Wednesday, 22 May 2013

Lessons from Apple's Tax Avoidance

The scandal of the day is that Apple has been using a hostof tricks and loopholes in order to avoid paying tax on its enormous global profits. Naturally, everyone’s using this as a chance to draw their own preferred policy conclusions. Matt Yglesias is hardly alone in suggesting that it’s the US corporate tax code that’s the problem. But it’s hard to see a future in which the US tax code isn’t a problem – and that’s an important fact to consider when taking a step back and looking at corporation tax more broadly.

The government needs money to pay for roads, police, schools, hospitals and pensions. That money has got to come from somewhere, and as a democratic society we have to make decisions about how much of that money should come from the rich relative to the poor. We also have to make decisions about how to actually collect that money.

Mitt Romney got a lot of stick for his infamous comment that ‘corporations are people’ and yet he and his detractors were actually making much the same point. Apple is not a person, and as such it can’t pay taxes. When the government taxes Apple it doesn’t take money away from Apple the corporation. It takes money away from Apple’s shareholders, who own those profits.*

This makes corporation tax a roundabout way of taxing rich people. Another way to tax rich people would be to take money from them directly. The appeal of corporate taxation as a way of getting at rich people’s money is that, if it’s not too distortionary, it might be easier to do and harder to avoid than if we tried to tax rich people directly. Clearly, though, the Apple fiasco suggests that, in a globalised world, it’s really really hard to squeeze money out of corporations. And Yglesias' followup echoes Derek Thompson in hitting the nail on the head – we’re never going to be able to effectively tax corporations. So what’s the point in doing it if it would be easier just to go straight after the rich people?

Sidenote: There is one side benefit of corporate over individual taxation – individual taxes apply only to people living in your country, whereas corporation tax allows the government to get revenue from rich foreigners’ investments as well. If your aim is to squeeze the most money out of foreign shareholders, though, the best strategy is to set your corporate rate low, Ireland-style, so that lots of foreigners redirect their corporate tax liabilities to your country.

*To make things simpler, I’m going to make the heroically generous assumption that the incidence of corporate taxation falls entirely on shareholders and not on workers etc.


  1. The 'not on workers' (and consumers) is too big an assumption to let slide, it scrambles the picture.

    The Apple 'scandal', though, sheds light on something more fundamental. The world market is semi-globalized, corporations run wild across (some) national borders. Yet the world is governed by national states with territorial bounds.

    An increasingly globalized world is not compatible with continued national governance in the long term. Either the governments must internationalize, or they must restrain the range of corporate activity, in order to function.

    Libertarians who call for unlimited cross-border free trade and travel, and rail against the idea of a world state, are being incoherent, the one leads naturally to the other. If one values national sovereignty, and also support unlimited, unrestricted global free trade, one is also being incoherent, they are not compatible long-term.

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