Emmanuel Saez on Multinational Corporations - Dictionary of Arguments
Saez I 115
Multinational Corporations/Saez/Zucman: Down the path of tax competition, tax injustice will prosper and inequality will keep rising. >Tax Competition/Saez/Zucman.
Fortunately, there are other, equally feasible paths. Halting the spiral of tax competition is possible: it is anything but utopian to expect that big multinational corporations will pay a decent amount of tax soon. An effective action plan has four pillars: exemplarity; coordination; defensive measures; and sanctions against free riders.
Def Exemplarity/Saez/Zucman: each country should police its own multinationals. The United States should make sure that US companies, if they don’t pay enough abroad, at least pay their dime in America.
Example: Imagine that, by shifting intangibles and manipulating intragroup transactions, the Italian automaker Fiat had managed to make $1 billion in profits in Ireland—taxed at 5%—and $1 billion in Jersey, one of the Channel Islands—taxed at 0%. There’s a problem here: Fiat pays much less tax than it should; much less, in particular, than domestic Italian businesses. We call this a tax deficit. The good news is that nothing prevents Italy from curbing this deficit itself, by collecting the taxes that tax havens choose not to levy. Concretely, Rome could tax Fiat’s Irish income at 20%. It could tax its Jersey bounty at 25%. More generally, it could easily impose remedial taxes such that Fiat’s effective tax rate, in each of the countries where it operates, equals 25%. Such a reduction of Fiat’s tax deficit would not violate any international treaty. It does not require the cooperation of tax havens.
Saez I 116
This seems like a mundane tax administration issue until you realize that, thanks to this rich new information source, it has never been easier for big countries to police their own multinationals. The United States, France, Italy: any country could ensure its corporate champions pay a minimum tax rate of say 25% wherever they operate. Policing multinational companies this way would bring large sums home.
Saez I 117
Is it realistic to expect big countries to start policing their multinationals in the foreseeable future? Very much so, for it is in their interest. Unlike trade, tax
Saez I 118
competition makes some countries win and others lose, and all large economies are in the losers’ camp. They have a clear incentive to stop this shell game. (...) small countries that apply tiny tax rates collect a lot of corporate income tax revenue as a fraction of their national income. (...) because almost all multinational companies are headquartered in large economies, lawmakers in Rome, Berlin, and Washington can whistle the end of the game by collecting remedial taxes on profits booked by their multinationals in low-tax countries.(1)
Saez I 119
Problem: A mutually agreed minimum tax among G20 countries would not solve all the problems. Companies could still dodge taxes by moving their headquarters to tax havens.
Saez/Zucman: (...) the danger is exaggerated. For all the talk about tax inversions, very few firms have moved their headquarters to tropical islands. Among the world’s two thousand largest companies, only eighteen are headquartered in Ireland, thirteen in Singapore, seven in Luxembourg, and four in Bermuda today.(2) Close to a thousand are headquartered in the United States and the European Union, while most of the others are to be found in China, Japan, South Korea, and other G20 countries. >Tax Evasion/Saez/Zucman.
Saez I 125
Solution: With a high enough tax floor, the logic of international competition would be turned on its head. >Globalization/Saez/Zucman.
1. The 2018 US tax reform introduced an embryo of remedial taxation with its GILTI (“global intangible low-tax income”) provision. According to this rule, the foreign profits of US multinationals deemed abnormally high (that is, exceeding a 10% return on tangible capital) are taxed at a minimum tax rate of 10.5% in the United States. However this provision is insufficient for two key reasons: the 10.5% tax rate is too low, and the remedial tax does not apply on a country-by-country basis but on a consolidated basis (which means that a company that books profits in Bermuda but pays high enough taxes in Japan can avoid it). See Toder (2018) for more details:
Toder, Eric. “Explaining the TCJA’s International Reforms.” Tax Policy Center, Urban Institute and Brookings Institution, February 2, 2018.
2. Forbes. “GLOBAL 2000: The World’s Largest Public Companies.” May 15, 2019. Available at www.forbes.com/global2000_____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.