What a strange way to tax corporations


We've found over the years that Sir Simon Jenkins is generally sound on the subject of civil liberties. But he's a great deal less assured when it comes to the subject of economics. A pity, because he has decided to tell us all how corporations should be taxed: clearly within the purview of the economic way of thinking. He tells us that:

The answer is clear. Companies should pay corporation tax on the basis not of their headquarters or research base or place of origin.

They should pay on the proportionate spread of their sales. Likewise, individuals should pay tax to the country where they live or whose citizenship they enjoy – as is the case with most Americans.

That companies should pay on the basis of their sales is one of those Chesterton's Fence problems. Why doesn't the system work that way already? Because it has been considered and rejected, that's why. Such a system would mean that the company that made on single overseas sale would then need to file a full corporate tax return according to the rules of that country. This is not something that is likely to increase trade among small companies. And that's why the system is as it is.

It's entirely possible that it's not quite right in detail, but the current system operates on the basis that if you've a permanent establishment in a tax jurisdiction then you do indeed file a local return. And a permanent establishment, while it's not perfect, is used as a proxy for the corporation being a large enough actor in that local economy that it should be filing a tax return in it.

A business that one of us was once involved in once made a single sale of $6,500 gross value into India. The only sale into that country in a decade of operation. No sensible tax system is going to demand an Indian tax return on that basis, is it?

Sir Simon's suggestion also flies into the very face of the basic underlying rules of the European Union's Single Market. All companies are equal, from whichever jurisdiction, and may sell from any one EU country into any and all others.

Finally, look at the underlying idea. People buy things because they make them better off, by their own lights. The point and purpose of having an economy at all is to maximise this, to maximise peoples' opportunity to maximise their utility. We thus say, well, you, Mr. Johnny Foreigner, you have just made some of the residents of our country better off. Hmm, we'll have to fine you some tax for having done that you know.

Just not a sensible logical basis for taxation, is it?