The offices of financial and legal institutions on the British island of Jersey OLI SCARFF/AFP/Getty Images

A Better Way to Fight Corporate Tax Avoidance

The recent corporate-tax cuts in the United States have intensified an ongoing global race to the bottom, in which countries compete for investment at the expense of the revenues needed to fund public programs. With past efforts to reform the current global system having come up short, it is time for a new approach.

NEW YORK – Over the past few years, leaks of documents such as the “Panama Papers” and the “Paradise Papers” have exposed the dark underbelly of globalization, and provoked indignant denunciations of tax avoidance from people around the world. Ordinary workers have no choice but to pay their taxes. But, apparently, multinational corporations and wealthy individuals can get away with paying hardly anything.

The most shocking feature of today’s corporate-tax-avoidance schemes is that they are legal. When multinationals create subsidiaries, those entities are considered to be legally independent firms. A parent company can then set the prices of transactions between its subsidiaries to register its profits in low-tax countries, rather than where the original economic activity actually occurred.

This system of “transfer pricing” has fueled competition among countries to lower their corporate-tax rates. And now that the United States has slashed its rate from 35% to 21%, the global race to the bottom will likely intensify. In fact, politicians in India, Mexico, Brazil, and other developing countries are already calling for tax cuts of their own, in order to remain competitive, attract foreign investment, and create or save jobs.

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