Corporate Tax

Governments band collectively to lift corporate taxes – economic system

Lots of people are angry that big corporations can get away with not paying a lot of taxes.

Corporate tax is the money that companies pay to governments. It is calculated as a share of their profit, and different countries have different corporate tax rates. At the high end, Malta takes 35 percent of a company’s profits, while the United Arab Emirates is one of several countries that take zero.

Both approaches have advantages and disadvantages. Higher corporate tax rates mean more revenue for governments to spend on everything from health care to nuclear weapons. This is good for citizens who want these things. Government spending can be good for businesses too, as it is often invested in things like education or transportation infrastructure that businesses need to grow and thrive.

However, high tax rates are associated with deterring companies from starting businesses or trying to grow. Not everyone wants to put blood, sweat and tears into making money only to have to give a lot of it. Because of this, some countries believe that low tax rates will lead them to do more business overall. Some argue that it will actually translate into more tax revenue overall because there will be more companies to collect from and they will make bigger profits. Even when they don’t, companies offer other benefits that governments and societies value: jobs, new products, expertise, and so on.

In theory, it seems fair enough that each country can determine the corporate tax rate that best suits its interests. But globalization has made everything a little more complicated. Because lower tax rates than in other countries can give you a competitive advantage when it comes to enticing multinational companies to set up a warehouse in your country. (Often companies only pay corporation tax in their country of headquarters, even if they sell some – or even most – of their products elsewhere.)

This tool can be valuable, especially for smaller and poorer countries that may not be able to deliver some of the attractions of their larger neighbors – from cultural weight to innovation centers to world-class infrastructure. But it can lead to a “race to the bottom” as countries continue to cut corporate taxes to outdo each other.

Many people feel that large, wealthy multinational corporations are using this system to get rid of their levies on society. Apple, Starbucks, and Microsoft are just a few examples of super-famous companies that have been criticized for underpaying taxes. At the recent G7 conference (basically a club for powerful nations) governments worked out a plan to set a new global minimum tax rate of 15 percent.

If implemented, it would mean there would be no more tax havens and governments would have to spend a few extra billions. But a lot of people think the plan doesn’t go far enough. The worldwide tax losses of companies playing the system are estimated at about $ 240 billion. The proposed tax reforms are expected to raise $ 50 billion to $ 80 billion. Several organizations have called for the tax ceiling to be raised to 25 percent. Others have raised concerns that the overhaul will be beneficial richer countries more than poorer oneswhat seems unfair.

Read our explainer about: Taxes

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