8 - Taxation, MNEs' Behavior, and Economic Welfare

Summary

Besides the great issues of progress, sovereignty, and economic justice that swirl around the multinational enterprise (MNE), taxation sounds like a matter for narrow minds that warm to accountancy. That instinct is squarely wrong, because arrangements for taxing corporate net incomes turn out to play an important role in dividing the gains from foreign investment between source and host countries. In this chapter, we consider the normative effect of corporation income taxes imposed on MNEs – first on global welfare, then on the welfare of source and host countries separately. We take up some empirical aspects of the MNE's responses to taxation in the location and management of its investments. These include how intra-corporate transactions can be manipulated so as to minimize the MNE's tax burden.

Corporation Income Taxes, Market Distortions, and World Welfare

All countries levy taxes on the net incomes of corporations at marginal rates typically ranging from 30 to 50 percent. Textbooks traditionally identify the profits tax as a levy on a pure economic rent or surplus that has no effect on saving or output decisions. But, in practice, the tax falls on profits in the popular sense – the sum of the opportunity cost of equity capital plus any rents or windfalls accruing to suppliers of equity capital. Therefore, the corporation income tax drives a wedge between the net return received by savers and the before-tax earnings of their savings when invested by companies.