“Perception is reality”. A simple and yet powerful idea.
It came to mind this week after I had conducted a complete unscientific yet exceptionally telling Twitter poll on the evolution of corporate tax avoidance over the past decade. Thanks to those who voted and retweeted.
89%(!) – a crushing majority – of around 1400 voters believe that, in terms of the tax lost to nation-states, corporate tax avoidance has become worse since 2007. Caveats abound – as noted, this is not a scientific poll: it is based on a convenience sample of followers of myself and my followers (in particular barrister Jolyon Maugham, who was the most prominent retweeter of the poll), who I’d wager are, on average, more critical towards corporate tax avoidance than the general population – but I believe nonetheless that it is a useful result for starting a reflection.
One reason why this is a good starting point is that it is backed up by other (and more scientific) work. Corporate tax avoidance has, if nothing else, seemed to get worse to many. For instance, while in 2011 corporate tax avoidance did not feature as a key concern around UK business ethics (per lists published by the Institute of Business Ethics), it has been the top issue every year since 2013. Another recent study has also shown that the public salience of corporate tax avoidance exploded in the wake of the global financial crisis, around the same time as investigative media reports began regularly scathing the tax planning of major multinational corporates like Amazon and Starbucks.
Okay, so attention by the public and by the media to corporate tax avoidance has risen in the past years. That doesn’t mean that corporate tax avoidance actually has risen. Bingo! This is one element that fascinates me about this – there is very little, if any, discernible, tangible, hard evidence to suggest corporate tax avoidance has in fact “gotten worse” in terms of tax lost to nation-states. To the best of my knowledge, there exists no longitudinal academic research that sheds light on the evolution of corporate tax avoidance, in terms of tax lost, over the past decades. (If you are reading this and know of some, please let me know!)
A number of tax administrations publish annual estimates of tax gaps – the difference between the amount of tax that should, in theory, be collected, and what is actually collected – on corporation taxes (thanks to Heather Self for nudging me to include this point). The British HMRC is one such example, with its “Measuring Tax Gaps“. Although I generally believe that most tax administration’s tax gap estimates on corporate tax avoidance are woefully cautious and inadequate (they are generally based on limited random samples or simple models based on immediately available information, and they have strong political motivation to underestimate the problem), at least they are usually consistent over time. In the case of HMRC, their most recent estimates (2016) find that the CT (corporation tax) gap has been slowly declining over the past decades.
More broadly, we have a vast range number of point estimates on corporate tax avoidance, with the OECD’s estimate of an annual global $100-240bn gap probably the most well-known. But in terms of longitudinal academic research, the only even remotely relevant hard indicators we have (that I know of) are studies by Niels Johannessen and Gabriel Zucman and Lukas Hakelberg and Max Schaub, respectively, which both use data from the Bank of International Settlements to investigate the evolution of offshore bank deposits. (I should note that I posted this blog just before Johannesen, Zucman and colleague Annette Alstadsæter published a new paper with more extensive and time series data in this vein.) The former conclude that the international crackdown on bank secrecy circa 2009 had no noticeable effect on offshore deposits; the latter conclude that the second crackdown a few years later had some effect, but only insofar as individuals shifted tax haven deposits to the USA. Importantly, these studies concern bank secrecy and individuals’ bank deposits, not really corporate tax avoidance. There are some arguments that the two might be correlated, but there are also arguments that they aren’t, and once again we have no systematic research to substantiate it either way. In short: we still don’t really know whether corporate tax avoidance has really gone up or down.
In the way of softer indicators, my own research has given some tentative answers. I spend a lot of time interviewing and observing tax professionals – corporate tax advisers, in-house counsel, policy-makers, bureaucrats and others. One sentiment that has been reoccurring is that recent developments, around the world, have effectively addressed many historical opportunities for avoidance – both in terms of purely legal innovations in shutting down loopholes and such, but also in terms of changing conventional understandings of what is and what is not acceptable corporate tax planning. This aligns with the indications given by HMRC above, whose staff of course fall into this category of professionals.
So what are we to make of these huge discrepancies? The general public seems to perceive corporate tax avoidance as a growing problem, media attention and political momentum is up, but research does not offer anything in way of substantiating this perception, and the perception is exactly the opposite among many professionals, who believe that corporate tax avoidance has been addressed effectively (although certainly not entirely).
Clearly, the varying sources of information play a key role. Rising media attention has correlated with political action and public concern, while increasing exposure to regulatory shake-up and criticism quite possibly shape practitioner views. Another factor is likely to be the post-crisis environment, which has been more open for political innovation, new ideas and new villains. But in general the massive divergence in perceptions is a very intriguing and somewhat perplexing state of affairs.
This polarisation of perceptions has a number of key implications. Most immediately, it draws attention to the monumental gap in the academic literature on the evolution of the scope and scale of corporate tax avoidance, where systematic longitudinal research is sorely lacking. More broadly, it has implications for the general debate on corporate tax and potentially for political progress. As I have written elsewhere with Maya Forstater (final paper coming soon), this kind of polarisation of perceptions amongst people is not necessarily conducive towards effective, sustainable, long-term progress in terms of policy and practice. Reality is perceptions, indeed, but massively diverging perceptions (and thus massively diverging realities) can create an unstable, conflictual and potentially counterproductive environment. If we are to really address the current problems in the international corporate tax system, there is a need for fundamental change to perceptions and material realities, which must encompass all relevant stakeholders, both inside and outside practice – and it is doubtful that polarisation of perceptions will contribute positively towards that end.