Leaked Documents Expose Global Companies’ Secret Tax Deals in Luxembourg

A government, its taxes and the public services it offers (firefighters, courts&police, mandatory vaccination, schooling, etc) are a great solution to a prisoner's dilemma that people face: "Why should I contribute for the fire department, when my neighbors will?" Then, a house somewhere caches fire and the whole city burns down, because no one was willing to pay for a single fire truck.

Then, the question is not, "how much does a single person benefit from a specific service", but more "how much does the society benefit" - everybody benefits a lot - less revolutions, less famine, less epidemic illnesses, less crime. How should we finance this? The answer almost all countries converge to is progressive taxation; it makes sense, really, as those who have the most also have the most to loose. What should we tax? Most countries tax income, sales (VAT), and profits/dividends; also specific goods (e.g. tobacco), capital gains/interest, and property. Most of these are IMO good - sales tax is very progressive (those who have more -> consume more -> pay more tax), tobacco tax discourages smoking (a lot of external costs, especially in countries with public health system), property tax promotes effective use of land and is progressive as well, as are capital gains/interests taxes. Personally, I would reduce income tax, and raise profits/dividend tax (as those who work tend to be poor, those who own tend to be rich), but that's just me.

AFAIK, taxes don't work the way you think they do - sales tax is really VAT, so you don't pay 20% (you only pay 20% of the added value you create, which for most businesses is a much lower percentage of revenue) - also, income tax is applied before tax on profits (employee salary is a cost to the business), and for most people it's quite a bit lower than 30% (i.e. for the poor, those who spend most of their paychecks on basic goods). Tax on profits is in many jurisdictions completely optional - the owners could very easily elect to pay no tax on profits (only tax on dividends, which is in line with income tax), but then they would have unlimited liability. Tax on profits is basically the price of buying limited liability.

I'm not saying there should be no double tax treaties - there should be, of course, but companies should not be able pay less tax on the profits generated within one country, just because taxes in the other country are lower.

As an aside, it's kind of nice to see the government's over-complicated tax code used against them.

Yes tax is often to used to pay for public goods, though fire isn't a perfect example because in some parts of the world actually fire protection is considered a product that you buy from the government and you actually can opt out of it. In that case if your home catches fire the fire fighters will turn up and do only as much work as needed to stop it spreading, but they won't bother trying to save your home:

http://www.huffingtonpost.com/2010/10/04/firefighters-watch-...

That story is pretty brutal, especially if they really did forget to pay the fee and not merely decide to opt out, though it's hard to know after the fact of course. But it is possible and it does happen.

Still, there are lots of other examples of public goods funded via taxation and vaccination is a good one.

One point of terminology confusion here: sales tax and VAT are not the same thing. Sales taxes usually only apply when goods are sold to a consumer at retail. VATs apply at all parts of the supply chain and have rules in place to charge tax only on the value delta. America uses sales tax, I think most other places (and certainly Europe) use VAT. It's very confusing to claim they are the same thing. Additionally sales taxes are not normally described as progressive - it's the opposite, they are considered regressive:

http://en.wikipedia.org/wiki/Sales_tax

(see the "effects" section)

... because the rate is the same no matter what your income is. Rich people don't necessarily consume more: they can choose to consume the same amount as poorer people and often do just because many goods are pretty uniform. I.e. rich people tend to use the same smartphones as middle or even lower income people. They don't use smartphones that cost 10,000x as much even if that's how much more they earn.

I'm not saying there should be no double tax treaties - there should be, of course, but companies should not be able pay less tax on the profits generated within one country, just because taxes in the other country are lower.

Companies don't generate profits within a country, they generate sales, and they already pay the local rates of sales tax or VAT. Attempting to bodge this arrangement is why politicians are always screaming about how unfair profit-shifting is, but it's fundamental - how do you define where a profit is made? Deciding where a sale is made is not too hard because you can identify the location of the person who bought the good or service, or where the business is headquartered, but when you add up all the profits from these sales which country gets to help themselves? Consider Google. Is their profit made in California because that's where they were founded and where the brains of the search engine are made? Or Ireland, because that's where the sales people were made? Or Switzerland because there's an office there that contributed a nifty feature that increased profits? How much does each country contribute towards a companies profit? Trying to figure this out is a mugs game, it's entirely arbitrary, which is why companies can game it so easily by having subsidiaries license IP from each other and so on - who can really say what arrangement is correct?

In theory, in the EU, it's simple: profit is booked where the company is headquartered. Same thing for the USA, hence all the companies registered in Delaware, a notorious tax haven. Sometimes you can't arrange things in this way because you need / want to operate outside that trading bloc, this is when you start getting subsidiaries that pay their parent companies huge licensing costs for IP or the brand, but really it's just about moving profits to where the company wants them to be.