It has genuinely been fascinating to spend the last two days discussing international tax and it’s relationship to the funding of developing countries over the last two days at a workshop at the Institute of Development Studies at the University of Sussex.
There is one assumption that we all seem to share is that corporation tax is an essential part of the tax system and as far as I can tell that is because the belief is widespread that this tax is paid by the companies themselves and the incidence of the tax falls on capital.
The problem with this is, of course, that it’s simply wrong.
This is an excellent little primer on what is actually going on.
But economics professors quickly add that all bets are off in the longer run, when the company’s capital stock relative to the input of labor can change and when the owners of investable funds can decide whether to invest their money at home or abroad or in enterprises not subject to corporate taxation.
General-equilibrium models accommodating this wider view of the economy and the longer run go much beyond the compass of a freshman course and show that who actually pays the corporate income tax — the owners of capital or labor — is driven by a number of factors in complicated ways that elude simple intuition.
Essentially, the smaller the economy in relation to the world economy, the more mobile capital is (and the less mobile labour is) then the more the tax falls upon said labour, not capital.
Exactly how much falls where in which circumstances is indeed debatable. That these are the factors which change that incidence is not.
So we’ve Ritchie’s (and the various other tax campaigners) usual basic problem in evidence here. If there’s a piece of economic knowledge they don’t like then they ignore it. This leads, sadly, to their proposing actions that are entirely counterproductive to their declared aims:
Worse, those developing countries that are much more heavily dependent upon corporation tax as an income source than developing countries (and that is most of them) will have that opportunity undermined because, as is still all too obviously the case, shifting profits to low and no tax states is all too easy.
In both cases the outcome of an abolition of corporation tax would be a shift of the tax burden onto those less able to pay, or the denial of services to those who really need them, and for whom they are absolutely essential.
Developing countries are, by definition, small economies in relation to the global one. And quite obviously we’re also talking about mobile capital here: it’s the multinationals they want to tax. So, we know that in such economies more of the corporate tax incidence falls upon the workers than in larger and richer economies. So, Ritchie and pals are actually advocating increased taxation of some of the poorest workers in the world: while declaring that they advocate this in order to tax capital. And they manage this feat by either being ignorant of, or deliberately refusing to acknowledge, basic economic facts.
It’s just not a great way to run a planet really.