Could we simply scrap taxes on company profits?

The latest scandal concerning the behaviour of the Luxembourg government under Jean-Claude Juncker raises the question of whether attempting to tax company profits is doomed to failure. The tax deals offered by Luxembourg meant that multinationals could set up a one room operation in Luxembourg whose job was to lend money to other parts of the company, charge interest and declare the profits in Luxembourg where the tax rate could be as low as one percent. It is clearly immoral, even if it could well be legal.

At last week's meeting of G20 leaders, it was suggested that such practices could be limited by preventing companies from lending money and charging interest between different their different operations. But I think that as soon as you eliminate that trick, the tax optimisers will simply find some other option to take advantage of differential tax rates in different countries. And it will always be the case that a small country that can offer very attractive tax rates will be able to grab more than its fair share of the tax revenues.

I've been arguing for over four years that a sensible way to eliminate this problem would be to simply scrap all taxes on company profits, and to replace those taxes with something more intelligent - namely a simple tax on all financial transactions.

How much would countries lose in income if they were simply to scrap taxes on company profits completely? Well, to find out, I've been looking at the data provided by the OECD for 31 different countries.  You can find the original data here. I've taken figures for the percentage of total tax revenue coming from taxes on company profits since 2000 and sorted them based on the figures for 2011 (since the numbers for 2012 are not yet complete).

I find the numbers quite revealing. First, Norway manages to get around 25% of its tax revenue from taxing company profits - presumably oil. Lucky them. Other economically strong countries such Australia, Korea, New Zealand, Japan Canada and Switzerland all manage to get over 10% of their revenue by taxing company profits. But within the Eurozone countries (shown in blue), you can see that for most of them, they only get about 5-6% each. The notable exceptions are, guess what, Luxembourg and Ireland, who have both been accused of attempting to undercut the other countries. That strategy has clearly worked, because the lucky residents have managed to get 13.5% of their tax paid by companies that often have just an office and a desk in Luxembourg. Actually, that rate reached over 20% in 2002.

For me, it seems clear that, since the amount raised by taxes on profits in most European countries is actually quite modest, it might well be a good move to get rid of them completely.

Suppose that the European Union or perhaps just the Eurozone were to make that move. It would provide an obvious and much needed boost to businesses in Europe. Apart from the fact that those businesses would not have to pay the taxes (which would obviously be good news), they would also be able to forget about employing armies of tax consulatants and optimisers, making European produced goods more competitive.

A further advantage is that Europe would suddenly become a really attractive place for companies to set up their headquarters. It would appear that many big multinationals currently have hundreds of billions of profits that they are keeping off shore - simply to avoid having to pay taxes on those profits. Bring that money back into the economy!

Of course, those people who currently make their money by devising increasingly complex mechanisms to allow their employers to avoid paying taxes will have to find something more useful to do. So be it. I really have little sympathy for them.

One other group that will probably moan are the policians. For decades, they have been used to the idea that they can play the system by giving perks to their allies in the form of tax breaks. All that would be a thing of the past.

But, if you were to ask any normal citizen, or any businessman involved in trying to make a good living, I doubt that there will be many who would find it problematic if politicians had a little less room for negotiating with the lobbyists.

Of course, we will need to replace the lost revenue. But, hopefully, if you have been reading my blog you will know what we need to do. Simply put a microscopic tax on all electronic financial transactions. With over €2 quadrillion in transactions in the Eurozone, over £2 quadrillion in the UK, and a minium of $3 quadrillion a year in the USA (although the real figure could easily be several times higher), it is clear that there is enormous scope for generating revenue.  I expect that the FTT rate needed to scrap taxes on company profits may well be as little as 0.01%.

Jean-Claude Juncker  - are you listening? Will you do something to try and recover your abysmal image?