Why we focus on corporation tax

Paul Monaghan
Chief Executive
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At the Fair Tax Foundation, we’re often asked why we focus on corporation tax,* when this is just one of a number of taxes that business pays.

Today, we’ve released a new paper (packed with facts and figures) that explains why corporation tax is so important, and why we place it at the centre of our work and our Fair Tax Mark accreditation standards.**

Corporation tax is uniquely important because:

• Corporate tax avoidance is a clear and present significant problem
• Corporation tax is a crucial source of revenue to governments across the world
• Corporation tax is a progressive tax and has a major impact on a country’s tax morale
• Corporate tax dodging reduces national productivity
• Corporation tax is a ‘red flag’ issue for many investors

No other tax borne or collected by business comes close to having such an impact. Which isn’t to say that other taxes are unimportant. They are really important. But corporation tax is in a class of its own for the five reasons we outline below.

1. Corporate tax avoidance is a clear and present significant problem

The current international tax rules still allow large multinationals to earn significant income in a jurisdiction without paying corporate income tax there. Some 40% of multinational profits are artificially shifted to tax havens annually, leading to a US$250bn reduction in corporate income tax revenue.

Commitments and disclosures on responsible tax conduct have improved recently, but still significantly lag behind reporting on other sustainability issues. For example, only a third of multinationals have commitments or policies on tax transparency in place, compared to 87% for climate change and 98% for health and safety. A miniscule 3% have a named position responsible for tax policy at board level.

2. Corporation tax is a crucial source of revenue to governments across the world

While average headline rates of corporation tax have been decreasing globally over the past two decades, it remains a substantial source of tax revenue, particularly in developing countries.

In some countries in Africa and Asia and Pacific, corporate tax revenues make up more than one-quarter of total tax revenues. Corporation tax was recently found to make up almost a third of all taxes paid globally by the largest companies headquartered in Europe.

3. Corporation tax is a progressive tax and has a major impact on a country’s tax morale

Beyond revenue generation, corporation tax plays a critical role in preventing wealth concentration and ensuring a fair distribution of the tax burden among individuals and businesses. It acts as a backstop to personal income tax, limiting the scope for tax avoidance by individuals who might otherwise incorporate to escape personal income tax.

Corporation tax has a progressive nature, with richer households bearing a greater share of the tax burden. This is important because people are more willing to pay taxes when their tax system is viewed as being generally progressive.  Where there is perceived tax inequity, individuals and businesses are less likely to act morally, and more likely to respond to taxation through noncompliance.

Corporation tax reliefs can serve as a means to encourage investments in public goods, like renewable energy initiatives.

4. Corporate tax dodging reduces national productivity

Aggressive tax avoidance and evasion distort national economies, hindering fair competition for businesses domestically and internationally. Some tax-evading corporations enjoy implicit subsidies, allowing them to thrive despite low productivity, reducing market share for compliant businesses. There is a significant productivity gaps between tax-compliant and non-compliant firms, impacting economy-wide productivity and growth.

At the same time, keeping tax rates at a fair and reasonable level is crucial to the development of a thriving, diverse private sector and the formalisation of business. Corporation tax reliefs can also be used to incentivise investment in public goods, such as renewable energy.

5. Corporation tax is a ‘red flag’ issue for many investors

Institutional investors and asset managers increasingly see corporate tax avoidance as a ‘red flag’ for an overly aggressive attitude to compliance in general and poor corporate governance.

They also recognise that it is in investors’ interest to ensure that corporate taxes contribute to stable, well-functioning socioeconomic systems that are conducive to achieving investment returns; and that aggressive tax planning exposes firms to reputational, governance, and earnings risks – which have been amplified by COVID-19’s aftermath and global anti-tax avoidance efforts.

The bottom line

Corporation tax matters, and progressive businesses recognise this and are proud to contribute their fair share. It has a unique ability to support public service, economic growth and reduce inequality. Long may it thrive.

Read our full paper, ‘Why focus on corporation tax?’, for more detail, facts and figures.

* Corporation tax (sometimes known as corporate income tax) is a tax on the profits of a business (which is, put simply, revenue minus costs).

** With a tip of the hat to the Tax Justice Network, and their excellent ‘Ten Reasons to Defend the Corporation Tax’, which was published in 2015.