There are occasions when even Guardian economists can prove just how closely wedded to the blackboard and how out of touch with reality they are. Phillip Inman did so this afternoon when writing about corporation tax. He said this afternoon:
Soon there will be no such thing as corporation tax. Among the first items on the shopping list of reforms outlined by Spain's new prime minister Mariano Rajoy on Monday is a cut in the main business tax.
He said more firms would enjoy a 20% rate as a central plank of his mission to make Spain more business friendly.
And from this Phillip moved on to argue:
The TUC and tax campaigner Richard Murphy's groundbreaking 2008 report The Missing Billions: The UK Tax Gap (pdf), found a £12.5bn difference between what companies should have paid in corporation tax annually and what they really paid.
Some on the left argue, as the TUC did, that government's should play hardball with companies and make them pay the full charge.
But not only is that a forlorn task against the run of play (when governments across Europe are reducing corporation tax rates), it is wrong headed.
We need to generate taxes to fund social welfare and for that we need to redraw the tax map. I subscribe to the OECD's recipe for reform. Despite the Paris think tank's reputation for rightwing, pro-capitalist reforms, in this case it is pretty even-handed.
It would reduce all taxes on income and increase taxes on spending and wealth.
As he continues:
Unfortunately, the proposal leaves most leftists gasping for air. What do you say when a proposal slays the sacred cows you hold dear, but also slays those of the opposition.
The left loses a tax on businesses, and must suffer the regressive nature of high consumption taxes. On the other hand, workers pay less tax and crucially, the owners of wealth, be they rich individuals or corporations, must pay a new tax on their holdings.
The OECD, like most economists I speak to across Europe, subscribes to a tax on land as the simplest and fairest tax on wealth.
He tries to justify his position:
The shift has many positive benefits. They key must be to unlock a desire for work by cutting taxes on incomes. At the moment we lock families into static or falling living standards, partly through the interaction to income tax, tax credits and benefits.
Consumption taxes rise, but there is evidence that skewing VAT away from food to luxuries makes it much less regressive. Land taxes would discourage the wealthy from hoarding land without doing something with it (planning rules permitting). If they want to live in expensive areas of the country or base their businesses in the south-east, then there would be a significant tax charge for doing so, and one they cannot dodge with elaborate schemes or offshore trusts.
Rajoy is, like most rightwing politicians, only tacking one side of the equation. The left should argue the logic of the right's position on income taxes with demands for taxes on wealth.
We do argue for a wealth tax Phillip, we do. But we do so based on our understanding of the real world, which is what Inman's suggestion so clearly lacks.
Let's just address one very obvious problem. About 700 companies pay more than half of all corporation tax in the UK. Details of the £42 billion paid in 2010/11 are here. But this misses the fact that maybe £12 billion is paid by small business - who should also, as I have shown, be liable for much more if only this tax were not so heavily evaded. Inman says we should have no corporation tax but a tax on wealth instead. How is he going to address the taxation of 1 million or probably more small businesses as a result? And how will he stop everyone forming companies to avoid tax henceforth? The naivety of suggesting the abolition of corporation tax to create this potential tax chaos is staggering. The back hole in government finances would be enormous.
Let's take a second issue. We would lose £42 billion from corporation tax. Inman suggests we recover this from VAT or wealth taxes. First, Inman suggests we skew VAT from food to luxuries. We already zero rate food. That shows how much he knows about that: precisely nothing by the look of it. Secondly, perhaps he does not realise there is no EU provision right now for a luxury wealth rate of VAT - although I would prefer one. So, to recover his VAT we'd need not a VAT rate of at least 28% based on this year's forecast yield of £100 billion. That's going to help inflation, isn't it Phillip? And boost the economy a lot, isn't it? Whilst of course creating no labour market distortions, at all. Nor will it create any benefits re-rating issues whatsoever, of course. And let's ignore for a moment the impact on those on pay freezes. The proposal should make every right thinking person shrink in horror. How come Inman thought of none of these issues?
And can we just ignore the suggestion that income tax rates will fall? How does cutting a whole tax raising £42 billion mean income tax rates fall? That's just fantasy. Making up the deficit will be enough of a challenge. Other cuts is just a ludicrous claim.
As is the argument for a wealth tax. I agree with these. Fundamentally. Completely. I want them. But there are some conditions. Like securing the data to assess them. And whilst we have tax havens that let anyone hide their wealth in offshore companies - which are tax free entities that no authority asks questions about - the chance of collecting wealth taxes is about zero percent. Of course I want to shatter that secrecy but suggesting a wealth tax without mentioning that pre-condition is plain absurd.
As for taxing land. Yes, I agree: that has to be done too. But there's an issue Phillip. It's called cash flow in the first instance. Is it reasonable to charge tax when there is no means to pay it? This is the perennial argument with taxing land. How are you going to overcome it? No mention is made? And then there are other problems you ignore. Like finding the owner. Not all land is registered, and much is registered offshore. How do you overcome that? And last, but by no means least - land (despite the Georgists's claim) is not the sole source of wealth. Cash generating assets are as well, very much so, but it seems Inman wants to ignore them.
I could go on, but won't. I want radical reform of taxation. But I also want a tax system that works. I find those like Phillip Inman who're still wedded to the old theories of economics and who have had no real encounter with the real world of tax where the problem of extracting payment is the number one priority putting forward ideas that are barking mad on a blackboard and economic insanity in the real world profoundly annoying. Even if they do work for the Guardian. Especially when they can only increase the wealth gap in society and the opprtunities for tax evasion that corrode social justice.
Inman owes the Guardian and its readers an apology.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Corporation tax is a tax on the profits a corporation makes; it is paid by shareholders. It is, consequently, paid at the same rate by the pensioner shareholder as by the chief executive shareholder. Legally, and for tax purposes, companies *are* their shareholders; practically, they *are* their executives, who see shareholders just as a rather expensive source of capital. Better to tax all shareholders progressively each at their own personal marginal rate, than the company as a whole at a single rate.
But this demands much greater reform of the tax system than just abolishing corporation tax, because each of the different ways added value leaves a corporation (dividends, salaries, stock disposal) attracts a different tax regime. My solution to this is to tax cash flow (via a Meadian direct expenditure tax) rather than income/capital gains.
The complex corporation tax regime means that companies make investment decisions based as much on “tax efficiency” as on the commercial merits. It enriches tax professionals at the expense of shareholders. So long as the tax base is subjective – as are income and profits, being determined by essentially arbitrary accounting standards particularly in relation to the treatment of capital expenditure – there is scope for avoidance and evasion. With an objective tax base, such as cash flow, the scope is much reduced. Indeed, if you are going to tax corporations at all (and I have indicated why I think you shouldn’t) it makes much more sense to tax cash flow than profits.
But – and it is a big but – in exchange for tax freedom, companies should become transparent, that is, with all their ledgers readable in real-time, and commercial confidentiality abolished….
This us what happens on blackboards
It is not the real world
You are suffering from Inman’s problem – confusing theory with reality. That’s always dangerous – especially when the theory is wrong
Philip has previously written more effusively about LVT. Here he ‘downgrades’ it, talking about land taxes. There is only one effective land tax. It is also the only effective wealth tax – because you can’t hide land in a tax haven and it is unavoidable. If you want to claim ownership you have to register your title and pay the tax.
I wish I were so simple – and I agree I could be so – but the condition has to be stated
It wasn’t
One could of course argue that personal and corporate tax is blackboard theory – you only have to read your informative blog each day to see the defects both in failing to tax cash only decorators to rich individuals and companies with clever professional advice. Someone once said profit is a theory cash is a fact so maybe you should not be so dismissive of ej’s contribution.
True maybe we could make income tax more effective by recruiting 20,000 more inspectors but this serves to demonstrate the impracticality of the current regime. Could be that cash flow and/or consumption taxation would be far more effective in having tax paid at the right time, the right place and in the right amount by making tax far less avoidable.
Applying a land tax is easy – you just require the legal owner to pay, and place a statutory charge against the property if they don’t (forcing a sale if it isn’t paid after a set amount of time). If there is a beneficial owner lurking behind the scenes in a tax haven then it will be very much in his or her interests to ensure the tax is paid. So we can impose such taxes without needing mechanisms to trace beneficial ownership.
If only it were as simple as that
You also ignore all the otgerscarevsaying issues I note
you mean the cashflow issues? Yes – it’s a problem if one wants to impose land value or similar taxes on normal residential properties, and that’s generally not a great idea. But cashflow isn’t an issue for commercial property.
But on the point I was making, it really is that easy – there is no need to trace the beneficial owner (just as SDLT operates very happily without tracing beneficial owners).
I wish it were so simple – but I can already foresee abuses
But that’s for another day when I’m not so tired
“Inman suggests we skew VAT from food to luxuries. We already zero rate food.”
It shows how much I know as well. I always thought there was VAT on hot, take-away food.
there is
But it’s hardly enough o change the rules of te game as he suggests so you are being a pedant too
Sorry – but hot take away is not the issue – so shall we stick to that
OK, sorry! I wasn’t agreeing with him. I was just wondering whether that tax still applied, that’s all!
As you say, it doesn’t change the rules of the game and hardly applies. As you say, and as ever, the £42 billion loss is going to have to come from somewhere. This is what tax cutters always gloss over! The money has to be made up from somewhere, maybe, as you suggest, a crippingly high VAT rate of 28%
Its like the old saying; what you don’t pay on the swings, you pay on the roundabouts! If you are not taced to make up the difference, it will be either paid for by cutbacks, sell-offs or put onto the deficit.