CORPORATE TAXES

The Australian Government has come to an agreement with the mining companies on the scale of its proposed "super profits" tax. Controversy about the tax was one of the main reasons why the Labour Party dumped its leader Kevin Rudd and replaced him with his deputy, Julia Gillard, who thereby became the country's first woman Prime Minister. So the deal marks a good start to her tenure.

Lost in all of the arguments about rates is a more fundamental point; namely why does the world bother to tax companies' profits at all?

Companies are, in essence, black boxes; money comes in (in the form of sales revenue, new borrowing, equity subscriptions and sales of assets) and money goes out (in the form of wages and salaries, taxes, purchases, interest, dividends, investments and debt repayments). According to the Nobel-prize winning economist Ronald Coase, the main reason they exist is to minimise the transaction costs of these operations. You can, after all, do all of the above things without having to form a company; though it might drown you in administration.

But the other point about all of the above things is that they are already taxed. Wages and salaries (returns to labour) are taxed in the hands of recipients; so too are interest and dividends (returns to capital). If corporate profits were not taxed, then they would just sit there in the company until they were paid out at some later stage in one of the above forms. Why not, therefore, just wait until that later date? At a stroke, you would get rid of what all accountants know is one of the most complex parts of any tax system. Not least because the concept of "profit" is elusive, to say the least, particularly when companies have operations in more than one country. Governments would of course get less tax from companies themselves; but they would get more from the other sources as and when the (now higher) profits were paid out in some form.

One argument for the Australian super-profits tax is that it will be levied on minerals, which can only be used once. But there already exists a system for dealing with that, namely licences and royalties. It works in much the same way as a patent.

There is one downside with the concept of not taxing companies. For it to work, everybody would have to do it, otherwise one country would be undercutting every other. I think that this effect might well be exaggerated, since companies decamping wholesale to another country would face a lot of upheaval (those transaction costs again). Furthermore, to the extent that it is true, then it would give any non-cutting country a big incentive to match the reduction, thereby cancelling out that effect. However, we shall probably never know what would happen if the idea were implemented, since I put the likelihood of countries abolishing corporate profits taxes at about zero. Governments are too wedded to the revenues to dare to change the system. Even if I suggest it.

Walter Blotscher