From the Guardian blog by Vince Cable:
In the case of the UK-based global banks, we have also painfully discovered in recent weeks that the UK taxpayer has vast exposure as a result of the government's role as lender (and, now, investor) of last resort. To see these catastrophically mismanaged institutions going cap in hand to the government while simultaneously organising tax avoidance schemes at the expense of the UK taxpayers beggars belief. One of the important supplementary arguments for the government assuming direct control of the banks it has rescued is to bring such practices to an end.
And:
[T]here is a strong case for a more aggressive approach to tax avoidance. The systematic and widespread avoidance of stamp duty land tax by corporate vehicles can be stopped quickly. More broadly the idea of a General Anti-Avoidance Rule is that tax is applied wherever there is an intention to avoid it, even if the loophole hasn't specifically been identified in advance by the Inland Revenue.
There is only so much governments can do in isolation. Tax arbitrage involves playing off one state against another. Governments can limit that game by co-operating. The British government's dogmatic opposition to any EU tax harmonisation has inhibited sensible, practical initiatives like agreement on a common EU tax base (not harmonisation of rates but agreement to treat depreciation and other accounting conventions in a similar way). Britain has formed a bizarre alliance with Ireland and the Baltic states to block co-operation.
And:
Tax havens are the big challenge for the UK, which has spawned a substantial number in its dependant territories. There has been limited progress in stopping the grosser abuses, such as money-laundering, but non-criminal tax-dodging continues apace. There is now a mood in the Obama administration and the EU to crack down on havens through such measures as withholding taxes to prevent leakage outside the main jurisdictions. The UK has traditionally dragged its feet on measures to curb tax havens, on the basis that these helped the City of London to attract business. It is to be hoped that straitened fiscal circumstances and a less credulous approach to the City will now persuade the government to turn its guns on the tax havens and tax-avoidance industry.
You can see why this man is thought to have the best economic brain in British politics.
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Odd that you didn’t mention this Richard:
“Companies are, of course, not individuals but legal entities. Any corporate tax is ultimately passed on somewhere else – in reduced dividends or wages or in higher prices.”
Vince Cable certainly believes in tax incidence….
Tim
As I’ve just put on the Guardian blog:
I do not dispute incidence. I am saying that the likes of Tim Worstall who argue that corporations cannot pay tax are absurd. They put forward an idea that in the real world cannot be sustained.
Sensible people cannot believe that. It is very apparent that corporations think they do pay tax.
That is the point I am making.
I am equally saying that corporations do deliberately change where tax is paid and who pays that tax.
Neither are arguments against incidence per se. They are arguments against a form of the incidence argument which is regrettably widely espoused by economists which is that corporations cannot suffer a tax burden. I do not agree.
That was the point I was making. I think it a fair and appropriate one to make. I am certainly not embarrassed by making it. It is glaringly obviously correct. Corporations are real, they have real impact in the world and for all practical purposes exist as economic agents quite independent of their owners or any other party – a fact the International Accounting Standards Board now recognises in its framework for accounting reporting, but which many economists seem to deny.
If incidence means someone pays the tax of course I believe in incidence.
If it means as you say it means that companies doe not pay tax then that is patently absurd – as I have argued persistently.
Companies are active agents in tax – redefining what is paid, where it is paid, when it is paid and choosing which part they pay on their retained earnings and which part may contribute to the tax liability of others.
To say they are neutral as you do is what I say is absurd.
And it is very obvious Vince Cable agrees with my position because it is practical, and reflects what corporates themselves actually think and , therefore, the drivers of their behaviour, which is critical if change is to happen.
I reiterate: only economic fantasists can believe your version of this story. And the world cannot afford your fantasies which are used as cover to permit corporate abuse, which we know happens.
As the Guardian is noting, day in, day out right now, proving they too agree with me.
As do all the big forms of accountants and the International Accounting Standards Board.
Richard
Tim
I note you’re still nit picking Tim
How about answering the challenge I gave you?
Why your silence on the real issues?
Richard
It’s been up for several hours Richard.
http://timworstall.com/2009/02/03/a-challenge-from-richard-murphy/
That’s not an answer Tim
That’s just more pedantry
Addressing the issue is clearly beyond you
Richard
PS You also made the mistake of assuming I visit your site. Have you ever wondered why would any reasonable person would do that?
I’ve followed this exchange with interest, and I think there’s actually much less disagreement here than meets the eye.
On the substantive point – whether there is a large and growing amount of tax abuse by large companies – there seems to be no disagreement. Richard, I think everyone knows this is your view(!), and Tim states here that he is in agreement:
http://timworstall.com/2009/02/03/a-challenge-from-richard-murphy/
(para 5)
On the specific point of tax incidence arguments, I think language is getting in the way. I suspect neither of you would disagree with the following:
– that tax incidence plays out in such a way, over the medium term, that 100% of corporation tax is not simply a distribution from profits;
– that nor is 100% of corporation tax passed through to either reduced labour payments or higher prices, so that some part at least is a distribution of profit; and
– that the exact share will differ from context to context.
I don’t think any sensible economist would disagree with this either – and nor should they! Even the somewhat more obviously ideologically driven work that one can think of does not claim to identify 100% pass-through of corporation tax; and I’ve never heard anyone argue that it is zero either.
Perhaps the disagreement underlying your disputes is about whether the incidence is sufficiently high that corporation tax abuse is worthy of greater attention.
Richard’s work, our own at Christian Aid, Ray Baker’s, Simon Pak’s and so on, all confirm that the scale of abuse – in terms of lost revenues for countries rich and poor – is at the very least substantial.
If Tim disputes this, and hence the importance of the issue, then this is more serious. But judging by Tim’s focus on these issues in his blogging, not least here and at the Guardian, I rather suspect he agrees on the importance also. Tim?
So – in summary – can’t we all just get along?
Alex
I know you’re a reasonable man. And I respect that, a lot.
Trouble is you assume Tim might also be reasonable: might even reflect that this is not a cut and dried issue (as I have, for example, in long blogs on the Guardian site). But I think your hope is forlorn, for as he says there:
You really need to look up the concept of “tax incidence”. Companies don’t shoulder the economic burden of corporate taxes. Some mixture of the workers, in the form of lower wages, the customers in the form of higher prices and shareholders, in the form of lower returns, shoulder the economic burden. The more open the economy the more it will be the workers who pay the tax in reality.
No, don’t argue about this, go and look it up. “Tax incidence”.
Sorry, but you’ve entirely wasted your time on this entire piece of research, for you appear ignorant of the basic economic reality about corporate taxation.
He seems to be in the 100% camp – he seems to have it that the corporation is a ‘look through’ entity and therefore inconsequential.
That is what I argue with. I think it reasonable to do so. But it seems Tim is sure he’s absolutely right: so be it. Thankfully I have found a lot of people who are happy, like me to say that the best reaction to his argument is ‘so what?’ because in practical terms it makes no difference: we have to tax corporations anyway as we cannot otherwise be sure we would collect the tax form all who benefit and in that case making sure we get it right and just is the right thing to do. I also have to say most in the tax profession just simply profoundly disagree with Tim.
Richard
Richard, it appears that the man you describe as having the best economic brain in British politics, Vince Cable, agrees with me though. “Any corporate tax is ultimately passed on elsewhere”.
That is of course just the starting point about tax incidence. What we then want to know is where is a specific corporate tax passed on to? Who bears that economic burden?
For example, we might want to tax the returns to capital. We might then have, say, corporation tax, thinking that this does tax the returns to capital. If, however, we find out through empirical sutdies of tax incidence that the major part of the economic burden of corporation tax is carried by workers in the form of lower wages (which is indeed what most empirical studies state, at least in the UK and US economies), then we might conclude that corporation tax isn’t a very good method of taxing the returns to capital.
And we might decide that, given that corporation tax doesn’t do what we want it to do, tax the returns to capital (or at least, not very well), that we abolish corporation tax and replace it with something else which does indeed tax the returns to capital.
No?
Tim,
I offer this from the Guardian blog, by me, yesterday:
Luis Enriques
You are quite clearly an economist from the school of economics for which I have little regard. It is, of course, the school of economics that has helped bring the world economic system to a near halt at this point of time, but let’s leave that aside.
You, like Tim Worstall, appear to believe that corporations do not, as such, exist. Nor do you think that they have corporate personality. You argue that they are mere conduits, and no more.
And yet corporate law has for many years believed that corporations can think: it is quite clear that law believes that there is central management and control of corporate organisations quite independent of the individual human participants in the process.
Law also affords corporations a personality: that is why they can pursue claims in the court of human rights; a paradox for you economists if ever there was one, but which they have been keen to exploit.
And quite clearly if economists think that corporations maximise profit (and much of your theorising presumes that they do) then this activity must take place independently of the managers, quite contrary to the argument that you have presented above.
Put simply: your argument does make for nice mathematics on the tax professors blackboard, but it has no accord with what happens in the real world. As someone trained in both economics and accountancy, and who long ago realised that all the economics he had been taught has no relationship whatsoever with what he witnessed in the corporate world, I have had to make a choice: do I stay true to an economic principle which is clearly unrelated to reality, or do I accept the evidence of behaviour as I witness it, and the consequences that follow from it?
In other words, do I make policy suggestion based upon the real world, or upon the theory on an economists blackboard? It seems to me that there is only one answer that is available, but of course it does mean that I’m in conflict with you, and those economists who think like you.
But let’s also be clear why I’m in conflict with those economists like you and Tim Worstall. You propose a world where corporations do not pay tax. I notice that many of you also propose a world where investment income should also be exempted from tax, the argument being that this is secondary taxation, the capital invested having been accumulated out of earned income and that this is, therefore, unjust. The result, therefore, is that capital would be entirely untaxed and all tax would therefore fall upon those people who have to exert their human effort for the rewards that they secure.
What would the consequence be? A profoundly regressive tax system, of course. That, I believe, is the real political agenda that is being promoted by those who argue, contrary to all the evidence, that corporations cannot pay tax.
But I persist in my point. Corporations do think. Corporations do have personality. Corporations can not be assumed away. Corporations do reallocate where tax is paid, when tax is paid, how much tax is paid, and who might also bear part of that burden of tax when in some circumstances they choose to distribute their income to others. They are, therefore, economic agents in their own right. That means they should be taxed in their own right. That means they are accountable in their own right. And because we cannot predict or measure how they might behave with regard to that range of variables there is only one rational course of action whether or not my argument is true (which also somewhat negates any counter argument that you might present) and that is that we should tax the corporation whatever happens because it is a back stop to any effective income tax system, which would otherwise fail to collect that income that is due to the society in which a corporation makes its profits whether or not it is truly liable for it, or not. Incidence has to fall somewhere in the sense that someone has to pay. Best that we capture it in the corporation before it creeps elsewhere untaxed.
If you then say I’m arguing both ways, I am relaxed. You might say, and I think you do say, that I’m a very poor economic theorist. I think that actually means you’re saying I do not agree with you, which is something quite different. But Id put it to you that since economists of your persuasion can offer no answer to the problem of corporate tax if they pursue your line of reasoning because you quite literally assume the problem away when we in the real world know it exists, then the alternative evidence and reasoning that I present might be much more useful than anything you have to offer.
Richard
Tim
I also offer this from the Guardian blog today:
Luis Enriques
To say that all taxes are paid by human beings is in a sense a truism. And yet it is also absolutely no help whatsoever in this debate.
Of course it is possible to argue that, but what is absolutely clear is it is not possible to say which human beings might pay the tax on corporate profits if the corporations do not, so the understanding is of no help to us.
Tim Worstall says it is labour. Why? I think because Mike Devereux at Oxford says so — but he came to his conclusions by studying corporate tax increases and suggesting these gave rise to a cut in labour rates. But that paper was horribly flawed — and cannot sustain the arguments made of it. First of all, he did not study corporation tax cuts (which are almost all that happens now) and see whether wages rose. I suspect there is no link in that direction — and he was careful not to make it, but that has left it open for others to make that claim — which I think he knew might happen. After all, his centre is supported by the FTSE 100 who are in favour of tax cuts. Second the assumptions required to build the theoretical model Devereux uses are heroic — plain daft might be another description. That I am afraid is typical of all such work. It might appeal to an economist. To the informed lay person, let alone the seasoned tax practitioner or company director, the assumptions required to reach such conclusions cannot be accepted.
In which case, as I will reiterate for probably the last time here, the incidence argument is of no use to us, which is why I dismiss its relevance. If all we know is that a corporation is an economic agent that can change the distribution of who might be taxable but without us having any clue how that might happen then the only rational thing to do is tax it rather than wait for the unknown outcome that might otherwise prevail. Only in that way can we also be sure that we can deliver a sustainable income tax system.
And the delivery of a sustainable income tax system of which corporation tax is a part as an essential back stop against avoidance and leakage is the purpose of corporation tax. Its really that simply stated.
Those who argue otherwise do, I note, have a near universal dislike of tax. Thats a separate issue, but one they do not mention. So I will. Those of us who believe in the social contract do believe in tax. Thats why we seek to collect it from economic agents with economic influence within jurisdictions in which their earnings arise — whether they have human or legal personality.
Thats precisely why the argument you present is both pointless and disingenuous, a fact reflected by the fact that no one thinks abolishing corporation tax makes any political or practical sense at all.
Richard Murphy
Now, having read those two Tim you will see that I’m not arguing about incidence if incidence means ‘someone pays the tax’.
I’m arguing your interpretation of incidence is wrong.
Of course you’re happy to quote from Mike Devereux that corporation tax is paid by labour. But I’ll be blunt: Mike Devereux’s work is sponsored by the 100 Group of Ftse finance directors, and it was structured to ensure he did not show that tax cuts favoured labour, only that tax increases (which are as rare as hens teeth) cost labour.
There is of course another, purely political explanation for the cost: it is FTSE directors punihsing their employees for having the cheek to vote for tax increases on capital.
I guarantee that tax cust do not increase wages. I guarantee Devereux thinks that too. That’s why he did not investigate the hypothesis, I suggest
But let’s also be clear: your agenda is actually one of cutting taxes. We all know that. We know why you front this up in the way you do.
And as I note above, that’s why we reject your trumped up argument.
Sure incidence is valid. But since you choose to misrepresent it, and so might anyone else we do what is pragmatically right: we tax where it is possible knowing that otherwise it may not be possible.
I’m 100% in agreement with Vince.
I’m pretty sure he’s 100% in disagreemnt with you.
Richard
Tim
I also note that, as ever, when presented with an argument, as Alex Cobham has done, you have ignored it.
Why is that?
Why not respond to what he says?
Richard
Richard,
You are missing the very point of the argument about tax incidence. It isn’t about what companies might do to limit their exposure to tax and it isn’t about what people intend to do, either companies or lawmakers.
It’s about the actual effect of what is being done. As with so much in economics, it’s not about what people intend or say, but what is the effect of what they do.
And I’m not relying upon Mike Deveraux. Try the US Congressional Budget Office.
http://www.cbo.gov/ftpdocs/75xx/doc7503/2006-09.pdf
“Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax. The domestic owners of capital bear slightly more than 30 percent of the burden.”
Given that we intend to tax the returns to capital that doesn’t look like a very good outcome. That’s why corporation tax is a bad idea, because it doesn’t do what it says on the tin. It doesn’t tax the returns to capital: it taxes the returns to labour.
If we want to tax the returns to capital then we need to find some other method of doing so, a method that does in fact tax those returns.
Tim, I don’t think this is a very useful response.
The paper you cite is not an empirical analysis, but a rather simple model. The assumptions are extremely restrictive, and include the following, for example:
“All production technologies are characterized by constant returns to scale; production functions are twice differentiable and concave; competition is perfect at the level of the producer.”
“Labor is homogeneous and perfectly mobile within each country, but cannot move between countries. Thus, the wage rate is the same for every sector within a country, but can differ between countries. Individuals do not vary their amount of labor supplied to the market.”
“The worldwide supply of capital is fixed but perfectly mobile between countries in that the geographic location of investment does not matter to a marginal investor. The marginal return to investment is the same everywhere in equilibrium, excluding producer-level taxes on capital income. Capital owners can own capital in either country, but cannot themselves relocate abroad. Each owns a fixed share of the world capital stock”
Now, it’s very difficult to model the complexities of these issues well, but clearly these are rather extreme assumptions. What would be needed is an empirical examination of their reasonableness, or at least of the reasonableness of the predictions, and the paper does not attempt this.
One would expect that, if we assume capital to be perfectly mobile and labour to be perfectly immobile, tax burdens are likely to end up on labour – and unsurprisingly, this is what the model predicts.
One aspect that the author highlights, that perhaps you didn’t look at, is the role of other countries as tax havens in exacerbating these effects. As the conclusions state, “As more
countries become tax havens, workers living in the countries that are not tax havens acquire an increasing average share of the burden. The average burdens are reduced for capital owners in those countries.”
So the incidence of corporate taxation – even within such a restricted analysis – is highly dependent on the behaviour of other jurisdictions.
Overall, this paper certainly does not get us to the point you suggest, that we should do away with corporation tax. Even under the extreme assumptions of the model, capital – which is notoriously difficult to tax – still bears a substantial part of the burden. Closing loopholes and bringing havens into line would of course increase this. Meanwhile, on the labour side, rich country governments at least can, and do deal separately with the potentially regressive side-effects due to incidence issues.
The problem is greater for developing countries, who often lack both the technical capacity and the international political clout, to demand sufficient transparency from corporates or from tax havens, and so see their citizens – the poorest people in the world – bearing the burden (in higher tax or, generally, less revenue for desperately-needed services). As Christian Aid has calculated, the tax losses to mis-priced trade are as high as $160 billion a year for developing countries.
[this is a re-post – thanks for suggesting I put it here Richard – and relates to the debate on the Guardian blog where comments are now closed]
Mr Murphy,
I am rather distressed. I have consistently a repeatedly said I am not opposed to corporation tax, yet you persist in responding to me as if I am. Please address this point explicitly and acknowledge your error.
After arguing strenuously against the proposition that people not corporations pay taxes, you now appear to think that idea is a truism that makes no difference to anything. That’s fine with me: the only difference I ever thought it made was to guard against thinking of corporation taxes as a free lunch that only cost corporations and not people.
You think the tax incidence argument is irrelevant and disingenuous. Look: all the theory of tax incidence says is that when thinking about the effects of taxation, we have to think about how the firm responds, and consider the effects of the tax upon wages, profits and prices (and then we can think about the effects of those effects). That’s it. It just points out where the effects of a “tax on profits” might be felt. I am sure that you do not really believe that firms respond to taxation solely by accepting lower profits and that taxation has no effect on prices and wages, so really, unless you are barking mad, you already agree with the theory of tax incidence. Nothing about the above is irrelevant and disingenuous.
I should add – if you then want to investigate tax incidence empirically or theoretically, and you then find that corporation tax adversely affects labour, you may then wish to you this to argue that corporation taxes should be replaced by something that targets the returns to capital (enjoyed by debt and equity investors) more directly. Empirical and theoretical results are open to question, as are the implications about optimal taxation drawn from those findings.
Again, none of the above has anything to do with the validity of “the theory of tax incidence” itself, which Richard M, you have on several occasions appear to have been arguing against as if the theory of tax incidence might itself be false.
There are all sorts of reasons, drawn from within mainstream economic theory, that might leave us wanting to impose corporation taxes, so it is wrong to think that standard economics plus tax incidence equals abolishing corporation tax.
Luis
I am not arguing against incidence per se: I have said that time and again. I agree: people pay tax. I am arguing against the way the theory has been used by some to argue that corporation tax should be abolished. The reason is simple. I say that so far no one has shown who does pay and in that case corporations should.
I will comment more soon on what Alex has to say – and I agree with him – but in essence my point is simple – and I have repeated it time and again: the work of economic researchers is unsound in this area and as such makes no sense at all as a basis for policy
In that case we have to use alternative methods for making policy decisions
And from that I draw the inference that if the theory has no practical use, what use is the theory?
Richard
Alex
Thank you for these comments. You have saved me a lot of time in making somewhat similar points.
In practice I have sat through what have seem like interminable papers at academic tax conferences on this issue of incidence, always to my considerable dissatisfaction. Not only are the models based upon the extraordinary and simple assumptions that you note (Mike Devereux is also guilty of this: one of those from his paper that particularly amused me was his assumption that any company suffering a labour dispute could move its entire production to another location in another country for the duration of the dispute without any cost arising!), they are also completely burdened by the wholly inadequate nature of the data on corporate taxes paid that the Guardian has persistently noted in its report, and to which I refer in reports like The Missing Billions so, rather amusingly, Mike Devereux assumes that the tax charge on the face of the profit and loss account is the cash paid tax charge in undertaking his work. This is an absurd assumption: my work has shown deferred tax balances have not given rise to cash liabilities over the last seven years.
Others have ignored the group nature of entities or simply use date on selected entities in selected countries, being those where there is some transparency. But this, of course, completely ignores tax data on those locations which refuse to place corporate data on public record, which are of course largely the tax havens, so distorting results in their favour. It also completely ignores the opportunity for groups of companies to manage their affairs across international boundaries, which as the Guardian is noting, forms a major part of corporate tax avoidance.
And as you also note, maybe a good reason why the apparent incidence of tax on labour is that the capital on which it should not be paid cannot be found by those doing the economics: it is in tax havens and is not found in the data.
The obvious conclusion is not that we get rid of corporation tax: that would be perverse because as you note it certainly does tax capital in part, at least. The answer is to a) improve the data on tax which requires country by country reporting of tax liabilities b) close the tax loopholes and c) require transparency in all jurisdictions.
Then we are highly likely to find that corporation tax achieves exactly the desired aim of being charged mainly (but I’ll conceded, almost certainly never entirely) on capital and we’d have the data to prove it.
Which is exactly why those on the left who think this is a campaign worth pursuing are right to do so.
Richard