How Should Multinationals Be Taxed?

By Theo Vermaelen, Professor of Finance and The Schroders Chaired Professor of International Finance and Asset Management at INSEAD

The recent attack on the tax policies of corporations becomes close to ridiculous when politicians argue that companies that try to avoid taxes (legally) are "socially irresponsible" and "immoral."

The people interviewed in the recent INSEAD Knowledge piece How Should Multinationals Be Taxed are disproportionally representatives of the political left: two socialist politicians (Fleur Pellerin from France and Dirk van der Maelen from Belgium) and representatives of left-wing organisations (War on Want, Tax Justice Network). As usual, the Left talks about taxation in terms of "fairness" and "justice" rather than economic efficiency. In other words, it's always about dividing the pie more equally assuming that the size of the pie is unaffected. Fairness and justice are very subjective concepts. The French Left believes that taxing people at 75 percent when they make more than 1 million euros is "fair", while I believe that this is an unfair confiscation of private property by the State.

The debate about fairness also ignores the fact that corporate income is taxed twice: once at the corporate level and then again at the personal level when investors pay taxes on capital gains and dividends. Since 2,000 U.S. taxpayers have paid more than $US1 trillion in capital gains taxes. So the capitalists have shared their gains with the rest of us. Presumably a significant part of this tax payment comes from Apple and Google shareholders, considering the meteoritic rise in their stock price during the last 10 years. So it is not true that the shareholders of Google and Apple don't pay taxes on the profits generated by their companies.

A question of morality

The recent attack on the tax policies of corporations becomes close to ridiculous when politicians argue that companies that try to avoid taxes (legally) are "socially irresponsible" and "immoral"[1]. Such a statement makes one immediately think of the famous quote from Judge Learned Hand[2]

"Anyone may arrange his affairs so that his taxes are as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do...