So Ritchie has this new paper that he insists shows that labour doesn’t bear the incidence of corporation tax. I maintain that the paper is actually saying that precisely and exactly because companies dodge taxes, go jurisdiction shopping, is the reason that this is so.
“In this context,
it is important to note that the reporting of profit in particular tax
jurisdictions is becoming increasingly discretionary. Truly global multinational
firms are adept at using complex chains of ownership together
with tax-motivated decisions regarding the holding of
intangible property, the structure of finance, and the transfer pricing
of intermediate goods, in order to report income where it is most
lightly taxed. If global firms separate the location of their profits from
the location of their investments and employment, then workers need
not bear the burden of the corporate tax. The firms that are adept at
shifting income face a lighter tax burden, which need not adversely
affect their workers. Whereas immobile firms behave like closedeconomy
actors, and thus they are unlikely to generate the open-economy
Ritchie tells me that this is an absurd reading of the paper:
I suspect Kim Clausing would laugh herself silly that someone could read such an absurd argument into her paper
In that context it’s only fair to say I last saw her at lunchtime
And I say:
Excellent: so you might be able to ask her about that interpretation of the paper then?
I know what she’d think of it
It’s very clear she thinks there is no empirical evidence on any basis of a link between corporate tax and labour rates
As her paper very clearly and robustly shows
What she is saying that to even attempt to link tax rates and investment and wage rates is in this case absurd
There is clearly no link to be made
And it’s even bad theory to think it exists
So, I emailed Professor Clausing, the author of the paper:
I read that as stating that precisely because many multinational firms
are “tax dodging” therefore the incidence of the corporate income tax
is not upon the workers in the form of lower wages.
I can see the logic here. If Google sells all its EU advertising from
Ireland, as it does, then the corporate income tax rates across Europe
will not affect its decisions to invest in Europe. For however many it
hires or employs, it knows that it will be paying tax in Ireland on
the revenues and or profits of such hires.
The same would be true of the various arrangements of Microsoft,
Facebook, Amazon, Apple and so on.
In wider terms, it is precisely the jurisdiction shopping that such
companies undertake that explains the lack of evidence of an impact
upon labour of the corporate income tax.
I just wanted to check that that is the implication that you are
making in this part of your conclusion?
Thank you for your email. Yes, that is the implication.
So, err, score 1 for Timmy’s understanding of the paper then. 0 for Ritchie’s perhaps.
She goes on:
It does not necessarily imply that if the dodging went away, that labor would bear the tax. (That remains an empirical question, and there is not much evidence (as I note) that K/L ratios are sensitive to taxation, which is what you would need for a large effect on labor.)
At which point I agree entirely. It *is* an empirical question, one that does indeed depend upon K/L ratios and the influence that K taxation has upon them. We also all agree, the basic theory that is being explored here, that such effects will be lower in large economies relative to the size of the world economy than in economies that are small in relation to the global economy. The data studied here is OECD stuff: by definition, economies that are large in relation to the global economy….collectively, $46 trillion of global GDP of around $70 trillion.
We would expect, whatever the effect is, for it to be larger in those smaller, developing, economies. You know, the ones where Ritchie insists that multinationals must pay their corporate taxes so as not to burden the workers?