Who will pay corporation tax? That is the question

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It’s interesting to note that there are two camps who want to attack my work on the Tax Gap. First there’s the camp who say:

so what? Tax isn’t paid by corporations anyway so the fact that they’re not paying at the advertised rates is a good thing.

This is the incidence brigade, pretty much located in the world of academia, right-wing think tanks and their follow on blogs. Their argument is that corporations can’t pay tax, so what is the point with worrying about the rate they pay since the cost is always borne by others anyway?

Then there are those who say that tax is a cost to business and that it must be cut for that reason. This camp would appear to include the CBI, the professional institutes, the professional firms and most companies. For example, the CBI said in their report on corporate taxes last year:

Rates are critical but only part of the story. A commitment to competitiveness should encompass much more than strategic policy reform, it must also mean a commitment in terms of tax rates and tax burden.

There should be a clear commitment to significant further reductions in both the headline rate (important to overseas investors) and the effective corporate tax rate to improve the competitiveness of the tax system for all UK businesses.

• Headline rate Рa staged reduction in the marginal rate over a period of up to eight years to a target of 18%.

• Effective rate Рeffective rates are a more accurate reflection of the true burden of corporation tax on UK business. Any base broadening measures must be more than offset by reductions in the headline rate of corporate tax.

The CBI do by implication do three things:

a) They say tax is a cost to business. Something you do not pay can’t be a burden, and they’re explicit that corporation tax is a burden on business;

b) They admit that the tax gap, as I define it, is important.

c) They say that they want this gap widened at the same time as they want the headline rate cut.

So, all they would appear to disagree with me about is whether the difference might be called avoidance or not. And if that’s all the difference is about it certainly doesn’t justify calling the work ‘rubbish‘.

But there’s one other thing that’s not possible: the CBI can’t buy the incidence argument. Tax cannot be a cost if the incidence argument is right. But this also means that, presumably, the CBI can’t buy the incidence argument that cutting tax is the right course of action because it boosts wages.

That though has a further implication. This must mean that the CBI and business lobby must accept that if they want a tax cut then someone else will have to pay that tax burden removed from them, because I really do not believe that they think that at 28% we’ve passed the peak of the Laffer curve with regard to corporation tax (not, I would hasten to add, that I accept that there is such a thing as the Laffer curve in any meaningful sense).

So, what this means is that the tax cut lobby is horribly split.

The CBI are, without doubt, closer to the truth on how tax works. The problem for them though is a simple one: who do they want to pay the tax they’d rather avoid?

That’s the question they’re going to have to answer at the Treasury, sometime soon, if not at today’s meeting on the future of corporation tax at which their Chief Executive, Richard Lambert is present.