I've noted this morning that far from there being a legal obligation on companies to avoid tax, this action is probably contrary to the law (as well, as is now clear, good commercial practice, which happen to coincide on this issue). So in that case, who created the myth?
I think the finger can be unambiguously pointed at micro-economists. Because this breed has over the last 60 or so years become obsessed with seeking to solve all problems mathematically they have to make massive simplifying assumptions about the true nature of human (and so corporate) behaviour to reduce life to terms that they can handle in their equations. One of those massive assumptions is that companies have a duty to maximise profits. If they did not make this assumption they could not otherwise mathematically model corporate behaviour in the abstract, as they do, rather than look at its reality, which they don't.
But the fact that there is a fundamental flaw at the heart of conventional microeconomics because it is built on an assumption that is not only wrong,because as a matter of fact companies do not only not maximise profit but would have no clue what to do if instructed to do so, does not make that false assumption right. It should just instead lead us to doubt the advice of those who offer suggestion on the basis of such falsehoods.
And nor does an economist's false assumption create law that does not exist.
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Do you mean macro-economists, Richard?
No, micro in this case
They do the theory of the firm
Is this not about an interpretation of the duties on Directors to act in the interests of the company?
Hi Richard
Be interested in your views re companies in a wider context. True free market economists would argue that the company (in its common Limited Liability form) is a pernicious concept which distorts the transactions of market forces and progressive taxes (not that free market economist would necessarily advocate taxes). And therefore arguments such as yours above, although valid in context, do not get to the route problem. I have a great deal of sympathy with this view. For example:
The reason banks are able to write off losses and pass them on to us – Limited Liability (i.e. the shareholders are limited to losses equal to their investment). The shareholders are able to withdraw profits into individual ownership when the company makes them, but are not required to provide individual funds to cover losses when the company makes losses. Profits go to individual, losses are other people’s problem. This one way funnelling of profits distorts almost the whole economy. Directors are not playing with their own money, rational economic decisions are therefore not made. In a just and free system we would have been able to look through those bank companies and taken back from the individuals all the profits that were removed from these companies in the form of dividends on profits which ultimately turned out to be losses. If the shareholders knew this risk, they would not sanction bonuses of ridiculous proportions.
Secondly, taxes on companies. The argument that companies should pay no tax at all is interesting. That corporation tax is unprogressive seems logical. Rather than taxing companies we should be taxing the individuals that receive the profits of those companies at their progressive rate. The additional profits that the company would make by not paying taxes should ultimately go to employees or shareholders (who then pay individual tax on it) or reinvested. (ignoring the likelihood of it being sucked up by ridiculous corporate pay – but this is a separate problem also linked to how we operate companies).
This idea though is of course much like we treat partnerships (although there is the relatively recent introduction of an LLP), but none the less the ‘Business’ does not pay taxes. We do not frenzy ourselves with blaming KPMG or Freshfields for not paying any tax in the UK, because we know they are partnerships and therefore all profits are taxed on the individual (an added benefit for the exchequer being no delay here between ‘business’ profit and individual taxes that there is with companies). So therefore we should we frenzy ourselves if companies paid no taxes?
My conclusion is that the lifting of the corporate veil for taxes and profits and the effective removal of the limited liability company as we know it, as well as control of executive pay seems to be one of the most compelling economic decisions that this country should be looking at.
Very interested to hear your thoughts.
I have a very strong sympathy with this
At the very least a price has to be paid for limited liability
And that is tax
Thanks Richard.
Seems like a raw deal to me! Especially when tax on dividends are relatively low.
A dividend received has effectively been taxed at the company level (presumably they are paying tax!) and then at the individual level. So at 24% (company) and 35% (effective individual dividend top rate) a £100 earned and fully distributed amounts to £49.4 in the hand of the individual after all taxes. A net tax of 50.6%.
A partner in a law firm in the same tax bracket pays 47% (45% and 2% NI) on the business earnings.
So the difference between Limited Liability and non Limited Liability is 3.6%, and this is probably just due to vagaries of the ridiculous complicated system.
So if the cost of allowing Limited Liability is tax. At the moment we’re not charging very much.
Small but significant error. In my example I assumed the April 2013 drop from 50-45% on income tax for the partner in my example, but not the same drop for the higher rate dividend receiver. If we assume 50% for the partner to be consistent, he/she actually pays more tax (52% vs 50.6%)
So there does not appear to be any price to pay for corporate limited liability. In fact it appears to be an added bonus together with a lower tax (to be come even lower as we got to 22%).