Are Corporations Immoral When They Don't Pay (Much) Tax?

I'm in the UK right now, and I'm not sure the fuss over US corporations paying little to no tax in the UK has hit the shores of the US yet, but this subject is causing quite a stir over here. And although no-one is mentioning the fact that the 3 corporations being named are all large US corporations, this is definitely apparent in terms of the 3 multinationals who have been named by the Chair of the UK Parliamentary Public Accounts Committee, Margaret Hodge (a Labour MP), and her use of the word "immoral" to describe the tax avoidance schemes used by Starbucks, Google and Amazon to avoid paying taxes in the UK (see here, here and here for some examples of the UK media coverage).  To be fair, in some articles I have also seen eBay and Ikea (the Swedish discount furniture giant) also mentioned.

 

In the show that I try to listen to every day on the radio here (The Today programme on Radio 4), Margaret Hodge accused Starbucks in particular of using "transfer pricing" rules which permit Starbucks UK to buy coffee beans from other subsidiaries at higher prices than exist in the market, and book loans at extremely high interest rates from the US Head Office, which then makes the UK subsidiary look like it is making losses when in reality it is making a profit. The basic idea here is to make subsidiaries in high corporate tax countries make losses, and subsidiaries in low corporate tax countries make profits.Thus Starbucks UK has not paid any corporate taxes in the past 3 years, despite having extremely "profitable" UK operations which resulted in the UK CEO being promoted up through the international organization, and yet Starbucks Switzerland (where corporate tax rates are only 12%) has consistently been making profits.

Google UK has also been quite closed-lipped on it's UK subsidiary's activities, but nevertheless was forced to provide some statistics to the UK PAC. Google paid £6m corporation tax on £2.5bn of UK revenues in 2011. That is a tax rate of 0.24%, significantly less than the headline UK corporate tax rate of 24%.

It also emerged, in new figures supplied by Amazon to the PAC, that the online retailer's total UK sales topped £2.9bn last year, while declaring Amazon.co.uk revenues of only £207m.
If Amazon UK is assumed to be paying a 24% corporate tax rate on it's (let's assume net) revenues, then doing the same calculations to obtain a corporate tax rate, that comes to a 1.7% tax rate. Obviously my calculations are wrong because for the past three years, Amazon.co.uk Ltd paid £2.3m in corporation tax ( - our assumption would have had Amazon paying £49m in corporate taxes for one year alone) on UK sales of £7.1bn.

Phillip Stevens of the FT comments that "Societies have sets of norms and ethics that extend beyond tax law. To function well they demand more of individuals and companies that they avoid breaking the letter of the law. Call it moral obligation or corporate responsibility, but the market economy cannot separate itself entirely from this broader notion of fairness.”

In my opinion corporations can either be viewed as collections of citizens who have grouped together to do business, or as separate individual entities in and of themselves.  Each notion of a firm leads to a different conclusion about the way in which corporates should be taxed. In the former case (businesses as collectives of individuals) only the income that is derived by those citizens who are involved in ownership of the business should be taxed and it should be taxed at the same rate as all other individual income. In the latter case (businesses as individual stand-alone entities), businesses should be taxed on the same basis as individuals - in terms of their revenue - not in terms of profits as currently is the case. The same income tax bands (presumably as for families) would apply to corporations, and then they would pay taxes like all the rest of us do. So to sum up, my view is this: either the government should i) tax the returns from company activity (i.e. dividends) as income to invidividuals (and not tax the companies at all); or ii) company revenues should be taxed at the same rate as individual income tax. 

I'm afraid I see things rather differently from Phillip Stevens. Why should the company be responsible to anyone other than their stakeholders - after all, they are the people who are involved in the company, aren't they?  Surely corporate responsibility involves obeying the law, and if the law allows these corporations to pay less taxes, why shouldn't they take advantage of this?

Clearly we don't use a system like my ii) above describes where company revenues are taxed, and this is unlikely to be introduced in the near future if corporations have anything to do with it! So we are left with i) which is the taxation of dividends as income but at the same time phasing out corporation tax. This is what I would advocate should be happening to the talks on the fiscal cliff in the US.  Despite what John Boehner and the Republicans say, we should be taxing dividends as income, but at the same time we should be lowering the rate of corporate taxation in the US to at least match what it is elsewhere.

It is obvious that corporate taxes are messy as not only do they tax profits, something that is easy to hide using international tax loopholes, but also even when we do tax profits paid to shareholders at dividends, we don't tax these payments as income but rather at a different rate to income tax rates.  Clearly a re-think on corporate taxes and capital gains taxes is needed, and the tax rules relating to multinationals are badly in need of reform.