If taxing equity-holder-owned corporations does not work, what does? May 21, 2013 at 5:14 am

David Cameron has finally* written to the Crown Dependencies asking them to buck up their game on international tax. I don’t have high hopes. Many of these places have based their business models on secrecy, tax avoidance, and perhaps even the whiff of money laundering. Asking them to help the UK get its rightful tax revenue is roughly equivalent to asking them to hand back a substantial fraction of their GDP. We can achieve something here, of course, but it is going to take something more coercive than a letter to get it.

Let’s be optimistic, though, and say that Cameron, perhaps as part of a G-20 initiative, succeeds. So what?

Chris Dillow makes a fascinating, and provocative observation, observing that a new paper finds that, in Germany:

a 1 euro increase in [corporate] tax liabilities yields a 77 cent decrease in the wage bill.

In other words, companies just pass over three quarters of their new tax burden on to workers. Dillow then asks if taxing profits is infeasible, what policies would increase equality? One of his answers is radical:

Another possibility is … to abolish capitalism and profits. Granted, nationalizing companies so that the state can grab their profits might be like buying an airline to get free hot towels. But I suspect that worker-owned firms would provide a more stable tax base than profits do now. If workers owned firms, they could no more enrich themselves by shifting the burden of profit taxes onto workers than they could by moving their wallets from their left-hand pocket to the right-hand one.

Now, this really is left field, but I do like his thinking. Certainly the proposition that key service providers, like google, or vodafone, or the banks, should be in private hands is by no means proven. We could even nationalise them by issuing tracking stock that grants a share in their profits, like a share, but with no voting rights. What equity investors mostly want, after all, is a share of profits; companies routinely ignore their wishes anyway, so having the government in charge would not materially affect things. Indeed, you could simply change the legal nature of what a share is without having to buy anything: Marxism by corporate finance reform. It will never happen, of course, but that doesn’t stop it from being a good idea.

*I was far from the first to agitate about this, and my post was over four years ago.

7 Responses to “If taxing equity-holder-owned corporations does not work, what does?”

  1. “a 1 euro increase in [corporate] tax liabilities yields a 77 cent decrease in the wage bill.”

    Doesn’t this argue against nationalization? If corporate owners were collecting economic rents (in the form of monopoly power or otherwise) than wages should be quite inelastic with regards to taxes on capital. On the margin a rentier is quite insensitive to cost. Increasing taxes on a rentier should have virtually no effect on the scale of his enterprise since he’s earning excess profits regardless. Hence the marginal cost of taxes should not affect labor.

    In contrast if most corporate profits represent compensation to returns of capital we’d expect something different. Since capital, unlike rents, is elastic we’d expect a marginal increase in taxes to affect both corporate owners and workers. Since capital is probably more elastic than labor (for various common sense reasons), we’d expect workers to bear most of the economic cost of increased corporate taxes.

    Since this seems to be what’s occurring (at least in Germany over the time period), then this implies that there’s no “free lunch” to be had from nationalization. Rents can be re-distributed from owners to workers/taxpayers. But capital costs must be borne regardless of public or private ownership. Meaning workers/taxpayers don’t gain anything by nationalization.

  2. I like the share as “share in profit” – right now it’s more of a Milo Minderbinder’s “everyone has a share” in Catch 22.

    Re corporate tax – I say abolish it, and tax cash and cash equivalents (=highly liquid assets). And dividends at the source @highest personal tax rate but that the tax paid can act as tax credit where individual tax payer is in the lower bracket (pass-throug for investment funds).

  3. Maybe the “state” should stop wasting so much money

  4. Entrepreneurship, and invention, are the foundations of the great edifices of wealth; the article’s vision has no place for them. A system, structured as envisioned, would not simply fail to encourage the inventive, it would squelch them. (call my view of government’s tolerance for original thought cynical, if it pleases you)

    I see “equality” enters the picture, halfway through the post – Ahh! So, we’re talkin “social justice” here ! I see.. despite some equality of opportunity, we must, perforce manipulate the rules to ensure equality of outcome !

    Consider this: a perfect state of equality of outcomes is an inherently unstable equilibrium; the least perturbation will disturb it. I don’t see how you design a system of governance which is not at least a bit robust…

  5. I found it a little amusing that he wants progress on the issue of “tax information exchange and beneficial ownership” from the Crown Dependencies and British Overseas Territories. There is no information anywhere on the beneficial ownership of private limited companies in the UK. Even the companies themselves do not have to have any idea who the actual owner is. The Crown Dependencies all make maintaining this data a requirement.

    Added to that, the UK refuses to regulate company formation in any way (unlike the Crown Dependencies), and has adopted the position for the purposes of money laundering enforcement that, provided the money laundering doesn’t start until after the corporate service provider has transferred ownership of the shell, the CSP is completely off the hook.

  6. What is the mechanism by which increased tax rates is supposed to lead to reduced wage rates?

    If we think of an individual,profit maximising firm,where the only thing that changes is the tax rate, then it has no reason to change its wage rates. It will still be maximising pre-tax profits, which is what its objective will be (if we assume that tax rates are exogenous).

    Longer term, other issues might come to play. One is that the tax increase will reduce overall demand in the economy and hence the demand for labour.

    Another is that the increase in corporate tax rate will reduce investment and hence the demand for labour.

    These do not strike me as obvious channels, so would welcome other people’s thoughts.

  7. @james c

    “What is the mechanism by which increased tax rates is supposed to lead to reduced wage rates?”

    The following is a pretty good analysis of the economic theory behind corporate tax incidence.