I have to admit to a certain amusement when reading Robert Reich when he's writing about matters economic. He may well be an excellent professor, possibly even he was a decent Labour Secretary, but an economist he doesn't appear to be all that with it. Here he's talking about how the international corporate tax system should change and he seems not to understand any of consumer surplus, Ricardo on comparative advantage nor even the benefits of trade.
He does get one point right:
Global companies are not interested in raising living standards in a particular country or improving any nation's competitiveness. Their singular goal is to maximise returns to their investors. "We don't have an obligation to solve America's problems," said an
Apple executive last year. "Our only obligation is making the best product possible" (he might have added "in order to make as much money as possible").
This is most certainly true: corporations are not in the business of making kittens gambol in sunlight nor other methods of raising living standards. They are interested in, or at least should be as Milton Friedman pointed out, making the maximum legal profit possible for their shareholders. However, what's interesting is what happens next. For the only way to make a profit (absent the all too common tactic of bribing the politicians) is to produce something that a consumer wishes to purchase. What is it that determines whether the consumer wishes to purchase it? That said consumer thinks that the value they will gain from the purchase is higher than the cost of the purchase. This is the consumer surplus. And note what has happened here: the consumer only buys if she thinks that the purchase makes her richer. That iPhone is worth more to her than the $700 or so she is being charged for it.
Which means that while companies may not care, or even intend, to increase living standards they must do so in fact. For the only way they can make a profit is if the consumer purchases, a decision driven by whether the consumer thinks the purchase increases their living standard.
We can go further too: the consumer surplus is vastly higher than the profits the corporation is making and therefore a multiple, many times over, of the taxes that corporation is or is not paying on those profits.
Another way of putting this is that the value to us consumers of Apple is not the taxes that Apple pays (or doesn't) but that we're able to buy Apple products. The value of
Now that we've got that straight we can see what is so odd about Reich's proposal to stop companies not paying their taxes:
After all, global capital depends on consumers, and access to large consumer markets such as the US and the EU is essential if global capital is to earn a healthy return. Why should Apple have access to US consumers, for example, if Apple refuses to pay its fair share of taxes to finance the infrastructure and education that Americans need to improve their living standards? Americans could buy from one of Apple's competitors instead.
But the value to US consumers of Apple is that they can buy Apple products. Why would you want to punish US consumers, by banning them from buying Apple products, just because Apple obeys the current tax laws? This is quite apart from the fact that Apple pays all US taxes anyway: the whole argument is about how much Apple pays on the profits that are not made in the US, not those that are. Why deny Americans that consumer surplus?
Then we get this seeming ignorance of Ricardo on comparative advantage:
Similarly, the EU could be a bargaining agent for its citizens if it were to condition access to its hugely valuable market on paying taxes in proportion to a global corporation's EU earnings, as well as making investments (including research and development, and jobs) in similar proportion.
The way Apple works is that the R&D is done in California. Because that's the world centre of the sort of R&D that Apple needs. You can't just set up a budget and say, well, we'll do some research in Italy because we sell phones in Italy. Different places have different comparative advantages and Silicon Valley's great advantage is that it is a hotbed of really bright people with enough money to do lots of exciting and interesting research. Italy contains the world's leading designer and manufacturer of spectacle frames: should they start to design them in Silicon Valley therefore, given that geeks do often wear glasses? This is simply nonsense from Reich. And it's even more clearly so when we think about manufacturing jobs. Sure, Apple sells lots of kit in Germany. Made, all of it, in those Foxconn factories where wages are $6,000 a year. You know, over in China? And how many $6,000 a year jobs would Germany be happy to get under Reich's insistence that the jobs must be where the consumption is? Further, how many German machine tool makers would like to be told that if they're selling them to China (as they are, by the boatload), they must now employ Chinese engineers in China to make them?
In fact, if you insist that the jobs must be where the consumption is then you're denying the very idea of trade itself. You're, at the extreme, insisting that you cannot make something in one place and sell it in another. Which is absurd.
As I've long been shouting there is a simple cure for the current furore about the taxation of corporations. Simply stop taxing them and instead raise the income tax on dividends and stock capital gains to the marginal income tax of the recipient. Job done, problem solved and hundreds of thousands of tax lawyers will have to go and do productive work: a shame, eh? And yes I know that there are people who object to that idea: but it's still an awful lot better than this stuff from Reich.
