidance are greater, both due to the larger average scale of MNEs and expanded opportunities for profit shifting across jurisdictions.

The demoralisation costs of corporation tax are arguably also high. They arise both from a perception that corporations in general are not “paying their fair share,”[4] and from the impression that some firms – ostensibly those with more domestic activity – face a higher tax burden than otherwise similar but more internationalised companies.[5]

Taxes on corporate profits also exhibit higher-than-average excess burdens, for a number of reasons. Firstly, the tax base – profits – is highly mobile and thus responsive to changes in relative taxes across countries. Secondly, by lowering effective – post-tax – returns on investment, corporate taxes discourage saving and investment and therefore undermine an economy’s long-run growth potential. Thirdly, because of the enforcement challenges outlined above, corporation tax often has to be coupled with complex rules and regulations to curb avoidance (ibid.). These regulations further raise the relative cost of investment and make it less attractive.

A significant portion of corporation tax falls on workers, not shareholders

Corporations are legally liable for the payment of corporate income taxes. However, because they are only legal entities, they cannot possibly bear the economic burden of taxation, which is borne by one or several of the categories of people associated with the firm: shareholders, workers and consumers.

Early theoretical analyses of the economic incidence of corporation tax (Harberger, 1962) seemed to suggest that the burden fell almost exclusively on shareholders in the form of lower (post-tax) returns on investment. However, these models made a number of strong assumptions, such as an economy that was closed to international trade, and a fixed capital stock, which are unrealistic in today’s globalised world. Subsequent studies (cf. Fuest, 2015; Southwood, 2014) have tended to show that a substantial share of the burden is borne by labour. In his review of the literature, Southwood (2014) finds that the average share of the corporate tax burden shouldered by workers is 57.6 per cent of the amount raised by the tax.[6]

The workers’ share of the tax burden comes in the form of lower wages, which are the consequence of reduced productivity as a result of lower capital investment in response to the tax. In general, the more open an economy and the more mobile its capital stock, the larger the burden of corporation tax which will be borne by workers. The characteristics of the UK economy suggest that British workers likely bear a non-negligible portion of corporate taxation, perhaps mitigated somewhat by the fact that the UK imposes a lower corporate tax burden than most other OECD countries. However, corporation tax will still lower investment returns and thus discourage saving, regardless of tax policy in other countries.

Corporate income taxes have a negative impact on GDP per capita, investment and entrepreneurship

In a study for the OECD, Arnold (2008) finds that income taxes are associated with lower per capita GDP than indirect taxes such as VAT and taxes on immovable property. His results show corporation taxes to be particularly harmful. Arnold’s analysis of 21 countries, after controlling for a number of potential confounding variables, concludes that “tax reforms […] especially away from corporate taxes, are likely to enhance the prospects for economic growth.”

The same is true for investment and entrepreneurship. In an analysis of 85 countries, Djankov et al. (2008) find that corporate income taxes have a large negative effect on aggregate investment and entrepreneurial activity. Their results show that a ten percentage point increase in the corporate tax rate reduces the investment-to-GDP ratio by two percentage points. They also find corporate income taxes to be negatively correlated with growth and positively correlated with the size of the informal economy, as predicted by economic theory.

There is also evidence that corporate income taxes have a negative impact on innovation. An example is Mukherjee et al. (2015), which looks at tax rate changes at state level in the United States and finds that rises in the state corporate tax rate adversely affect the number of patents filed.

Distributional issues

Proportionality, the idea that people should pay taxes according to their means, has been widely accepted as a principle of good tax design since at least the time of Adam Smith (1776) first posited it.[7] This notion has, over the last century, been complemented and sometimes replaced by progressivity, i.e. that taxation should not be proportional to economic means but rather that the relative burden should increase as one’s resources increase. A degree of progressivity is present in most modern tax systems, and it is part of governments’ attempts at income redistribution and equalisation.

Corporation tax, however, raises a number of distributional concerns which potentially run counter to the principles of proportionality and progressivity. Traditionally, it was assumed that a tax on corporate profits was equivalent to a tax on the wealthy because the latter owned the vast majority of assets. Yet, as we have seen above, it is now an accepted fact among economists that workers bear a considerable share of the corporate tax burden. What is more, it is difficult to discern whether the workers’ share is itself borne proportionately or progressively. On the contrary, it could well be that poorer – low-skilled and manual – workers bear a greater burden than richer ones, which would make the tax regressive.

Furthermore, it is no longer true that most asset owners are wealthy. More and more individuals of limited means own stocks and shares, either directly or through pension plans. Indeed, it is government policy to encourage saving and asset ownership for old age provision. But corporation taxes defeat this purpose by lowering returns on investment.

Corporation taxes mislead the public and are politically poisonous

Given the accumulated evidence against corporation tax as an efficient, fair or desirable way to raise government revenue, it is worth asking why it remains in place half a century after its introduction.[8] It is likely that political inertia and the natural conservatism of tax authorities (“an old tax is a good tax”) have played a role.[9] However, it is not unreasonable to suggest that confusion resulting from its name and the related political incentives have impeded the sort of repeal and replacement which might in other circumstances have followed the evolving consensus among economists.

The belief that corporation tax is actually paid by corporations – understood as somehow an independent entity from their owners, workers and customers – continues to be widespread. It is reflected in media accounts of alleged tax avoidance by multinational companies, and in discussions among policymakers as to who should pay for public goods and services. These are entirely legitimate debates to be had, but they must take account of the fact that only people pay taxes. One may venture that voters and elected officials would be less supportive of corporation tax and more amenable to reform if they knew who actually pays for it.

  1. Base erosion and tax avoidance by multinational firms

There are increasingly concerns, especially in the rich OECD countries, about a gradual erosion of the corporate tax base. It is feared that globalisation and the digital economy are making it easier for multinational firms to avoid corporation tax in some of the jurisdictions where they operate. A related claim is that these developments are putting pressure on countries to lower their corporate tax rates, leading to a “race to the bottom.”

The average rate of corporation tax in OECD countries has indeed been declining since the 1980s. Figure 1 shows tax rate trends in representative countries, including the UK. The average statutory corporate tax rate in Canada, France, Germany, Italy, Spain, the UK and the U.S. has dropped from over 47 per cent in 1981, to just under 30 per cent in 2015. The decline was particularly steep in Britain, which in 2015 boasted the lowest statutory rate in the G20 large economies.[10]

However, the hypothesis of base erosion implies that corporate tax revenues would have declined during this period. Yet, there is no evidence of that. In fact, the share of corporate taxation in all taxation has remained stable in the last 35 years across the OECD, and it has increased as a share of GDP. Figures 2 and 3 below depict the trajectory for selected countries and for the OECD as a whole.

We can see that corporate tax revenue responds strongly to the economic cycle, with steep declines in periods of national recession (see the UK in the late 1980s/ early 1990s, and Germany in the late 1990s/ early 2000s). But a positive relationship between rates and revenues, which would imply a gradually declining tax take over the last thirty years, is not apparent in the data.

In fact, rather than being solely the product of tax competition, the drop in statutory rates reflects progress in economic science. A growing focus by economists on the supply side has led to the recognition that the level of taxation has important consequences for economic activity. Low taxes can lead to a rise in revenues via greater investment, labour participation and consumer demand. The Laffer Curve, which posits that all taxes feature a revenue-maximising rate beyond which receipts start to decline as economic activity is discouraged, has popularised this insight.[11] Governments and official bodies such as the International Monetary Fund, the European Commission and the OECD have largely adopted a supply-side view and have, in addition, tended to encourage indirect taxes such as VAT and property taxes over the direct taxation of incomes, seen as more inefficient and distortionary (cf. Arnold, 2008).[12]

Nevertheless, it is true that global economic developments, such as increasingly open trade, greater use of financial instruments by companies, and the growing role of intangible assets in value creation are making it easier for capital to move around the world. This is an overwhelmingly positive phenomenon which has contributed to the worldwide rise in living standards, illustrated by declining poverty rates, the growth in the FDI stock and lower prices for many consumer goods. However, it could also give multinational firms increasing scope for tax avoidance, using, for instance, financial transactions between subsidiaries, transfer pricing arrangements, and company operations in tax havens to reduce their overall tax bill.

Studies using different methodologies have consistently found there to be some tax-avoiding activity by MNEs. In her review of the literature, Riedel (2015) puts the lower bound of these estimates at five per cent of multinational firms’ income, and the upper bound at 30 per cent or more. While finding a similar consensus in the literature, Hines (2014) places the likely share of corporate profits diverted by firms to low-tax jurisdictions at two to four per cent. The OECD (2015) in turn estimates annual corporate tax avoidance at U.S.$100bn to U.S.$240bn, equivalent to between four and ten per cent of global corporate tax revenue.

In fact, what is striking about these figures is that they show a much smaller degree of multinational tax avoidance than might be expected in light of the narrative about firms’ ability to game national tax systems. Hines (ibid.) argues that transfer pricing rules, limits on debt interest deductions and other international and national regulations constrain MNEs’ opportunities for tax avoidance. He argues that, even if efforts to rein in avoidance were successful, the additional revenue raised by tax authorities would amount to substantially less than one per cent of the global tax take.

Furthermore, it is important to recognise that any attempt to limit multinationals’ ability to transfer capital around the world will not be a free lunch.[13] The corporate profits which are currently not paid into national exchequers can, for the most part, be assumed to be deployed to other productive uses, so an increase in payable taxes is likely to reduce investment returns. This may well not hold governments back from claiming additional revenue from MNEs, but it is important to be aware of all the likely consequences from such action.

At any rate, tax avoidance underscores perceptions of unfairness in the tax system, especially in the differential treatment of domestic and multinational firms, raising the demoralisation costs of corporation tax (see above). It also highlights the compliance burden of the tax, with substantial resources devoted to profit shifting. Finally, the fact that some corporate income is moving in response to tax policy shows that, absent tax factors, it would be devoted to other uses.[14] Avoidance therefore illustrates the excess burden of corporate taxation. Thus evidence of profit shifting strengthens the case for fundamental reform of the way in which capital income is taxed.

  1. The consequences of the OECD BEPS package

The OECD package to tackle Base Erosion and Profit Shifting (BEPS) seeks to limit tax avoidance by reforming international tax frameworks and improving coordination between tax jurisdictions. The package, presented at the end of 2015, calls on national governments to implement a number of measures to achieve greater transparency in tax collection and curb firms’ ability to transfer resources across the jurisdictions where they operate. These measures include: limits on interest deductibility to between 10 and 30 per cent of applicable EBITDA; country-by-country reporting by MNEs of the profits attributable to each jurisdiction; changes to the transfer pricing regime and definitions of permanent establishment aimed at reducing opportunities for profit shifting; and measures to prevent abuse of bilateral tax treaties.[15]

While implementation is at its very early stages, a number of observations can be made regarding the likely impact of the proposals. Country-by-country reporting will increase the compliance burden on MNEs. A different application of transfer pricing and permanent establishment rules will force many firms to rearrange their business structures to comply with the new requirements.[16] Limits on interest deductibility may reduce opportunities for tax avoidance, but they could also hurt the ability of MNE subsidiaries to finance their day-to-day operations. It is unclear how large this effect will be, but it could have a material impact on firms’ profitability.

Finally, the BEPS proposals add to the climate of regulatory uncertainty that has surrounded international taxation in recent years. Uncertainty discourages investment and makes firms less likely to expand their operations to new markets, especially when the new rules will also curtail the ability of subsidiaries to borrow from each other. All of these effects would raise the operating costs of multinationals. While these higher costs will partly be related to fewer opportunities for tax avoidance, they could also result in higher prices for consumers and less economic activity – and employment – than might otherwise be expected.

On the other hand, there is reason to be sceptical as to whether national tax authorities will be able to effectively implement the measures proposed by the OECD. The BEPS proposals on the whole amount to thousands of pages of legal definitions, new regulations and reinterpretations of existing rules. The language is in many cases vague and open to interpretation, while implementation will require international agreement and cooperation between dozens of tax authorities, a time- and resource-intensive process. Moreover, while well-staffed treasuries in developed countries may be able to cope with the volume of new regulations and procedures, it is questionable that their stretched and less sophisticated counterparts in developing countries will have the means and expertise to do so. This observation is especially poignant given that poorer countries are often cited as the biggest losers from corporate tax avoidance.[17]

  1. Radical but not equal – the proposals for reform

It has been argued above that the existing system for the taxation of capital income is deficient. A number of scholars have come to a similar conclusion and proposed a range of reforms, with the aim of improving on the shortcomings of the status quo. However, not all of these proposals would resolve the efficiency problems associated with corporation tax, and some of them would probably entail negative consequences of their own. Below we examine the most salient reform proposals to see whether they are fit to meet the challenge.

A tax on turnover

A number of commentators, including former Chancellor of the Exchequer Lord Lawson, have called for corporation tax to be replaced by a tax on turnover. Such a tax has some prima facie benefits over the status quo. It is relatively transparent as it would be levied on the UK revenue of companies, which would eliminate some uncertainty and disputes over profit attributions and presumably reduce opportunities for avoidance. Moreover, to the extent that one believes all corporations – regardless of profitability – should pay some tax to account for the public goods and services – defence, rule of law, infrastructure, and so on – that they use, a turnover tax would seem a fair way of levying this payment.

However, the fundamental differentiating trait of a turnover tax, namely that it applies to revenue rather than profits, means that loss-making firms would face the same burden as profitable ones. This could present struggling businesses with an insurmountable hurdle. Furthermore, it would eliminate the tax benefit of capital expenditure, potentially discouraging companies from seeking expansion through spending. A suitable example is Amazon, which has deliberately kept its margins thin in a bid to capture a larger share of the market by lowering costs to consumers. With the current corporation tax, Amazon was able to offset some of the cost of this expansion via a lower tax bill, but a turnover tax would eliminate this advantage.

Destination-based corporation tax, with sales as the activity proxy

In order to limit opportunities for avoidance, it has been proposed to attribute profits not on the basis of the principle of where value is generated, but rather where firms make their sales (cf. Devereux, 2014). This proposal is attractive because it relies on a straightforward proxy for profit attribution, namely the share of a company’s sales in each tax jurisdiction. It would therefore reduce uncertainty regarding taxes owed in each country, and it would eliminate opportunities for avoidance through profit shifting.

Yet, a destination-based corporate tax raises concerns of its own. The first is the rationale behind attributing profits in proportion to where sales are made, even though the relationship between profits and sales is tenuous. Indeed, it is possible and even likely that many multinational firms have thinner profit margins in countries where their sales are greater, as a result of additional expenditures on marketing, staff and physical infrastructure. Furthermore, at a time when intangibles such as intellectual property play an increasingly important role in many sectors, ignoring them for the purposes of tax assessment would not be sensible.

A destination-based corporation tax could result in companies’ ceasing operations in jurisdictions where their sales are large compared to their profit margins, harming consumer welfare. Depending on how it was designed, such a tax could also discourage vertical consolidation – which in many ways can increase efficiency – if it meant that tax liabilities would rise as a result.[18]

Formulary apportionment

A third reform proposal involves the allocation of taxable profits on the basis of a formula. An example of such formulary apportionment is the Common Consolidated Corporate Tax Base proposed by the European Commission.[19] As with a destination-based tax, profits for the given multinational would be calculated on a consolidated basis, and then apportioned to the various countries where the MNE operated. But rather than attributing profits using sales, formulary apportionment uses a number of components to calculate attributable profits in each jurisdiction. Proposed formulae typically include staff – employment numbers and total wages – physical assets and sales.

Formulary apportionment tends to exclude intangibles from the calculation because they are seen as highly mobile and thus prone to be used for avoidance purposes. Yet, excluding them from calculations of taxable profits would ignore their growing role in value creation and thus attribute profits in an entirely arbitrary way determined by legislators. Furthermore, a one-size-fits-all formula conceals the fact that corporation tax applies to firms of large and small scale, in myriad sectors, and with very many and very different business structures. It is unlikely that a single formula could appropriately reflect this diversity. Instead, it would likely penalise some firms and benefit others.[20]

In this regard, it is worth pondering the significant transitional costs likely to result from moving to a formulary system, and the incentives for firms to lobby elected officials to shape the formula according to their preferences. It would be a recipe for rule by special interests and lead to protracted disputes over the final arrangement.

The international dimension – an additional conundrum

All of these proposals would have international implications. The UK is currently party to a number of multilateral and bilateral agreements with other countries to prevent the double taxation of corporate profits in two or more different jurisdictions, and to facilitate cooperation and dispute resolution between tax authorities and firms. Any of the reform proposals above would require a renegotiation and redesign of these treaties. Indeed, it is not readily apparent how the risk of multiple taxation could be mitigated unless other countries agreed to adopt a new framework that was similar to the UK’s. In other words, the unilateral enactment of wide-ranging reform along the lines suggested above would introduce greater policy uncertainty – and the possibility of much higher tax bills – into the operations of any multinational firm that was active in Britain.

An alternative proposal: a gradual transition towards the direct taxation of shareholders

It is clear from the above that the taxation of profits at the corporate level has significant shortcomings, in the form of high related costs; damaging unintended consequences for growth, investment and worker productivity; and incentives for tax avoidance by multinational firms. However, the reform proposals examined so far would not meaningfully improve on the status quo, because they would fail to address some of the key weaknesses of the existing system and introduce problems of their own.

For reform to be beneficial, it should remove the principal distortion in the existing system, namely the use of corporate profits as the tax base. As we have seen, these are highly mobile and their attribution is subject to discretion and dispute. At the same time, successful reform plans should identify an alternative tax base which, unlike turnover, did not entail potential new distortions and perverse incentives. Finally, beneficial reform would aim to simplify the existing tax code, to apply the commonly agreed criteria of good tax design, and to avoid a contradiction between tax policy and other objectives such as proportionality and economic growth.

The replacement of corporation tax by a tax on distributed earnings at the shareholder level would seem to tick all the boxes. First of all, it would eliminate the distortions in firm behaviour caused by corporate income taxation. It would shift the tax base from a relatively mobile entity – corporations – to a less mobile one – individuals – thus reducing opportunities for avoidance. When fully implemented, it could be levied as income tax, under the same principles of convenience and progressivity.

Crucially, while there would still likely be some economic incidence on workers,[21] undistributed profits – those reinvested in the firm – would remain untaxed.[22] Moreover, a tax on shareholders would eliminate the differential treatment of debt and equity financing at the corporate level, which encourages leverage with potentially damaging consequences.

Ideally, reform of corporation tax along the lines suggested ought to take place alongside a wider simplification of the UK tax code. The proposals of the 2020 Tax Commission (Heath et al., 2012) merit consideration in this respect. However, movement towards the direct taxation of shareholders could also happen independently of other tax policy changes.

The first step would be to abolish corporation tax as it currently exists, and to replace it with a tax on distributed income, which would be set at a single rate and levied at the firm level. This could be the prevailing rate of corporation tax prior to the reform, or a higher or lower rate, as deemed appropriate.[23] Such a system is currently in operation in Estonia, which was recently recognised as the most tax-competitive country in the OECD.[24]

There would then likely be an extended transitional phase during which the UK would renegotiate its tax treaties with other jurisdictions, with a view to adapting existing double taxation agreements to the direct taxation of shareholders. The aim would be to ensure that distributions to UK shareholders from firms based in other countries would be exempt from tax in those jurisdictions and subject to tax in Britain. A reciprocal system would apply to foreign shareholders in companies incorporated in the UK. Whether or not corporation tax continued to apply in other countries is in principle irrelevant in this regard. Agreements would be about the coordination of dividend taxation.[25]

Once these negotiations had been concluded with a large enough number of countries, the final step would be to stop levying capital income tax at the corporate level, and to assess it directly from shareholders (with appropriate exemptions for foreign dividend income as per above). After this change, capital income tax would be levied at the same rates and under the same conditions as taxes on income from work. At a time when new business models – notably the so-called ‘sharing economy’ – are increasingly leading people to rely on asset income in addition to wages from work, the merging of capital and labour income would seem particularly appropriate.

  1.                                            Conclusion: a question of tax structure

Discussions of corporation tax tend to mirror discussions about the optimal tax level: those in favour of reform tend to also favour a reduction in the overall tax burden, while those who support the status quo or more interventionist reforms are concerned about raising revenue for the many functions that modern governments engage in.

However, it is crucial to differentiate between the tax level – how much people should pay in taxes – and the tax structure – what forms taxation should take. The above discussion is mostly concerned with matters of tax structure. Indeed, it is argued that corporation tax is a very inefficient way of raising revenue from capital income – regardless of the view one may hold about the optimal tax level.

Thus the reform proposed is not in and of itself a tax-lowering reform, but rather a tax-optimising one, aimed at reducing the distortions created by the tax system and addressing the avoidance problem. It is important to recognise that both a tax-cutting agenda – which the author favours – and a tax-neutral agenda would be served by the above proposal, which would make the tax system more efficient.[26]

We urge public officials who are sceptical of corporation tax reform because they view it as tax-cutting and promoting the interests of the wealthy to consider the evidence discussed above and focus instead on the kind of structure which will usher in a more prosperous UK economy over the long term.

 

 

 

 

April 2016

14

 

[1] The direct burden of taxation consists of the resources transferred from the private to the government sector in the form of tax.

[2] The excess burden, also known as the deadweight loss or the tax wedge, results from changes in supply and demand in response to taxation.

[3] Average compliance time for UK corporation tax is substantially lower than in the United States (87 hours), but, interestingly, higher than in France (26) and Spain (33), which are otherwise more compliance-heavy.

[4] Corporations are legal entities and cannot strictly pay taxes. Shareholders, employees and consumers bear the burden of corporate taxation.

[5] Perceptions of unfairness may or may not reflect reality, but the point of demoralisation costs is precisely that they are subjective and vary depending on the type of tax concerned. For instance, the Managing Director of John Lewis was recently quoted: "If you think two companies making the same profit, one of them pays corporation tax at the UK rate, one does not because it claims to be headquartered somewhere else. That is not fair.” http://www.itv.com/news/2016-01-06/john-lewis-concerned-amazon-tax-problem-is-creating-an-unfair-fight/.

[6] Note that the burden of tax can exceed 100% of the amount raised because of excess burdens and other costs.

[7] Smith’s other three “maxims” were certainty, convenience and efficiency. See Meakin (forthcoming) for a detailed explanation of Smith’s principles of tax design and the additions and qualifications subsequently made by economists.

[8] It is interesting to note that the institution of a corporation tax was what prompted the foundation of the Institute for Fiscal Studies (Robinson, 1990). Despite its august reputation, the IFS has so far not ushered in the abolition of the levy which led its founders to action.

[9] There is some validity to the dictum quoted above: by definition, economic agents have been able to plan for existing taxes, which is not true of (most) new forms of taxation.

[10] Devereux et al. (2015).

[11] Arthur Laffer, pioneer of the eponymous curve, underscores that the revenue-maximising rate is not necessarily the optimal rate, which would maximise both the public and the private benefits of economic activity. This optimal rate would normally lie below the revenue-maximising rate.

[12] It is therefore not fanciful to suggest that the OECD itself has powerfully contributed to the downward trend in corporate tax rates.

[13] Teather (2005) offers a comprehensive account of the potential costs from curtailing tax competition and global capital flows.

[14] This is not to say that the current uses to which diverted profits are devoted are not productive, but rather that in the absence of corporation tax, relative returns would change and would make other activities more attractive, in line with real economic factors rather than tax factors.

[15] This is not an exhaustive list but is rather intended as an illustration of the BEPS proposals. See OECD (2015) for a detailed outline and EY (2015) for an analysis of the measures.

[16] Changing the tax arrangements of tax-avoiding multinationals is indeed one of the objectives of the BEPS proposals, but it is important to recognise the transitional costs associated with them.

[17] In fact, developing countries are overwhelmingly reliant on foreign investment for their economic growth. Thus, to the extent that international moves to tackle tax avoidance also have an impact on investment flows and the FDI stock, they stand to lose disproportionately.

[18] In a destination-based system, transactions between two independent firms in different tax jurisdictions would be subject to corporation tax where the purchasing firm was located. However, if the two firms merged, then tax would be calculated on the basis of consolidated profits and attributed to the location of the final sale, i.e. where the purchasing firm’s customers resided. If the latter location had a higher corporate tax rate than the location of the purchasing firm, vertical consolidation would be discouraged. This would be a distortion created by the tax system, part of the excess burden of the tax.

[19] http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm. See Zuluaga (2014) for a critical assessment of the merits of the CCCTB.

[20] This would depend on the composition of the formula as well as the weight given to each of its components.

[21] Because the tax would still reduce (post-tax) returns on investment, thus discouraging capital accumulation and making workers less productive than they otherwise could be.

[22] Reinvested profits would be – on average and in the long run – be reflected in share values, so they would still be taxed as and when those shares were sold. As with dividends, the rate applied would be the same as the rate on income from work for the relevant taxpayer.

[23] The chosen rate would partly depend on whether revenue neutrality was one of the objectives of the reform, and how much weight was placed on having an internationally competitive, growth-promoting tax code.

[24] http://taxfoundation.org/blog/estonia-s-growth-oriented-tax-code.

[25] There would still be double taxation issues given that a UK company with operations in another jurisdiction might still be subject to corporation tax in that jurisdiction. However, such double taxation already exists in the UK and elsewhere, in that profits are taxed twice – at the firm level and at the shareholder level. The proposed reform would be still an improvement over the status quo.

[26] A tax-raising agenda would in principle also be better served by the replacement of corporation tax. However, there is evidence that the UK is currently at its maximum taxing capacity (ca. 37% of GDP).