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On Corporate Taxes, Britain Follows U.S. Lead

Research & Commentary
December 28, 2012


American companies have no monopoly on avoiding taxes. British companies are also paying less in tax while reporting record profits. And American firms operating in Britain happen to be some of the UK’s biggest tax-avoiders of all.

By Salvatore Babones

Why should British companies in Britain pay taxes, UK CEOs are wondering, when American companies in Britain don’t?

Over recent decades American companies have become very good at avoiding taxes. On paper, America has one of the highest corporate tax rates in the world at 35 percent. In practice, American companies now pay just over 12 percent of their profits in taxes, their lowest rate over the last 40 years.

In fact, this year’s Executive Excess report from the Institute for Policy Studies found that 25 major U.S. corporations paid their chief executives more in 2011 than they paid in federal income taxes.

Some of these American companies are making news overseas. Executives from Amazon, Google, and Starbucks have been hauled before a UK parliamentary committee to explain why they pay so little in corporate income tax.

Their answer in the United Kingdom? The same as their answer in the United States: We do nothing illegal. In both countries, corporations routinely lobby government to create tax loopholes for themselves, then use those loopholes to avoid paying taxes.

This two-step may not be illegal, but ordinary taxpayers have every right to feel angry all the same. The British grassroots advocacy group UK Uncut is now leading a campaign to boycott tax-avoiding corporations, and tax avoidance has become a major media issue in UK newspapers.

A new investigative report from Reuters shows that British companies are getting just as good as their American counterparts at avoiding taxes. Reuters reports that corporate taxes paid by British companies have declined 21 percent over the past decade. Over that same period their profits have risen 65 percent.[pullquote]Corporate profits in the UK have grown faster than the economy as a whole, just as they have in the United States. [/pullquote]

Corporate profits in the UK have grown faster than the economy as a whole, just as they have in the United States. Profits aren’t just rising because the economy is doing well. Profits are rising even though the economy is doing badly.

In fact, the UK economy is one of the worst in the world right now, with a “triple-dip” recession expected in 2013. The UK has experienced no real economic growth at all since the beginning of the global financial crisis in 2007.

Additional analyses from Reuters show that about half of Britain’s decline in corporate taxes paid can be accounted for by changes in tax rules and differences in economic conditions. That leaves about half of the decline unexplained. Reuters suggests that much of the rest of the decline in tax payments comes via offshore financial centers for tax avoidance.

The UK’s conservative government claims that the British corporate tax shortfall does not constitute evidence of tax avoidance. But major government figures declined to be interviewed on the record for the new Reuters report. That’s not surprising: Tax avoidance has become a real hot button issue right now in the UK.

Academic studies show that companies reward their CEOs for successful tax avoidance. New research from University of Iowa accounting professors Sonja Rego and Ryan Wilson shows that CEOs who adopt more aggressive tax avoidance strategies receive significantly higher compensation.[pullquote]Academic studies show that companies reward their CEOs for successful tax avoidance.[/pullquote]

It’s no wonder that so many CEOs today are making more for their tax avoidance than management skills. Companies can generate more money from avoiding taxes than from actually making things, Reuters reports that U.S. non-financial companies alone hold around $5 trillion in offshore accounts.

That’s around $20,000 for every adult in America. And that total only includes the offshore accounts of non-financial corporations. Not counted: banks, investment houses, and insurance companies.

After-tax corporate profits now account for over 10 percent of America’s total national income. Before 2010 the last time corporate profits hit that high a level came in 1929, when they reached 9.9 percent of national income. In other words, corporate America has never been so rich.

Now it looks like corporate Britain is catching up. American companies like Amazon, Google, and Starbucks are leading the way. Why should British companies in Britain pay taxes when American companies in Britain don’t? This low-tax logic makes sense for everyone — except those us who don’t have $5 trillion stashed in an offshore account.

Salvatore Babones is a senior lecturer in sociology and social policy at the University of Sydney and an associate fellow at the Institute for Policy Studies.

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