LONDON (Reuters) - As western politicians consider moves to clamp down on corporate tax avoidance, some conservative economic thinkers say the damage done by avoidance is overstated and any remedies are more likely to do economic harm than good.
Revelations that companies including Apple Inc (AAPL.O), Google Inc (GOOG.O) and Amazon.com Inc (AMZN.O) have shielded billions of dollars in profits from taxes by using tax havens have ignited a public debate on the issue.
But those who have long argued that taxing corporate income discourages investment and job creation say the current drive to extract more tax from companies is a step in the wrong direction and will prove only temporary.
“It’s a tax on growth, it’s a tax on success, it’s a tax on employment,” said Tim Knox, director of right-leaning think tank the Centre For Policy Studies.
“While we may have lost the public argument for the time being, the intellectual argument is actually even more in our favour. The system is unsustainable,” he added.
Knox said the complex arrangements employed by Apple and others showed how multinational corporations could get around any tax rules. So rather than waste resources trying to tackle avoidance, governments should cut corporate income tax rates further or abolish the tax altogether.
Ben Southwood, researcher at the free-market Adam Smith Institute, said companies avoiding taxes did not hurt the economy, but rather, gave it a boost.
He said lower tax bills contributed to lower prices for consumers, higher wages for employees and higher returns for shareholders, which could be spent in the economy or reinvested.
“The question we need to ask is, ‘Would the government have spent that money better?” Southwood asked.
Such views are anathema to those who think businesses should pay taxes to help fund the public goods and services, such as roads and the rule of law, that they enjoy.
Taxes also help pay for the state-funded consumption - such as direct purchases of goods or the stoking of demand through welfare payments - that helps drive corporate profits.
Tax campaigners, some economists including Nobel prize winner Paul Krugman and some businessmen such as investment guru Warren Buffett, also question the link between business tax rates and investment.
Indeed, while Britain has recently cut its main corporate income tax rate sharply - it was 28 percent in 2010 and is set to fall to 20 percent in 2015 - UK business investment has underperformed peers that have not cut their rates, data from Eurostat shows.
Gross fixed capital formation for non-financial corporations, a measure of business investment, rose only 2 percent in the UK between 2010 and 2012, against 8 percent for the whole European Union, where tax rates remained stable.
“Any model you have for corporate investment would have predicted a higher level of corporate investment than you’ve had in the last couple of years,” said Richard Woolhouse, head of tax and fiscal policy at business lobby group the CBI.
Woolhouse said the financial crisis was to blame and was optimistic tax cuts will spur a rise in UK investment, in time.
Chris Wales, a former tax advisor to Gordon Brown when he was Britain’s finance minister, said looking for clear statistical evidence of a link between investment, job creation and business tax rates was problematic because economies are so complex.
“Do higher corporate tax rates put off FDI (foreign direct investment)? Well, there doesn’t appear to be a lot of immediate evidence, but you maybe wouldn’t see that anyway,” he said.
Wales said the reason why political parties on the right and left in the United Kingdom had supported lowering taxes on business was because they found the economic theory compelling.
“In the end, politics has to take some account of the underlying economics,” he said.
Cuts in the headline rate and increased avoidance contributed to a 21 percent drop in UK corporation tax payments by large companies between the 2000/2001 and 2011/12 tax years, the most recent period for which figures are available, despite a big rise in profits over the period.
Nonetheless, big companies - those with annual profits of more than 1.5 million pounds - still paid 21 billion pounds in corporation tax in 2001/12. This is almost 5 percent of total tax receipts, an amount any cash-strapped government would be reluctant to give up, even if it believed that in the long term, doing so would spur growth.
Some free-market thinkers say short-term financial constraints are why governments should, and indeed do, tolerate tax avoidance.
Philip Booth, programme director at the Institute of Economic Affairs think tank, said international companies, which have a choice of where to invest, were likely to be most sensitive to tax rates.
Hence, governments could preserve tax revenue, and encourage investment, by targeting tax cuts at these more mobile companies. Since discriminatory tax practices are usually not lawful, the practical way to levy different taxes on mobile and immobile firms was to turn a blind eye to a multinationals shifting profits into subsidiaries in low-tax jurisdictions.
“Tax havens allow a country to allow corporations with mobile capital to get away with a lower corporate tax rate, whilst not applying that lower corporate rate to all the companies with immobile capital, which may seem unjust, but there is a logic to it,” Booth said.
Others argue such preferential treatment is damaging.
The British Retail Consortium lobby group said last week it was forming a body to press for changes in the corporate tax system, which executives said unfairly favours online players like Amazon and eBay Inc (EBAY.O) and contributed to the collapse of a number of domestic retail chains.
Michael Devereux, director of Oxford University’s Center for Business Taxation, said that irrespective of the economic arguments for or against cutting corporate tax rates, a country’s approach to taxation was often dictated by what its neighbours and peers did.
The major reason for plummeting corporate tax rates over the past 30 years was competition between countries for mobile investment, he said.
Since this international game shows no signs of abating, Devereux, who recommends a shift to turnover-based business taxation, predicts any political mood to increase the tax burden on companies will likely soon wane.
“You have to be lower than the other guy,” Devereux said. “The general direction is downward.”
Editing by David Holmes