I have promised Madsen that I won't talk about Richard Murphy here too often. And this is one of those "not too" moments for he's provided us with a target rich environment. Murphy is arguing that corporations are piling up cash, cash which they don't know what to do with. Therefore mutter mutter higher taxes!

One problem with this is that Murphy's response to everything is as with the Underpants Gnomes, "this, therefore, mutter mutter, higher taxes!". But in this instance we've a graver logical error to explain:

The first is that the tax system encourages it. In the US in particular, but in other states too, the tax system encourages profits to be recorded and retained in tax havens.

Yes, this is absolutely true. The US has one of the highest corporate tax rates in the world and US corporations do indeed park large portions of their foreign profits offshore in order not to pay it. This also means that they cannot distribute this cash to their shareholders via either dividends or share buybacks. It is indeed an explanation for why there are such large cash balances in corporates (some $1.7 trillion of the 2.8 trillion being complained about in fact).

Third, they do nothing because they have no clue what to do with their cash.

This is ascribed to their not knowing how to innovate: and I'm willing to go along with that. Innovation generally comes from new market entrants, not from established players.

So, that’s why cash is accumulating. What to do about it? The obvious answer is that we need a progressive income tax. As profits increase so should the corporate tax rate. The IMF has warned of growing inequality around the world. This cash fuels it. There is a need to tax it to reduce that inequality. The problem is, of course, that at present the cash is hidden away from tax. The answer is the one that I, the Tax Justice Network and others have promoted, which is unitary taxation. This taxes global corporations as if they are single entities, so wherever their cash is located it will be within the scope of a tax charge. Second, we may need to consider specific taxes on excess cash holdings. One of the reasons for tax is to correct market failings. It is a market failing that a corporation can accumulate too much cash because of monopoly power. An excess tax charge would correct this. The time for it has obviously arrived. Third, tax haven abuse needs to be tackled, of course, but so does the shift in corporate tax systems towards territorial taxation need to be addressed. The UK is positively encouraging this trend towards offshoring cash unproductively under George Osborne. That is absurd.

Therefore, mutter mutter, higher taxes!

Except there's that glaring error there about territorial taxation systems. As above, the majority of this corporate cash is sitting on the offshore balance sheets of US companies. And they won't bring it onshore and won't distribute it to shareholders because they would then have to pay that 35% on it. But in a territorial tax system foreign profits don't pay tax at all when they are repatriated. That's actually rather the point of a territorial system. Apple's profits in Europe simply don't get taxed by the US tax man.

So, therefore Apple can pass those profits through to investors. Who might spend it (Keynesian stimulus!) or pay taxes on their income or possibly even invest it in new firms capable of innovation.

That is, a move to territorial tax systems solves, entirely, the very problem that Murphy is complaining about. It shifts those cash reserves from the corporations who don't know what to do with it to the investors who quite probably do have an idea of what to do with it.

And yet, note, he's claiming that the solution to his problem is exactly the thing that should not be done.

Now, I've had fun over the years with various of Murphy's ideas but we must remember that he's not entirely a figure of fun. He really is trying, with his friends at the Tax Justice Network and the like, to determine how the entire international tax system should be changed. And yet he's using this sort of logic I've described above to do so.

Remember, a territorial tax system stops companies piling up profits offshore, for a territorial tax system means that they can distribute those offshore profits to investors. Therefore Murphy is claiming that we must not have a territorial tax system in order to stop companies piling up profits offshore.


Reform of the international tax system is one thing but might we ask for at least a modicum of logic in the proposals being put forward?