Thoughtful people invariably seek solutions at higher levels of governance.
The frustrated volunteer supporting a food bank will call for action to address poverty by the local authority. Councilors press for action at the national level. Governments want regional organisations such as the EU to do more. And these bodies look to global institutions for salvation.
It is unsurprising, therefore, that those concerned about companies directing income to tax havens are pressing for a global solution: unitary taxation.
“(It) divides a multinational’s global profits among each country where it operates, using a formula based on real economic substance: the number of employees and the size of sales, turnover and physical assets in each place,” says Nicholas Shaxson, a writer and champion of tax justice, in an article in The Guardian today. “Unitary tax has complications – not least because there are many ways to set the formula– but it is the only rational basis for modern global corporate tax.”
Interest in the concept is growing. The British Labour Party, defeated in the UK’s December general election, included unitary taxation in its manifesto.
But can unitary taxation actually work?
Or will it founder as other attempts at global solutions have since 1945?
The UN was created to end war, the IMF to counter global depressions, the World Bank to eliminate poverty and the WTO to stop trade wars.
None of these organisations is a total failure. But none has achieved its goals either.
The main problem global initiatives face has been exposed by US President Trump.
They can’t work without the unqualified support of the world’s largest economy. And that support always comes with conditions.
In the UN, the US has a veto. In the IMF and the World Bank, it has the largest vote.
The WTO is the egregious exception to the rule of that America always matters most. Members have equal voting rights, which might explain why Trump dislikes the organisation and would pull out of it if he could.
And given that the corporations that benefit most from the existing tax system are based in the US, why would America under Trump or any future president agree to replace it with unitary taxation?
There are many more tax jurisdictions than countries. For example, the UAE has a single seat in the UN but seven different corporate tax jurisdictions. The global total probably numbers more than 1,000 and is growing.
But even if American opposition, the doubts of nations seeking to attract private investment and the defiance of tax havens themselves could be overcome, the result might be a diversion of cross-border investment into domestic bubble, speculative and unproductive assets.
The lack of tax revenue, however, is not the main problem the global economy faces.
It’s the lack of investment in tangible assets, particularly in physical infrastructure.
There is a vicious cycle at work in practically every country on earth.
Inadequate infrastructure raises the cost of doing business and often disastrously undermines constructive human interaction, the sole source of value creation. This reduces the incentive to invest in productive assets which in turn leads to lower production and employment and in the income which governments can tax.
The bad economic conditions that inevitably flow from inadequate physical infrastructure undermine social infrastructure: law and order, the courts and governance overall.
Once the core challenge is recognised, the priority is obvious.
It’s not making corporations pay more tax.
It’s encouraging those corporations to invest more in tangible assets.
Large corporations are investing almost nothing in productive physical assets.
The balance sheets of the 25 most valuable companies listed on the London Stock Exchange show that on average only 10 per cent of their assets take the form of physical items.
This pattern is repeated in every advanced economy and is being emulated by companies in emerging economies as well.
So what might be done?
The first step is to require every company doing business to have a locally-incorporated subsidiary in the economy it supplies, both for services and for goods. That subsidiary should have a balance sheet that reflects the value of sales it records in each economy.
Critically, at least half the assets recorded on every balance sheet should be either physical – equipment, machinery, stocks and buildings – or government infrastructure bonds issued to raise money to invest in roads, railways, ports, airports, water, energy and housing.
That would have increased the value of physical assets in the balance sheets of Britain’s most valuable listed companies alone by more than 2.3trn in 2018. The enormous increase in investment in physical assets would stimulate output, employment, income and government tax revenues.
In fact, it might benefit governments to cut corporate taxation on companies with more than half their assets in physical items and infrastructure bonds.
Of course, tax havens would continue.
But they mainly exist because the global economy is increasingly dominated by companies that invest mainly in intangible assets.
The havens should not be the main target.
Raising investment in infrastructure is a much better one.