Moralisers take note: the more money firms pay the state, the less they have to spread around
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Starbucks has pledged to pay £10m in taxes in each of the next two years. Photograph by Martin Godwin
Why is it unethical to comply with the law? That is precisely what anyone who claims a company is immoral if it legally minimises its tax is saying. That is what anyone who boycotts Starbucks, or any other multinational company, is saying. The protesters – who have vowed to continue their action even though Starbucks agreed to pay £10m in taxes in each of the next two years – seem to be setting themselves above the law.
First of all, what place does morality have in this? There are some universally agreed moral principles – do not kill is pretty widely accepted – but does this really fall into the same category? Is it right, for example, to have a friend round to dinner rather than send some money to feed the hungry? Some will say one thing, some another. Universal moral principles are of the greatest importance, but are not a guide to every detail of life.
And in practical terms, companies actually do not bear the burden of a tax. Companies are not individuals. They are organisations designed to produce and supply things. They employ people, machinery, intellectual property, capital, raw materials, and so on, and combine them to produce things for people. Companies are intermediaries.
If a company has to pay as tax some of the money it makes from selling its output, that leaves it with less to distribute. So it pays less to shareholders, employs fewer workers, and buys less in the way of raw materials. And of course it makes and sells fewer goods. In other words, some of the profits may be handed over by the company, but the burden is borne by the company's shareholders, employees, suppliers, and customers.
Note too, that much tax is paid in consequence of the activities of companies; income tax, capital gains tax and, in many countries, sales tax (VAT in Britain, and also national insurance here). That is one of the reasons governments try to produce tax regimes designed to attract businesses. Those who complain about tax avoidance by companies should see that the more tax a company avoids, the more tax its owners and employees will pay. Criticising corporations for avoiding tax is actually criticising them for doing what governments want. Governments all round the world compete to provide favourable tax regimes for business. They accept the phenomenon of legitimate tax avoidance, taking advantage of the tendency in, for example, efforts to incentivise pension saving, or industrial development in particular regions.
Governments also engage in tax competition to attract firms. They do that to bring jobs, investment, and innovation to their countries, with all the benefits that can spill over from those to the rest of the economy. Companies follow such tax incentives because if they can conduct their business with decisions unaffected by tax paid by the business, then they can operate as efficiently as they can and let the taxes on the outcome be paid by the individuals who actually benefit from that outcome – the shareholders, employees, and suppliers.
When companies do what is legal to minimise the taxes they pay, they are actually doing what governments want them to – they are responding to incentives. If governments complain about this, it may be because the structure of the business is not what they thought or because they have made taxes so complicated that there are numerous ways to avoid them. Governments may want money in difficult times, but companies can use it too, to create jobs.
As the president of the CBI remarked of the agitation over taxes, "If you want different results, you have to have a different set of rules."
In thinking about these rules, politicians, and others concerned about the taxes companies pay, should remember the advice of two politicians of earlier generations. When he was chancellor of the exchequer, Nigel Lawson said that taxes should be "low, simple, and compulsory". Tax competition helps keep taxes low. If politicians want taxes to yield what they expect – want them to be compulsory – they should keep them simple, not make them so complex that the result is a surprise. And on morality they might heed the words of a former prime minister, the late Harold Macmillan. Politicians, he said, should "leave morality to the bishops".
David Giampaolo is chief executive of Pi Capital. Geoffrey Wood is professor emeritus of economics at Cass Business School and the University of Buckingham
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