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Britain's Chancellor of the Exchequer George Osborne (L) talks to a worker in the trim facility at Bentley Motors in Crewe, northern England December 4, 2014.
Reuters/Darren Staples
George Osborne, left, is armed and ready to tax.

What makes a corporate tax conservative? Depends on where you’re standing.

By Tim Fernholz

The US, UK, and Australia are in the midst of heated corporate tax debates right now. Conservative policymakers are taking the lead, but their different conclusions show more than the traditional right-wing principles at play.

In the UK, Conservative chancellor of the exchequer George Osborne’s aggressive plan to balance the budget features a crackdown on schemes that large multinational companies use to “artificially shift” profits out of the country.

Dubbed the “Google tax,” the policy would require multinational companies to pay a 25% tax on economic activity the treasury deems to belong to their UK operations. While the details of the special levy haven’t yet been revealed, the tax is not expected to raise much revenue directly.

Instead, it will act as a deterrent to big companies to stop playing tax-dodging games by rerouting sales, profit, and other payments via Ireland, Luxembourg, and other popular low-tax havens. Better to pay the UK’s normal 20% corporate tax rate than face a higher rate and the public shaming that would come from getting caught by the “Diverted Profits Tax,” as the measure is officially known.

Determining which profits belong in the UK is a deliberately subjective process. A company would “have to be pretty hard-nosed to challenge it, get bad press, and then lose in court,” Chris Morgan of KPMG in London told Quartz. 

This gambit is already attracting attention in other states: Australia’s treasurer Joe Hockey, a member of the center-right Liberal party, says that his government will be looking into a similar policy.

Meanwhile, in the US, Republicans—newly empowered because they will control both chambers of the US legislature next year—are pushing to make permanent the annual package of tax breaks mostly for corporations, including loopholes that facilitate the tax schemes conservatives in other countries are targeting. Much to the dismay of the Democrats in White House, it raises taxes on the working poor by not extending the Earned Income Tax Credit, a popular and effective anti-poverty policy. Given that opposition, Republicans have passed a year-long extension of the breaks that would add $44.7 billion to the US deficit.

At first, you might explain the disparity by noting that the biggest abusers of these schemes are US multinationals—smaller economies want to protect their revenue base, while the US is keen to preserve their firms’ advantage. But, though company shareholders may benefit temporarily, this often hurts the US public purse and leads to firms wasting resources on bond borrowing instead of repatriating the cash they stockpile abroad.

US conservatives have always had a different spin on fiscal responsibility than their cousins abroad, putting lower taxes ahead of lower debt. Their refusal to close loopholes that companies aggressively employ to shift profits abroad is part of their mission to force a tax overhaul that would eliminate US taxation of global profits. But as other countries get fed up with lost revenues, we may be moving toward a world where US multinationals pay more taxes abroad than they do at home.

Additional reporting by Jason Karaian.

Tim Fernholz
Reporter
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