The Hypothalamus is an anatomical region of our brain, which serves to regulate the primary functions of our body.
For thermoregulation, it triggers either perspiration, in case of overheating, or shivering in case of cold. It self-regulates other functions such as stress, circadian rhythm, hunger, …
In economy, this control center exists. It is the State and the police force, and as a primary function, we will speak of a regalian function. It is in charge of regulating flows, regulating an economy, without destroying its sources of wealth. In the absence of the State, it is all liberal, capitalist anarchy, and an exploitation of externalities, for individual profit to the detriment of the public interest.
We will see how the state regulates externalities through, among other things, taxation, and how this can be integrated into a balance of externalities.
The tax on profits allows the State to provide for tasks in the public interest.
It has been assumed in a previous article that all taxes can be considered a Pigouvian tax, since it is assumed that the role of the state is to guarantee the general interest and thus to ensure a balance of externalities between taxpayers (including companies) and citizens.
One of the contributions of companies is the payment of income tax.
This tax on profits is based on a tax base, the net result, which we do not question in this article.
Indeed, it allows the most profitable companies to contribute, and those in the most difficulty to “breathe”. It also adjusts itself to the economic (macro-economic) situation. Thus, all companies that benefit from an organized market on a territory (country) are liable for this tax. Tax evasion is therefore a source of negative externalities, or the balance of externalities, managed by the State, is unbalanced, so this can lead to undesirable social impacts.
When a company directs its strategy towards reducing the tax due, it will organize its production in a country where the tax is low, and from this country it will contract in other countries, in which it will have organized a commercial force. In doing so, the company benefits from a market, but pays the tax actually due. This has led to the BEPS (Base Erosion and Profit Shifting) initiative in Europe, which initially aims to identify firms that abuse it (transfer pricing policies are considered to be poorly regulated).
It is as if the hypothalamus decided to send bodily regulatory signals to one part of the body and abandoned the rest.
The tax on profits allows the State to provide for tasks in the public interest.
It has been assumed in a previous article that all taxes can be considered a Pigouvian tax, since it is assumed that the role of the state is to guarantee the general interest and thus to ensure a balance of externalities between taxpayers (including companies) and citizens.
One of the contributions of companies is the payment of income tax.
This tax on profits is based on a tax base, the net result, which we do not question in this article.
Indeed, it allows the most profitable companies to contribute, and those in the most difficulty to “breathe”. It also adjusts itself to the economic (macro-economic) situation. Thus, all companies that benefit from an organized market on a territory (country) are liable for this tax. Tax evasion is therefore a source of negative externalities, or the balance of externalities, managed by the State, is unbalanced, so this can lead to undesirable social impacts.
When a company directs its strategy towards reducing the tax due, it will organize its production in a country where the tax is low, and from this country it will contract in other countries, in which it will have organized a commercial force. In doing so, the company benefits from a market, but pays the tax actually due. This has led to the BEPS (Base Erosion and Profit Shifting) initiative in Europe, which initially aims to identify firms that abuse it (transfer pricing policies are considered to be poorly regulated).
It is as if the hypothalamus decided to send bodily regulatory signals to one part of the body and abandoned the rest.
Now let us return to the initial problem, which is to evaluate the externalities in such cases.
On the one hand, the firm pays (or not) a tax: private cost. On the other hand, it must be possible to calculate a social cost (by difference we will obtain the value of the externality). Calculating this social cost in a direct way is impossible, the number of variables to be taken into account being infinitely large. To compensate for this, we can define a rule, corresponding to what the state would be entitled to expect (in terms of tax payment). Indeed, we had assumed that the State is the guarantor of the balance of externalities (public interest), and therefore its administration must be able to define the inducers of this tax.
One of the proposals is therefore to recalculate the tax according to another economic driver of profit than the net result.
And to look at the difference that exists between a tax calculated on the basis of this inductor, and the tax actually paid.
We can therefore make the example, with the following figures and considering that we know the tax rate on the country’s result, the result before taxes per country, a tax paid per country.
Note that in this example, we do not deal with the tax advantages (tax-exempt part, tax credit), which must be considered as a “subsidy” to the economic activity (see article on subsidies). We therefore treat the example below as if these elements did not exist (to simplify).
From these elements, we can therefore reallocate the group result before tax, following an allocation key (for example the gross investment made in the country), to recalculate a tax, fictitious, if the result followed the allocation key used. Thus, if the difference between the tax paid and the assumed tax is negative, then we can deduce that the firm pays taxes only as much as it should, and is therefore a source of negative externality. Conversely, if the difference between tax paid and tax assumed is positive, then we can deduce that the firm pays more taxes than it should, and is therefore a source of positive externality.