Taxation: Always and Everywhere Unfair

Chris Beam -- good friend, perfectly decent roommate -- has a Slate piece arguing that if business interests are going to attack Obama's recent corporate tax proposals, they should avoid all the complicated talk about economics -- "supply chains" and so forth -- and harp on basic issues of fairness. And perhaps they should. But here's my question about this: If by "fairness" we mean "everyone competes on equal tax footing," can a world containing many countries with many different tax codes ever be fair?

As I understand it, the fairness-based complaint is twofold. First, the American corporate tax is higher than the OECD average. (At least, the statutory rate is much higher than the OECD average, and Obama seems interested in making companies pay the statutory rate.) Second, the American tax system makes (or will make) American multinational companies pay that rate on profits they earn abroad, once those profits are repatriated to the US. Most OECD countries don't do this. And the thought is that the higher rate and wider range puts American companies at a competitive disadvantage with other multinationals.

Indeed it does. But affecting the competitiveness of firms isn't a power unique to the corporate tax. Tax burdens shift all the time. The income tax, to pick the easy one, doesn't just tax hurt wage earners: It also raises the price of labor, which makes life more difficult to firms. Taxes on an individual's dividends and capital gains will do the same. So what is uniquely unfair about a world in which corporate taxes are different, as opposed to a world in which lots of other taxes are different? Some kind of global tax empire could solve this problem, I guess, but until then it seems like unfairness will always be present.

(And yes, I understand that the corporate profits tax is silly because the profits are taxed again when they are distributed to workers and shareholders in the form of wages and dividends. But I don't think affects the argument about global tax fairness generally.)

One more point about this. Chris writes:

Businesses generally do not open factories overseas to avoid taxes. They do it for cheap labor or government subsidies or advantageous shipping routes. Take India: The corporate income tax rate for foreign companies is 40 percent. The U.S. rate for domestic companies is 35 percent. Why would an American company relocate to dodge U.S. taxes only to pay even higher ones in India?

They wouldn't. But what people worry about is companies shifting profits -- not just factories -- to avoid the high statutory rate. And unless landlocked Luxembourg has some secret shipping routes they aren't telling the rest of the world about, that's exactly what happens:

corporate profits worldwide.png