‘The greatest treason”, suggested TS Eliot in Murder in the Cathedral, is to “do the right deed for the wrong reason”.
That feels like a description of the corporate tax reform plan being pushed by Republicans in the US Congress, as they hope to win the backing of the freshly-installed President Donald Trump.
For the plan’s main Republican sponsor, Kevin Brady, the objective seems to be kicking the ass of the rest of the world. Brady wants to create a system “that doesn’t favour foreign products over American products” and has described the reform as a way of levelling the playing field for US exporters who are, he claims, currently being subject to outrageous discrimination through the Value Added Tax systems of foreign countries, including Britain. Talk about the “wrong reasons”.
The idea that there is foreign discrimination against American exporters through VAT – something also believed by Trump’s economic advisers – is nonsense.
This charge is based on a fundamental misunderstanding of how a VAT works.
Furthermore, there is also zero reason to expect this particular corporate tax reform to give American firms any kind of lasting advantage when it comes to exports.
Indeed, we find ourselves in the paradoxical situation where a reform being presented by deluded right-wing American politicians as a way of sticking it to cheating foreigners actually represents the world’s best chance for lancing the boil of rampant tax evasion by multinational companies.
It is the right thing being pushed for the wrong reasons. To understand why, we need to look at the plan in more detail. The Republican plan would replace the US corporation tax, an annual levy on a firm’s reported profits, with a new levy on a company’s domestic cash flow.
It means taxing a company’s domestic sales at a certain rate, probably 20 per cent, after it has subtracted its domestic costs such as workers’ wages and the amount the firm has spent on investment in new factories and equipment.
The objective would be to tax a company’s economic activity in America, which means that it would be able to reduce its tax bill by the value of its exports, while imports would be part of its taxable liability via a “border adjustment tax”.
That probably sounds mind-numbingly complicated, but the principle is actually quite simple: it means taxing the firm’s value-adding and substantive economic activity in the country where that activity actually takes place. This is most people’s idea of what a tax on corporate income is supposed to do. Many have objected that US firms that import heavily will be placed at a major tax disadvantage.
Yet this impact would be entirely offset by a rise in value of the US dollar, which would follow the implementation of the reform, and which would increase the purchasing power of importers proportionately.
And for all Brady’s rhetoric and the protectionist-sounding border tax, the effect of the reform would actually be neutral on America’s terms of trade with the rest of the world.
But the great advantage of this reform is that it would eliminate the incentive for multinational firms to dodge their US corporate taxes through accounting tricks, such as registering profits at subsidiaries abroad and relocating their corporate headquarters to tax havens.
No matter where they based their headquarters, multinationals would be liable for a hefty US tax bill if they sold plenty of products and services in America. And if America, the world’s largest economy, were to institute this reform, there would be a powerful incentive for other countries – including Britain – to implement a similar reform.
Everyone who complains about multinationals making massive local sales but paying negligible local corporation tax – everyone from Theresa May to UK Uncut – should be hoping that Congress adopts this legislation, and that our own Parliament emulates it.
There are, it is true, potential transitional snags: Some believe that the unilateral reform of US corporation tax in this way would open America to a potential legal challenge for breaking the rules of the World Trade Organisation. The impact on income inequality is unclear, although there is no compelling reason to believe that it would be any more socially regressive than the existing corporation tax. This reform would certainly present some risks, some potentially hazardous financial side effects.
Yet there are also risks in trying, in vain, to patch up the current loophole-ridden “source-based” corporate tax system, which Mike Devereux, the UK tax expert whose proposals have heavily influenced the Republican plan, and who first proposed the reform back in 2001, describes as “fundamentally broken”. There are political risks in failing to respond effectively to widespread and justified public anger over flagrant multinational tax dodging by the likes of Apple, Google and Amazon.