It is time for a new approach to international tax. Multinationals ranging from GE in the US, Amazon in France and Starbucks in the UK are being attacked for tax avoidance. At a recent hearing, UK members of parliament pilloried companies for using tax havens, for “manipulating” their accounts to cut their tax bills and for engaging in “immoral” activity. MPs peppered their questions with phrases such as “it beggars belief” and “I don’t know what you take us for.”
Most striking about these exchanges and reports is that – beyond asserting that they have not broken any laws – the companies seem unable to defend their actions. This is because they cannot.
The international tax system effectively provides vast subsidies for multinational companies, helping them outcompete local competitors on a factor – tax – that has nothing to do with genuine economic productivity. They freeride on tax-funded benefits – roads, educated workforces, reliable courts – provided by the countries where they do business, while getting others to pay for those benefits. This distortion is inefficient and unproductive, and corrupts the very fabric of markets.