How to solve the corporate tax problem – Taxes –

11 Nov

This tendency of MNCs to find complementary loopholes among countries harkens back to the pre-globalization era, when multistate companies would shift operations to the lowest-tax states. The race to the bottom of tax revenues was relieved when states pooled their collective bargaining power to create more consistent tax rules.

To end the race to the bottom, states adopted a new approach to taxation. Known as formulary apportionment (FA), companies divide their total tax burden among host states based on the percentage of sales (and sometimes payroll and property) located in each state, rather than on the elusive headquarters’ location. The apportionment approach increases simplicity (which businesses love) and increases tax revenue (which governments love.) That’s what we call a win-win.

Of course, firms would not be happy with the change if it increased their tax burden. A shift to FA could be paired with lower tax rates to be revenue neutral, so America would no longer have the highest corporate tax rate. Policies designed to be revenue neutral, however, should err on the side of the Treasury, especially if we truly want to reduce the deficit.

The best global scenario is for all countries to adopt apportionment, so that MNCs would have one general tax rule to follow, rather than the current system where MNCs have different rules for every country in which they operate.

In the short term a truly global policy is unlikely. But the EU is now considering moving to apportionment, creating an opportunity for the U.S. to collaborate with Europe.

via How to solve the corporate tax problem – Taxes –


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