[netcan]

Taxing profits (as opposed to revenue, value add, capital gains..) is the ultimate quixotic temptation for politicians.

On paper, it is a fantastic tax. Google, Apple, FB, Amazon... all the new economy winners are very profitable, 20% - 30% margins & fast growth are expected (and priced into market caps).

They're so profitable that money is just piling up, atm. They can't usefully invest it all. This means you can tax their profits without affecting the real economy. There's nothing google is doing that it couldn't do if they had to pay $10bn (25%-30%) as a tax on profits.

OTOH, unprofitable companies (eg Tesla), would have trouble paying extra taxes. It'd need to come out of investments in production capacity, R&D, etc. They wouldn't have to pay.

Corporate income tax is just a sensible idea, on the face of it. Unprofitable? Don't pay. Profitable? Pay. Minimum economic disruption.

But in practice... across many times and places... it's proved very hard to make a corporate tax scheme work.

Tax policy complexity. Accounting complexity. Multiple jurisdictions. The looping cascade of company ownership, partial ownership, contractual relationships, making up the legal "structure" of a google or amazon.

It all adds up to a reality wherein politicans cannot make a law that says 25% tax.. and have that mean something similar to what it sounds like.

This is a pill very few politicans or voters can swallow. Of course we can! We're legislators. We make laws. We have police, and tax authorities. Google finance said google made $40.42bn. The rate is 25%. Gives us $10.1bn.

Empirically, they generally can't. Changing things to enable corporate tax would require massive, difficult legal/bureaucratic reforms. You would need to consider insanely difficult changes, like heavy handed restrictions on a company's ability to own other companies, and the types of legal entities that can own legal entities. You'd need new accounting standards. The bureaucratic guts of the economic machine.

[300bps]

We make laws. We have police, and tax authorities. Google finance said google made $40.42bn. The rate is 25%. Gives us $10.1bn.

Your post is very insightful. The only thing I’d add is that when you have a $10 billion tax bill that you can afford to pay $5 billion to attorneys and accountants to avoid it.

That’s the crux of the problem to me. No matter what scheme the government can come up with to tax it, the numbers are so large that it is in the company’s interest and ability to find loopholes. That’s why we end up with sophisticated shell companies shuffling money around in tax havens that are perfectly legal but don’t make sense outside of tax avoidance schemes.

[netcan]

when you have a $10 billion tax bill that you can afford to pay $5 billion to attorneys and accountants to avoid it.

I personally think this is overstated as a root cause. Giant corporations have the same lawyer budget to spend avoiding payroll taxes or GSTs/VATs, but it doesn't make that kind of difference. That's because salaries, sales and value adds are, in practical terms, objective truths. The law & accounting standards define them, locate them to a jurisdiction and that definition is defensible. A transaction either is or isn't a salary, or a sale.

Profit otoh, is subjective. Expenses can be expressed as investments, retained earnings can be expressed as growth. Most importantly, profit doesn't have an objective location.

[specialist]

Would a VAT be preferable?

[netcan]

VAT would work. You can enact it (most countries do) and collect the expected tax revenue.

But it's not a tax on profits. It's more like a sales tax.

The difference is market distortion. A VAT has more consequences. Higher prices, possibly some impact on employment and/or GDP.

So, in practice it's preferable because it's possible. In theory it's worse because corporate income is more efficient.