Tax Competition Does Work; Fiat Chrysler To Be Based In The UK
This is an interesting little piece of news. As Fiat Chrysler sorts itself out after the full merger of the two companies it has announced that it will be, as a company, domiciled in Britain. This would seem to be a vindication of recent changes to the UK’s corporate taxation system: it’s attracted not just Pfizer PFE +0.34%, if that AstraZeneca merger goes through, but also Fiat Chrysler and a number of other companies. This is of course good for the UK as it will raise employment and so on: but it’s also good for people in other countries as it will increase the pressure on those other places to reform their own corporate taxation systems. This is itself good because of the available armory of taxes corporation tax is a very bad one.
On Thursday, Italian-U.S. auto maker Fiat Chrysler Automobiles NV disclosed that London would be its new headquarters—to the chagrin of some in Rome and Detroit worried about losing local champions. A Fiat spokesman said the move was necessary for the company’s plans to establish tax residency in the U.K.
As I say, this will obviously be good for the UK. There will be some number of highly paid people employed in the country to be that head office that defines such tax residency. But the more controversial allegation is that a general lowering of corporate taxation everywhere in response to such tax competition will also be a good thing. For obviously, if large corporations are going to start fleeing places with higher or more difficult taxes then, they’ll need to respond if they’re not to lose everyone.
This argument is based upon the deadweight costs of taxes. We know that the imposition of any tax at all leads to some economic activity not happening. To some level this is of course fine: the value of what we get from government as a result of spending those taxes raised can be higher than the loss of having raised the money. This is obvious with some things: a criminal justice system for example. Perhaps less so with diversity advisers but we’ll always have some taxes as we’ll always have some government.
However, we also know that the deadweight costs of capital and corporate taxation are higher than that of income or consumption taxation. We lose more economic activity raising $100 in tax revenue through a corporate tax than we would if we raised the same $100 in a VAT or sales tax. Thus, for the greater efficiency of the economy we would prefer there to be a higher sales tax (or best of all, a proper land value tax) and lower or no corporate income tax.
The reason that we don’t get that is because corporate taxation is too attractive to politicians. We the voters seem to think that it’s the companies themselves that pay it: not so, it’s the investors and the workers in the form of lower incomes that do.
So, corporation tax is a bad tax and we’d like to see it lowered if not eliminated. And this tax competition that the UK is offering is leading to more companies coming to the UK to the benefit of us in the UK. But, note, it is also benefiting people in those other countries as governments will have to modify, lower, their own corporate tax regimes in order to stem the exodus. It’s all a win win situation here. The UK profits first of course but everyone will profit over time. That is, tax competition works.