The corporate tax profit shifting debate is a classic example of moral panic. First, it's incredibly complicated. How many Australians could explain how company tax is calculated, let alone what business practices a "double Irish Dutch sandwich" refers to?
Second, it's driven by hyperbolic and simplistic reports of companies paying little to no tax. These stories pivot on even more complicated scandals, such as "Lux Leaks", and the technicalities of foreign tax systems.
And third, it's wildly overstated. The best current estimates of how much corporate tax is shifted across borders is in the realm of 2 per cent to 4 per cent of total corporate tax.
It's true that earlier estimates in the 1990s were much more than that. It was those high estimates that got the Organisation for Economic Co-operation and Development interested in the issue. But the firm- and affiliate-level evidence is better now. It's pointless to scrutinise a moral panic for the clarity of its claims. But the corporate tax debate is missing the point.
As a society we don't value firms for the money the government extracts from them. We value firms because they produce goods and offer services that make us richer, our lives easier, more convenient and more enjoyable, and our standards of living higher.
We ought to design our tax system to encourage foreign firms operating and doing business on Australian shores, bringing investment and jobs. Any attempt to tackle profit shifting that raises uncertainty or lowers Australia's investment climate would be a disaster.
The corporate tax is not a good tax. As a recent Treasury paper pointed out, it is one of the most inefficient taxes levied by Australian governments. The burden of the corporate tax is scattered and obscure.
Greens leader Christine Milne has been running around this week accusing companies of not paying their "fair share". But that fair share is always and inevitably passed on to someone else. The literature on the incidence of corporate taxation suggests the burden of corporate tax is worn in the short term by investors, and in the long run by a combination of investors and workers. Of course, under our superannuation system every worker is an investor as well.
BIG, BAD BUSINESS AN ILLUSION
Few of the standard justifications for the existence of corporate tax — particularly in a small, open economy — are compelling. One fear is that company owners might divert their personal income into the company. But they'd still have to pay capital gains tax on the way out again. Another argument is that corporate tax is an easy way to get money out of multinationals. Absurd, we know.
That's why there are academic tax papers with titles such as "Why is there corporate taxation in a small open economy?" and "Can capital income taxes survive? And should they?"
For the political class, the corporate tax has one great advantage: it's unclear who ultimately pays. It's easy and comfortable to beat up on corporations, just as long as you stay mum about who actually ends up paying corporate tax. The whole system rests on this clever one-two trick. Who could sympathise with big bad business?
But even if the government wishes to keep the corporate tax fiscal illusion going, there's hope. For all the handwringing about the double Irish Dutch sandwich, one point often missed is that Ireland has been very clever. That country's low corporate tax rates have brought in multinationals, and with them jobs and investment.
It's not obvious those low rates have come at a cost to the Irish budget. Corporate tax revenue as a percentage of total revenue in Ireland is almost exactly the OECD average. There's no reason we couldn't copy the Irish example — get in on the Irish-Dutch sandwich ourselves. The Irish make their own luck. So should we.
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