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Friday 8 February 2019

10 minutes read time

The prophet of lost profits

What? A 32 year-old French economist has spent years documenting how big companies avoid tax by shifting profits into low-tax states.

Why? It’s all about the power gap. Ordinary citizens must pay their dues, but multinationals often do not.

By Paul Caruana-Galizia

One statistic gets lost when we talk about globalisation. And it’s the one that really matters. Between 1985 and 2018, the global average corporate tax rate fell by more than half, from 49 to 24 per cent.

Countries are building walls to keep people out and raising tariffs to stop goods coming in, but they are also slashing corporate tax rates in a scramble for capital. Cutting corporate taxes, they hope, will attract more plants and machines, making their workers more productive and richer.

This thinking underlies the US decision to cut its federal corporate tax rate from 35 to 20 per cent in 2018. The President’s Council of Economic Advisors argued that this would “increase average household income in the United States by, very conservatively, $4,000 annually”.

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Donald Trump at a meeting with Florida small businesses to discuss tax cuts

Don’t hold your breath, argues Gabriel Zucman, a 32-year-old French economist at University of California (UC) Berkeley, who has spent five years researching the “missing profits of nations”.

Zucman and his colleagues found that the largest multinational companies don’t move much tangible capital around, despite the corporate tax cuts. They don’t have much tangible capital in the first place.  Even with its slides, pool tables and free food, Google’s offices cost a lot less to build and run than, say, a car factory.

What they do move, Zucman has found, are their profits. In 2017 Google’s parent company, Alphabet, made $23bn in revenue – in Bermuda, a remote Atlantic island with a population of 64,000. Google doesn’t appear to employ anyone in Bermuda, apart perhaps from the accountants who make up a large share of the country’s workforce, and doesn’t own any tangible assets there. But Bermuda’s corporate tax rate is 0 per cent – a full 20 percentage points lower than the US, even after its 2018 cut.

It’s not just Google and Bermuda. Zucman’s team found that almost 40 per cent of multinational profits – $600bn globally – are “artificially shifted” to tax havens like the British Virgin Islands, the Cayman Islands, Ireland, Malta or Singapore. These countries account for almost none of the multinationals’ production, but most of their profits.

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Sundar Pichai, the Google CEO, addresses the annual developers conference

There are, then, winners in the scramble for capital. The effective corporate tax rate in Malta, an EU member, on shifted profits is 5 per cent. A low rate on big revenues brings in a lot of money. Almost 90 per cent of its corporate tax revenue comes from shifted profits. Those shifted profits account for 8 per cent of its total national income – the highest share in all the countries Zucman analysed.

The US, meanwhile, loses about 15 per cent of its profits to countries like Malta.

Bermuda is one of about 15 countries with a 0 per cent corporate tax rate. That is why Zucman thinks most countries have given up on taxing multinational companies.

This isn’t a necessary part of globalisation, however. Zucman has said that we need to “radically address [the] issue by changing the way that we tax corporations”.

How? If Apple, for example, makes $100bn in profits globally and 20 per cent of its sales are in the US, then the US could consider that 20 per cent of Apple’s profits were made in the US, so that is what it will tax.

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Customers try out new products at Apple’s new headquarters in California

If the political will for this reform grows stronger than the lobbying power of the multinationals, it does something  simple and clever. Apple’s customers are in the US; the company can’t move them to Malta or Bermuda like it can move its profits.

Zucman’s work is empirical. He has assembled a global database of multinationals’ profits by country, mixing a new source of data – foreign affiliates statistics (Fats), which are collected by national tax authorities – with standard financial accounts data. Previously researchers used a database called Orbis, owned by the credit rating agency Moody’s. None of Facebook’s profits are visible in Orbis’s financial accounts data. For Nike, only $0.5bn of profits are visible in Orbis for 2015, compared with Zucman’s “true global profits” estimate of $5bn.

Zucman uses this empirical basis to launch normative critiques (which express judgments, rather than being merely descriptive) of capitalism. This is rare among economists at prestigious universities. He wrote his 2008 master’s thesis at the Paris School of Economics on France’s “solidarity tax” under Thomas Piketty’s supervision. People call him part of “the Piketty School” – a loosely affiliated group of academics who study the concentration of wealth in society and the political upset  it provokes.

At UC Berkeley, Zucman works with Emmanuel Saez, another French Piketty collaborator, who recommends marginal taxes on the rich of up to 70 per cent, an idea recently floated by Congresswoman Alexandria Ocasio-Cortez. Saez and Zucman also supported Senator Elizabeth Warren’s proposed wealth tax. They brought data to bear on the debate – a wealth tax of 2 per cent on those with a net worth above $50m with an additional 1 per cent on net worth above $1bn would raise $2.75 trillion in a decade.

Zucman and his colleagues work with governments around the world to estimate the full extent of tax evasion by their citizens and help them stop it. His aim, he said last year, is to “combine an open world, a globalised world, with fairness, and justice, and in particular, tax justice”. He’s one to watch.

Further reading

Zucman, G. (2015), The Hidden Wealth of Nations. University of Chicago Press.

Alvaredo, F., Chancel, L., Piketty, T., Saez, E. and G. Zucman (2019), The World Inequality Database.

Zucman, G. (2018), Globalization, Taxes, and Inequality, Harris Lecture, Harvard University, October 17, 2018.

Zucman, G. (2017), How Corporations and the Wealthy Avoid Taxes (and How to Stop Them), The New York Times, November 10, 2017.

Zucman, G. (2017), The desperate inequality behind global tax dodging, The Guardian, November 8, 2017.

Zucman, G. (2018), If Ronaldo Can’t Beat Uruguay, the Least He Can Do Is Pay Taxes, The New York Times, July 3, 2018.

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