Forbes contributes to the international tax debate by imagining a world without corporate taxation

The International Centre for Tax and Development has recently published a paper by Sol Picciotto which asks if the international tax system is fit for purpose, especially for developing countries (hat tip: Tax Justice Network blog).

The main message of the paper is that there are fundamental flaws in the current international tax system which are exploited by multinationals to minimize their tax bills, for example by profit-shifting through internal transfer prices and using tax havens. It then proposes better alternatives to the current Arms Length Principle system, particularly Unitary Taxation with formula apportionment.

Forbes online has since published an article by Tim Worstall titled “Before You Reform the International Corporate Tax System You Really Need to Understand the One We´ve Got First” in which he claims that the Picciotto paper “fails, and fails badly, when discussing the economics of corporate taxation” and that “the best thing that such developing countries could do is to simply abolish corporation tax altogether.”

Worstall’s main argument is that “A correct understanding of the economics of “tax incidence” would show us that far from wanting to ensure that multinationals working in developing economies are charged more tax, we want them to be charged less.”

It goes on to claim that “This is the basic and standard analysis of the incidence of taxes upon the returns to capital.”

Let’s start by taking a look at that wikipedia link on tax incidence which Worstall kindly provides. Far from supporting his argument, it says that:

“The theory of tax incidence has a large number of practical results, although economists dispute the magnitude and significance of these results


“Most public finance economists acknowledge that nominal tax incidence (i.e. who writes the check to pay a tax) is not necessarily identical to actual economic burden of the tax, but disagree greatly among themselves on the extent to which market forces disturb the nominal tax incidence of various types of taxes in various circumstances.” (bold added).

The Forbes article then moves on to provide a theoretical example (“imagine, just imagine as an example”) in which after taxation is introduced “some of the investment in that country will leave it for better returns elsewhere” and also “foreigners reduce their incoming investments and invest elsewhere ”

In the real world, according to the United Nations Conference on Trade and Development, foreign direct investment doesn’t flit around the globe in search of the lowest corporate tax rates, but responds to the following factors :

“large domestic markets, availability of natural resources, an educated labor force, low labor cost, good institutions (the clarity of country’s law, efficiency of bureaucracy and the absence of corruption), political stability, corporate and other tax rates among others“. (bold added)

An educated (and healthy) labour force, good institutions and things like infrastructure all require large amounts of public expenditure via taxation. And as Picciotto notes: “…corporate income tax revenue accounts for an average of 8-10 per cent of the tax take in developed countries, and generally double that percentage in developing countries. Ending corporate taxation would mean either enormous cuts in public expenditure or large increases in taxes on individuals.”

At no point does the Forbes article engage directly with the main arguments and recommendations in the Picciotto paper; it goes on to make some bizarre connections between the size of an economy and its profits tax rate (“The implication of this is therefore that a large economy, like the US, can have a higher profits tax rate than a small one like, say, Estonia”). I suppose if your theoretical model leads to the conclusion that corporation tax should be abolished, you no longer need to bother with improving the international corporate taxation system.


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