The EU reaffirmed its commitment to fighting corporate tax avoidance through a statement by European Commissioner Pierre Moscovici. This should come as no surprise following recent financial scandals exposed through the Panama Papers and Luxleaks, and the ensuing international outrage towards corporations “not paying their fair share”. Yet, the push for higher corporate taxes disproportionately also affects ordinary citizens by increasing their tax burden.
Corporate tax avoidance is regularly said to be unfair to other taxpayers. Indeed, proponents of higher corporate taxes accuse multinational companies of de facto increasing ordinary citizens’ tax burden because these ones would be forced to compensate states’ budget shortfalls.
However, this artificial opposition between corporate and public interests is dishonest. When one argues corporations don’t pay taxes, the implication is that shareholders, workers and consumers are not taxed at all, which is completely untrue. All these people are taxed in various ways, including income tax and valued-added tax, among other costs imposed by national governments. The only purpose of this distinction is to push ordinary citizens to support higher corporate taxes without allowing them to realise they are the ones who are going to pay the bill.
In fact, a corporation is a legal fiction which aims to reduce transaction costs between physical stakeholders, which are shareholders, workers and consumers. Consequently, every fiscal cost imposed on corporations will necessarily be paid by these people. Therefore, as corporate taxes increase, shareholders’ dividends and workers’ salaries will decrease, while consumers will be forced to pay more for their purchases.
Let’s also remind ourselves that the shareholder, the worker and the consumer are often the same person. In our complex society, economic activity is not as separated as the European Commission wants us to think when it opposes stakeholders’, corporations’ and public’s interests. Workers are consumers. They are also savers, potential investors and shareholders, directly or through various financial intermediaries like banks, insurances, or pension funds.
Thus, governments’ desire to maintain the illusion of clearly separate functions is merely an attempt to use the old political strategy of “divide and rule.” By insisting on the distinction between “corporations” and “ordinary taxpayers,” government officials can support their discourse about the a corporate tax system which pretends itself to be redistributive while it is actually a negative-sum game.
This falsely leads citizens to believe they can increase their wealth and minimize their tax bill by taxing more multinational corporations. In reality, every form of taxation impoverishes the whole society by undermining productivity.
On the contrary, economic growth thrives with as little taxation as possible. This is precisely why tax competition is useful. By increasing the possibility for economic agents to choose the most competitive tax regimes, competition among states regulates governments’ incentives to provide a quality institutional framework.
European governments should stop misleading people about corporate taxation. Political and fiscal transparency would require the removal of taxation of legal entities and focus on physical persons. As Research Fellow at the Institute of Economic Affairs Diego Zuluaga posited: “The opacity of corporation tax may make for clever politics, as it can lead voters to support increases in taxation which they might oppose if they were aware of where the weight of the additional tax burden actually falls”.
Rather than trying to increase their revenues by reducing tax competition at the expense of their citizens, EU states, which already take and spend an average of 40 percent and 47.3 percent of Europe’s GDP, respectively, should think about reducing their size and scope of their activities to increase productivity in the private sector.