Evolving Thoughts

How to solve corporate tax evasion

One of the content problems with taxation in capitalist societies is the tendency of multinational and large corporations to evade tax to shift the burden onto individuals usually in the middle class. Over the past thirty years, the middle class has become increasingly stressed, and their tax burden has increased as large scale corporations, usually in the primary industries like mining and oil, pay almost no tax to speak of, and get government grants and tax concessions even as they make a massive profit. Trickle down economics is a failed experiment, and anyway, this is simply unfair, and a way to make the rich richer at the expense of society as a whole.

We used to have a concept of the “common wealth” or “common good” – infrastructure like roads, education, defence, the legal system and so on that support all the social and economic activities of the countries concerned. Since “globalisation” (that is to say, the latest incarnation of colonialism and exploitation of the poorer countries by the wealthy of the west), corporations have shifted their production and profits off-shore from most western countries, to the detriment of the communities of both the western nations and the exploited nations. So I wondered if there might be a way to redress this easily.

I therefore came up with this idea. I am sure someone else has also proposed it in better terms and detail, but I don’t know about them, so I thought I’d shoot off a short proposal.

First, let’s think of the infrastructural support from all corporations: things like transport systems, education (once upon a time, corporations used to do their own education of workers after a certain age, but now they have withdrawn from this and shifted that burden onto universities and state education systems, who are finding it harder to cope), health care, and so on. Let us suppose this is the shared wealth of the nation upon which they rely to do their business, a fair assumption to make. They should fairly be expected to contribute to this shared wealth. That they do not is the problem to solve.

One way might be to close loopholes in the tax law, but this will simply mean the corporations will either find new loopholes or buy new legislation to open new loopholes. A broad brush approach is needed. My proposal is this:

Set an infrastructure levy, say of about 5% of all gross trading (not profits, because they can be minimised). Given the auditing requirements in most nations this figure can be more or less accurately identified, as shareholders require it for the valuation of their shares.

Impose this upon all corporations that have a minimum trading amount, say $5 million per annum. So they must pay a 5% levy no matter what other tax they pay. If their tax burden exceeds this amount, then the 5% is subtracted from their tax burden. If they do not, then they pay the 5% levy in full. To make this even easier, allow corporations to not submit a tax return if they wish and their taxable income would be less than the levy, thus saving them a slew of accounting.

The result would be that all corporations would pay a minimum realistic amount. The levy could be raised or lowered according to the income needs for infrastructure. Governments could plan for social infrastructure works like public transport, freight transport, education and the like with some confidence. Tax evasion would become less important, and small businesses would not be hit with a major bill. The balance would shift away from individual taxation to those who benefit most by exploiting the resources of a country. And the motivation for exploiting foreign workers would drop, because there would be less profit to be gained by trading more cheaply.

It’s a thought…

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Comments (10)

  2. Interesting idea but the resistance to simplifying the tax rules will be enormous. It will come from the companies, the accountants, the lawyers and the civil servants who administer the rules.

  3. John. I have enjoyed following your blog for around 5 years. I have previously commented only on your “suspending’ post of 28 Feb ’13. As a retired chartered accountant, however, I am now driven by this post to comment again. Not a great analogy, but it is almost as shocking to me as it would be if I were suddenly to discover that you believed that Nasa had faked the moon landings.
    Where can I start? Perhaps if I were a polite and financially literate physicist I would tell you that you are ‘not even wrong’. As a curmudgeonly accountant may I simply suggest that you steer well clear of finance, accounting and taxation. (You’ll note that I do not, of course, include economics; since it is mostly bullshit anyway)

    1. Colin, we all have our areas of total ignorance. I know this is one of mine, so I would love to know, in some detail, why this would not work (in the Australian context).

      1. It’s a complex area – witness the shemozzle by Treasury, Wayne and his then bosses. So you don’t have to be over-modest.

        As a first point in response to you:
        Assuming that you have something like ‘total sales income’ in mind, (when you refer to “gross trading”, which is not a meaningful accounting term), then what you propose has much in common with the royalty charges currently imposed on miners (including gas/oil) by the states. Royalties, typically, can be levied by reference to total tonnes mined or to the sale proceeds of those tonnes. As such they are already a component of our current taxation regime. Relying solely or mainly on royalties, however, would create distortions in, and disincentives for, mining activity, resulting in reductions in future taxation.

        (I could say much more. And would rather enjoy doing so – quite apart from the consideration that I ‘owe you’, having learnt much from your blog over the years! Would prefer email/attachments format, however, not being comfortable with the blog/comments format. You’d be free of course to post anything I sent If you so wished. If ok for you, let me know address, mine being colinhuttonhome@gmail.com)

  4. This subject has been argued about for some time in a UK context, but perhaps some of the talking points could apply to Australia?

    Firstly tax evasion is legal. Most companies have an obligation to their shareholders to pay no more tax than they are required to. Companies are able to arrange their accounts so that they minimise the tax they are obliged to pay. Many of the schemes involved are in response to individual governments fiddling with the tax laws to encourage particular commercial endeavours (like start-up industries). If you want to reduce evasion, change the laws (but see below).

    Companies can pay more for the cleverest tax advisors than governments choose to.

    Tax avoidance is illegal and merely needs to be prosecuted diligently (but governments often seem unwilling to push hard).

    Multi-national firms can generally choose which country to use as headquarters for tax purposes. I understand that this idea has been incorporated in trading agreements for a century or so, with the idea of companies not being taxed more than once on the same income in different countries. So companies choose countries with the lowest rates of corporation tax or equivalent. This has consequences with countries competing to ‘host’ companies by lowering their corporation taxes. If you want to ‘keep tax on profits local’ you will have to change local laws and possibly international trading agreements – which is a big global task and one of the reasons it hasn’t been attempted.

    Some tax evasion is seen by some as ‘legal but immoral’, particularly ‘aggressive evasion’. This generates a lot of outrage but little in the way of solutions.

    As for a ‘local levy’ – that might be challenged as breaking international trading agreements. Companies already pay local taxes on employment (National Insurance in the UK) and business rates (or local property taxes, whatever) which, at least in principle, covers some of their contribution to infrastructure costs.

    It’s a tricky situation. Concerned people are outraged at companies dodging their ‘fair share’. Companies point out that they are paying out all they are required to do, and any more taxation would be expropriation.

    1. A very pertinent contribution. However, one correction is necessary : it is ‘avoidance’ that is legal and ‘evasion’ that is illegal.

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