Photo: Jay Singe. Source: Morguefile
In elementary school, we would count-off by twos, get on either side of a central court, and throw rubber balls at each other. If you got hit by a ball, you were “out” and had to leave the game. The goal was to move as quickly as you could to avoid the volley of balls being tossed at you. For some reason, the big kids who stood stock-still and threw with great velocity seemed to be immune from getting hit themselves. Sometimes they would gang up and throw coordinated volleys.
Corporate taxes are a lot like dodgeball. The big kids – governments – keep lobbing various types of taxes at corporations. Flexible firms that can relocate their intellectual property, or move their workers, or use tax-exempt structures can avoid the taxes. Slow-moving companies with fixed plants or highly regulated markets or strong ties to their communities get hit. Only they don’t get to leave the game. They get hit again and again and again. They end up funding government functions which benefit everyone: a legal system, safety and security, education.
This game of corporate dodgeball favors flexible capital. It’s assumed now that Apple or Microsoft or Qualcomm will domicile their intellectual property in a low-tax jurisdiction. When you purchase their products, what are you buying? When you download an audio book or ebook, what do you have? The physical items are almost trivial compared with the software. This is a new challenge for globally free markets: capital is no longer politically static. And governments are no longer local monopolies. They have to compete against each other to provide efficient policies and retain the intellectual and human capital essential to a modern economy.
Dodging taxes? Photo: Jeff Ness. Source: Wikipedia
Capital moves where it can provide the highest returns. Indeed, capital allocators have a fiduciary duty to take every appropriate measure to do so. In this game, quick, mobile capital wins. Unless it undermines the very institutions that make it possible in the first place.
Douglas R. Tengdin, CFA