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OneWorld discusses a recent report by the international labor union ICFTU which found that Increasing attempts by governments and corporations alike to decrease the share of taxes paid by multinational companies could lead to a crisis situation for public funding in many parts of the world.

The report is entitled "Having Their Cake and Eating it Too: The Great Corporate Tax Break", and at 56 pages it makes for some serious reading to put it mildly.

One key finding from the report is that in the past 20 years, industrial countries have witnessed a 15 percent decline in the rate of corporate tax, a trend that reflects increased official backing for corporate interests. In just five years, from 2000 to 2005, 24 out of the 30 OECD countries have lowered their corporate tax rates. Only six OECD countries have so far kept their rates steady. And no OECD country has raised its rates in the period. On average, rates in all OECD countries have dropped from 33.6% in 2000 to 28.6% in 2005.

As for developing countries, where "tax havens" are created by governments to attract investment and exploited by companies often in violation of international labor standards, the amount of loss in corporate tax payment is estimated to be around $50 billion a year. In addition to securing desirable cuts in tax payments, many companies use manipulative accounting methods to avoid taxes such as "transfer pricing, income stripping, and parking of intellectual property."

Of course, there is a world of difference between tax avoidance and tax evasion, and the authors of the report seem to see both as having deleterious effects in terms of government revenues. Tax competition among jurisdictions and the creation of tax shelters may be unfair, but if legal it is difficult to complain about their existance unless one is willing to take steps to close these loopholes.

As Oneworld report:

"Dismissing the argument that tax breaks are a must to attract foreign investment, authors of the report say their research shows that in many cases companies prefer to leave "tax haven" countries after making quick profits. Every year, the money lost to "tax havens" in developing countries is six times the amount needed to ensure that every primary-school-aged child in the world could get and education"

This is a graphic illustration of how much money is lost from corporate tax revenues. But the report also argues that the timing of these developments is particularly alarming.

From the report's Executive Summary (worth reading if like most people you don't have the time or inclination to read the entire report):

 "The parallel tendencies of corporations sharpening their skills in tax avoidance and governments competing against one another in cutting corporate tax rates come at a time when economies and societies might soon need corporate contributions more than ever.

The continuing trend towards a global labour market has given capital an upper hand not seen since the industrial revolution and boosted profits to their highest level in decades. With current global labour reserves, technological developments and waves of market liberalisation and deregulation, the current context is characterised by stagnating wages and soaring profits, and the near future looks to be the same. Relying on the income and spending of wage earners to finance ever larger parts of public finances will either hollow out government budgets or lower workers' incomes.

Corporations increasingly base their success on institutional and societal competitiveness, in short the qualities of the societies they are part of, typically financed by public funds, rather than qualities they have built and developed independently of these. As a result, more and more government spending is used to enhance such competitiveness. Not just equity but efficiency considerations would suggest that corporations, not just their workers, should contribute substantially to the investments and expenditures that make them flourish.

Ownership structures of private business are becoming more international on a daily basis. This means that more corporate profits in the form of dividends escape national tax collection, and thus contribute nothing to the spending and investments necessary to maintain and extend institutional and societal competitiveness - a trend that from day one is undesirable for countries and their citizens, and in the long term even goes against the interests of the companies. If tax on corporate dividends increasingly eludes national taxation, then taxing corporate profits should surely be the first place to look for compensation.

The system of employer-provided welfare is disintegrating. From China to the US fewer and fewer employers are willing to provide health care and pensions.Welfare schemes are being scaled back and costs shifted to workers. As inequality grows, in a not too distant future governments may well have to patch up the social safety net by picking up more of this tab. That will require new public funds - and corporations should chip in their share."

The authors also argue:

"With corporate tax rates in industrialised countries falling from around 45% to 30% in a couple of decades and intensified tax competition in the new millennium, corporate tax rates are fast approaching rock bottom. Add to that the growing number of multinationals paying either no tax at all or being taxed way below statutory rates, due amongst other things to the rise of tax havens, and you might see a future where corporate profits are sheltered from having to make any kind of public contribution."

The full report addresses the following key issues:

How tax competition and tax practices drive corporate taxes to the bottom; How the increase prevelence of tax shelters facilitates corporate avoidance and evasion; How the decline in corporate taxes risks undermining future social stability;
And finally, and perhaps most importantly, the report discusses some possible solutions to avoiding a "future global tax crisis".

This is a serious issue that needs to be addressed by policymakers--and although the report is far from a balanced and complete look at all of the dynamics in play, it presents a good opening for future discussion.

Originally posted to Steven Josselson on Sun Jul 09, 2006 at 01:01 PM PDT.

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Comment Preferences

  •  Recommended! (2+ / 0-)
    Recommended by:
    redfish, slksfca

    This issue is so important.

    I am a small businessman, and I am just floored by the support of the small business community for people that are slashing corporate responsibility in terms of taxes.

    Rates were in the 50 percentile in the US in the 1950s. Now what are they, 17% I think.

    Small business people are putting themselves out of business voting for rhetoric instead of looking at the results.

    So sad.

    Great piece.

    Ignore the base, hide our values, and chase the swing voter and we not only lose, but we fall farther behind.

    by k9disc on Sun Jul 09, 2006 at 01:04:50 PM PDT

    •  And that doesn't account for the (1+ / 0-)
      Recommended by:
      bigchin

      externalized costs to society, such as pollution, food stamps for underpaid/underemployed workers, unemployment compensation after the factories move on to the next tax haven. And more, I'm sure.

      Steven: could you add a couple of the suggested solutions to avoiding a "future global tax crisis"? For those of us who don't have the time to read the whole report?

      Thanks for diarying this.

  •  The small business (and even large ones) (2+ / 0-)
    Recommended by:
    Halcyon, bigchin

    have a lot of options in avoiding corporate taxation:

    Subchapter S corp
    Limited Partnership
    General Partnership
    Limited Liability Company
    Limited Professional Partnership

    It's primarily huge business that pays the corporate tax.  Given that they are no longer truly run for the benefit of their shareholders (instead run for the benefit of insiders and management), I am in favor of beating the daylights out of them with the tax stick.

    We should put Eliot Spitzer in charge of straigtening them out tax-wise, Spitzer will **** their **** up.

    "When the going gets weird, the weird turn pro" - Hunter S. Thompson (RIP)

    by redfish on Sun Jul 09, 2006 at 01:18:08 PM PDT

  •  Critical issue (2+ / 0-)
    Recommended by:
    opinionated, bigchin

    As a Social Security and pension specialist, I have been talking for a while about restructuring the revenue stream for the US retirement system, both public and private, so as to properly tax multinational corporations for their share of the responsibility of caring for this nation's elderly.  Of course, corporations will continue to dump their responsibilities to their employees with respect to private pension plans, mainly because there are no unions to stop them, in most areas.  The answer to providing income security in old age (regardless of whether retirement at any fixed age is maintained into the future, a different topic) may be a beefed up mandatory Social Security system financed not, or not solely, through payroll taxes (although benefits can still be based on earnings records) but through real corporate taxes on multinationals.  

    Of course, the argument against this will be that such companies will immediately restructure to avoid any nexus with the US under international tax principles.  I think a world wide regime that allows these companies no place to hide will be imperative over the next couple of decades - not just for tax revenue purposes, but also if we have any chance of regulating industrial environmental bad actors.

    Great diary.
  •  Another sign to worry about, (0+ / 0-)

    as reported in the NYTimes a week or two ago, is the rise in excessive executive salaries, especially in Europe.  Even now, European CEO's are not likely to be making 200x's an average worker and their compensation has historically been reasonable by US standards.

    Not any more.

    Wish I had a link...

    "...history is a tragedy not a melodrama" - I.F. Stone

    by bigchin on Sun Jul 09, 2006 at 02:25:22 PM PDT

  •  Does it make a difference? (0+ / 0-)

    I mean, money circulates in the economy and we have to intercept some of it for our common needs -- education, NSA etc.

    Given that corporation have

    (a) huge abilities to move revenue and profits around

    (b) huge abilities to lobby for special tratment

    taxing corporation is hard.  When the corporate tax rates are high, billions flow into politics to secure favors for this industry or that or to keep abusive tax shelters legal.  Wouldn't it be simpler to

    (i) settle on a low tax rate and simplify the corporate tax by closing "all lopholes" (easier said than done, but close a lot of them in any case)

    (ii) to make up for it, first, increase top rates of the individual tax; mind you, it is MUCH harder for individuals to live on Cayman Islands than for corporations

    (iii) add regresivie carbon tax and extra hydorcarbon tax (carbon for global warming, hydrocarbon for scarcity)

    (iv) balance once again by universal health benefits and subsidies for energy savings.

    In summary, increasing fuel taxes and slashing corporate tax would be regressive, individual income tax, health and energy saving benefits would be progressive.

    One explanation: the idea is that if we help low income people to use only half of the fuel than before and double the price, they are rougly no better and no worse off, but the planet gains (and so people less attacked by heat waves, hurricanes etc.)  Proportions of that change can be debated but the principle is simple.

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