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The developed world is increasingly facing a funding crisis brought on by this propaganda that if we tax corporations and the very wealthy then they'll leave.
by jmyeet 1y ago
The developed world is increasingly facing a funding crisis brought on by this propaganda that if we tax corporations and the very wealthy then they'll leave.
One of the most farcical examples of this is the decades-long race to the bottom on business taxes and incentives between Kansas City, Missouri and Kansas City, Kansas. For the non-Americans out there, this is basically one city but it sits at the border of two states. So the two states are constantly torching money to lure businesses that play this system and simply go back and forth.
I believe this situation will come to an end and there are several reasons for this:
1. For the EU in particular, reliance on US tech giants is increasingly becoming a security issue. The Eu will increasingly wants homegrown alternatives so the option of leaving will simply not exist because you could leave but then you lose the EU as a customer;
2. For a long time multinational companies used transfer pricing to avoid paying taxes. What's transfer pricing? Let's say you buy a sofa in China for @200, ship it to the US for another $200 and then sell it for $1000. You've made a gross profit of $600. What if instead you have a subsidiary in Vanuatu, which has no corporate income tax (AFAIK), and it buys the sofas for $400 and sell them to the US company for $950? Well, you've booked $550 in profit where there's no tax and only $50 profit where there is.
That's technically illegal. It's often-called transfer pricing manipulation.
So what do tech giants like Google do? They sell their IP to an Irish subsidiary. There's a nominal process to make sure this is done for a "fair" value (according to the IRS). Then they pay royalties to their own Irish subsidiary to shift profits to a lower tax regime. Previously, this created a problem because they couldn't repatriate the money without paying (then) 30%+ corporate taxes but this all changed in 2017 with a tax holiday and a change to how this kind of income was treated. The net result was way lower than 30% net tax however, even with Biden's 15% minimum tax (which was a good thing) that came later.
What's the difference between this kind of profit-shifting with IP and transfer pricing manipulation? Absolutely nothing, except one is illegal and one isn't.
3. Revenue will increasigly have to be taxed in the source country. For example, Google I believe books all UK ad contracts through Ireland such that the UK subsidiary has essentially zero income to tax. I believe governments will increasingly crack down on this such that if something is sold in the UK, it's taxed by the UK; and
4. While individuals may be able to notionally "leave", assets generally can't. Land can't be moved overseas. Natural resources that are mined or fished or logged can't be moved overseas. So it's really an empty threat.
I'm really sick of this "the businesses will leave" propaganda.
- lotsofpulp 1y ago>3. Revenue will increasigly have to be taxed in the source country. For example, Google I believe books all UK ad contracts through Ireland such that the UK subsidiary has essentially zero income to tax. I believe governments will increasingly crack down on this such that if something is sold in the UK, it's taxed by the UK; Wasn’t this only a thing while the UK was in the EU, because the EU expressly allowed it?
- refurb 1y ago> I'm really sick of this "the businesses will leave" propaganda. I don't think anything you've said convinces me it's propaganda. Businesses are profit-seeking ventures. They will optimize their operations to maximize profits. So I'm not sure why you'd call it "propaganda" to say that companies will leave. I think the evidence is that they will. Of course, taxes are not the only variable in a profit-maximizing formula. US companies aren't going to flee in mass if Somalia decides to have zero corporate taxes. But you can't ignore that companies will optimize their operations and structure if they can lower taxes.
- croes 1y agoThe US have something similar just for citizens and greencard holders https://www.greenbacktaxservices.com/knowledge-center/exit-taxes-us/ https://www.greenbacktaxservices.com/knowledge-center/exit-t... So should greencard holders flee the US before they become too rich
- tomcam 1y agoClear explanation, thanks. Seems that many companies have moved from California to Texas or Tennessee. Am I wrong?
- jmyeet 1y agoYou're not wrong. The reasons why come down to really one or more of these factors: 1. To lower labor costs. For example, the Big 3 auto makers are unionized. Tesla's manufacturing isn't. Guess who earns more? [1]; 2. Deregulation. Some things (eg polluting) are way easier to get away with in Texas than, say, California; 3. To shift the tax burden from the owners to the workers. Texas famously has no state income tax. It does have sky high property taxes though. Property taxes are a super regressive tax; 4. For the politics of the owners; and 5. Other miscellaneous reasons. For example, Texas is about the absolute worst place to get divorced for a spouse who is a parent and isn't the primary income earner. Why? Texas courts won't let you move out of state with the children [2] and child support will be severely capped [3], even if, say, the other parent is a billionaire. [1]: https://www.businessinsider.com/tesla-pay-vs-ford-gm-uaw-union-factory-workers-2024-2 https://www.businessinsider.com/tesla-pay-vs-ford-gm-uaw-uni... [2]: https://www.thetxattorneys.com/child-custody/relocation https://www.thetxattorneys.com/child-custody/relocation [3]: https://ondafamilylaw.com/what-is-the-maximum-child-support-in-texas/ https://ondafamilylaw.com/what-is-the-maximum-child-support-...