Raising VAT is not the answer to the corporation tax problem

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I admit that there are moments when I quietly despair of the harm that is likely to result from so called tax reforms. This morning the FT has reported that:

Corporation tax should be scrapped and replaced by extra value added tax

adding that:

The proposal, which is designed to address the growing difficulties faced by the Treasury in taxing international businesses, is part of a submission to an ambitious review of the tax system undertaken for the Institute for Fiscal Studies, an independent think-tank.

And the FT noted that:

Another proposal put forward for the review, being chaired by Professor Sir James Mirrlees, the Nobel prize-winning economist, suggested the UK should follow the "dual income tax" systems of Norway, Sweden and Finland by taxing capital income at a low flat rate, well below the top rates on wages. Individual investors should be allowed to exempt interest income from personal tax, in part to stop them hiding wealth in foreign tax havens.

I admit, I never had high hopes for the Mirrlees review: it was obvious from the outset that it was set up to reduce the taxation of capital, and that is exactly what it clearly intends to propose. And ye there can never have been a worse time to do so.

It is abundantly clear from the credit crunch and all the issues related to it that global flows of feckless capital have caused massive harm to society. The cost is being born by tax payers all over the world. Put simply, that means capital has not covered the external costs of its operations and as such if anything there is a clear case for its taxation rate to be increased at present.

At the same time as this is happening it is also obvious that for a variety of reasons the cost of living for the very poorest in society are rising, significantly, whether it be oil, food or mortgage costs.

And what is this Commission recommending? That the rate of tax on capital be reduced and that the burden so released (which does not trickle down to labour, because there is no evidence that it does) will instead be passed to those who must spend all they earn, i.e. the poorest. The inevitable consequence is obvious to deduce: the rich will get richer and the poor poorer. Thieu instability of our society will increase, crime and social discord will rise. Health and eduction outcomes will get worse, and all this to keep the owners of capital happy.

Politically this is a non-starter for anyone. It is not going to happen. And all that the think tanks (from so-called left and right) and academics who propose this show is just how far removed they and their theories are from reality. If there was ever a time for new thinking, new think tanks to promote it, and a radical reappraisal of just what economics is all about, then this is it.

What I can say, with some confidence, is that if this is the way the Mirrlees report is heading then it is destined to be ignored. And thank goodness for that.