TUC » Tax Research UK

Stop corporation tax relief on high pay

Feb 062012

The TUC has published a new report this morning called Bonus Season. The summary says:

Ending corporation tax relief for pay and bonuses worth more than 10 times average annual earnings (£26,200) could raise around £1.7bn a year if applied to the banking and financial services sector, according to a new TUC report published today (Monday).

The TUC report Bonus Season uses data from the Labour Force Survey to show that over a third (36 per cent) of employees earning more than £250,000 a year in the UK work in banking and finance.

The report then uses HMRC data to estimate that around 81,000 people have incomes of over £262,000 (10 times average annual earnings) that come primarily from employment, including 29,000 people in banking and finance.

The report finds that total pay on earnings above £262,000 in the finance sector – which the TUC believes should be disallowed as a deductible expense for corporation tax purposes – is around £6.8bn a year.

Ending corporation tax relief on earnings over £262,000 in the banking and finance sector would raise £1.7bn a year – vital revenues towards paying back the deficit created by the financial crash, says the TUC.

The report also estimates that extending the scrapping of corporation tax relief for top pay and bonuses over 10 times average earnings to all UK companies would raise around £5bn a year.

With the government effectively cancelling out its own levy on bank balance sheets by cutting the rate of corporation tax from 28 per cent to 23 per cent by 2014, the banking and finance sector is no longer making a proper contribution towards paying off the deficit it played a key role in creating, says the TUC.

A previous TUC report The Corporate Tax Gap showed that banks already pay well below the headline rate of corporation tax and that that the scale of bank losses at the height of the crash has allowed them to knock £19bn off their future tax bills, despite an £850bn bailout from taxpayers and the Bank of England.

The fact that banks are back recording big profits and handing out billions of pounds in bonuses proves they can easily afford a new tax on big bonuses, says the TUC.

The TUC believes that making earnings more than 10 times average annual earnings liable for corporation tax would not only raise revenue but also tackle growing pay inequality by encouraging companies to spread pay across the workforce, rather concentrating it on those at the very top.

As well as calling for top pay to be liable for corporation tax, the TUC believes the following changes would help tackle the growing pay divide between top executives and the rest of the workforce:

Bring a much-needed dose of economic reality to executive pay decisions by introducing worker representation on to remuneration committees.
Make executive pay more transparent by publishing the ratio between top pay and both median company workforce pay and the lowest paid members of staff.
Tackle the closed shop of non-executive directorships (NEDs) by forcing companies to advertise positions externally.
Make rates of pay increase for directors reflect those of other employees, with an explanation given in the remuneration report should this not be the case.

I think such a policy would be a valuable constraint on high pay. But I should add that I advise the TUC on such issues so my agreement is unsurprising.

The message though is a simple one: if all politicians agree high pay is a problem we should simply stop subsidising it. What’s the problem with that?

#n30 – Fair Pensions for All

Pensions, TUC 2 Responses »

Nov 242011

Next week up to 3 million people will strike for fair pensions.

I support their call.

That call is summarised in this leaflet.

I was happy to endorse the back page of that leaflet:

FTSE companies do not pay 26% tax

Tax gap, TUC, Uncategorized 8 Responses »

Nov 032011

I note a story from a couple of days ago that has spun in all sorts of weird ways.

UK accountants Hacker Young have suggested that the tax rate of FTSE 100 companies has fallen by almost 30% over two years, publishing a graph that looks like this:

This is utterly misleading.

In 2009 we had economic meltdown and many companies made losses. However, many of those losses were provisions that were not tax allowable so profits were deflated by tax bills weren’t, so rates rose.

Now that situation is reversing.

And in addition, of the unadjusted profit of FTSE companies before goodwill provisioning is taken as the base when goodwill provisions are almnost never tax allowable that is also misleading whilst failing to exclude rogue companies like Shell which includes oil taxes in its tax charges can also seriosuly distort reuyskts.

The reality is that, as I have shown, that the effective tax rates of companies in a controlled sample of FTSE 100 entities is much lower than Hacker Young suggest, as follows:

This makes sense, and broadly agrees with a wide body of data, none of which shows UK effective tax rates are higher than the headline rates of tax as Hacker Young are suggesting.

Candidly, this report on their part is poor work, misleading, and is simple headline grabbing to demand tax cuts when none are due. They do themselves no favours as a result by publishing it.

There is an alternative economic narrative – and it’s coming from the unions

Economics, TUC 8 Responses »

Sep 122011

There is talk today of there being no alternative economic narrative.

That’s not true. Take this from the Guardian:

Britain’s trade unions must build a movement for an “economic alternative” rooted in green technologies and forcing banks to lend to small businesses, the leader of the TUC says on Monday.

On the same day as the government-commissioned Vickers report outlines plans for reforming UK banks, the TUC’s general secretary, Brendan Barber, will urge trade unions to “shift the debate” away from deficit reduction and on to building a new economy.

And yes, I do advise the TUC. And I’m proud of that fact. And yes, this does sound like some things I say though I had no direct influence I know of.

But that’s not the point: the point is that right now is the Labour leadership can’t or won’t take the lead in setting the terms for the economic debate we need then the trade unions will, and that’s great news.

Is now the time for an empty property tax?

Economics, Tax Havens, Tax justice, TUC 9 Responses »

Sep 042011

It’s almost two years since I wrote the following blog, but it seems to me that it is as relevant as ever, which is why I repeat it here:

The Observer has reported:

Alistair Darling should levy a £5bn “empty property tax” on up to a million homes left vacant by absentee landlords, to help meet the costs of the financial crisis, trades unions will argue tomorrow.

The TUC wants the chancellor to charge five times the usual council tax – an average of £5,875 – on homes standing empty to persuade owners to sell or let them. It would like to see overseas landlords charged UK income tax on rental payments unless they can prove they are paying it in their home country.

Brendan Barber, TUC general secretary, will use a speech to an economic conference in London to argue that the number of homes standing empty, thought to be a million on some estimates, is a national scandal.

“Across the UK, the queue for social housing is growing. In London especially, a chronic housing shortage is pushing prices well above their pre-recession levels – and out of reach of many potential home owners.

“How can it be fair then that a million houses lie empty across the UK? These properties – often bought for purely speculative purposes or as a vehicle for tax avoidance by overseas landlords – contribute to our housing crisis and fiscal deficit.”

In its submission to the Treasury before Darling’s pre-budget report on 9 December, the TUC says the chancellor should use tax measures, as well as public spending cuts, to deal with the government’s deficit ‚Äî and ensure that the rich bear their fair share of the burden.

So let’s get the caveats out of the way first of all:

a) Of course short periods of inoccupancy would not count – indeed up to a year should not be questioned

b) But second properties should count as vacant and be subject to an additional charge – even if at a lower rate than that suggested for wholly vacant property – because you can’t live in two properties at once

c) Holiday lets should not count as vacant – but only if really let. They do play a role in the tourist economy

d) There should – as with some rules in capital gains tax – be room for appeal in special circumstances

These noted, the proposal makes complete sense. We have a shortage of housing. That housing is needed now. The UK has a stock of available housing that is being withheld from the market. By pricing it into the market valuable resources are saved, need is met and planning stress is reduced. The increased supply of housing will also reduce house and letting prices: another social gain.

As such the potential gain for society from changes in behaviour promoted by this tax is enormous. And if the tax yield falls as a result – so be it. That is part of the intention.

And dealing with the offshore landlord issue – evidence is available that many occupied and rented properties are now being registered through offshore, tax haven companies registered in locations such as the British Virgin Islands, Jersey, Guernsey and Switzerland. For all practical purposes it is almost impossible to determine who really owns these companies. The reality is that they could be owned by UK resident people who are hiding that fact by registering these properties in the names of tax havens companies.

Anecdotal evidence from HM Revenue & Customs also suggests that although there is a requirement that a non-resident landlord company be registered with HM Revenue & Customs this scheme has become a virtual rubber stamping exercise: enquiry is not made as to the beneficial ownership of the companies that apply to receive rent from the UK without taxes being deducted at source and a list of properties the landlord owns is not demanded.

That is why the TUC suggests that unless an overseas landlord who is an individual is willing to prove that they have paid tax in their place of residence on the rent they will receive from a property in the UK then tax at basic rate should be deducted from all payments of rent made to them either by their tenant or their letting agent. Procedures to do this are already in existence, but it is at present possible to apply for gross payment of the rent without ever proving that tax is paid elsewhere on the income arising. This should now change and tax should be paid in the UK in the first instance until the income can be proven to have also been declared elsewhere (an exception being made for EU residents).

And, in the case of the non-resident landlord being a company there should be a different requirement. In every such case tax should be withheld at source on the grounds that the property in the UK represents a taxable branch of the company in the UK. That tax withheld should be required to be paid to HM Revenue & Customs at least quarterly, but with the right to make application for repayment at the year-end if it can be shown that the tax due on a properly computed profit was less, but then only if the full beneficial ownership is reported to HM Revenue & Customs with evidence of the standard required by anti-money laundering regulations being submitted as evidence e.g. copy passports as proof of identity and utility bills as proof of place of residence. This would curtail the massive risk of tax evasion in this market through use of impenetrable offshore companies.

The final change would apply in the case of offshore companies owning property in the UK that had not proven the identities of their owners to HM Revenue & Customs: in such cases capital gains tax should be assessed on sale by requiring that 20% of all sale proceeds be paid as tax unless full beneficial ownership of the offshore owners of the company are provided and tax computations submitted with tax still then being due on the resulting profit.

This policy has four critical objectives:

1. To increase available housing stock

2. To bring down its price

3. To tackle tax abuse

4. To target offshore abuse

All are key objectives for any government. This is why this tax makes sense. And it will also raise significant revenue from a source that largely avoids and evades it now: that is the added bonus that should sell it to any Chancellor.

Disclosure: I advise the TUC on tax issues.

The UK’s economic problems have got worse since 2009. We could do with £5 billion.

More important than that, we could so with all these houses being put to use.

And we could do with many more being put on sale to bring house prices down.

Our young people have a right to aspire to what so many have done before them - which is to buy their own home. We should help them do so.

And it at the same time we remove the blight of empty homes, increase our tax yield, stop tax abuse and offshore evasion and redice the stress on green spaces all the better still.

Surely the time for an empty property tax has come?

There is more detail at page 29 here for those interested.

Unite Scotland – Economic Brief – Corporation Tax

Corporation Tax, Scotland, TUC 3 Responses »

Aug 162011

Unite published the following briefing written by me on corporation reform tax in Scotland this afternoon:

What is corporation tax?

Corporation tax is the tax due on a company’s profits.

What’s the big deal with corporation tax now?

Corporation tax is right at the forefront of economic debate at present, especially in Scotland. The Scottish Government is to argue for powers to be given to Scotland to change its corporation tax rate so that it does not have to charge the same rate as the rest of the United Kingdom.

Northern Ireland is also arguing for the right to set its own corporation tax rate. Northern Ireland looks like it will reduce its corporation tax rate to 12.5% for all companies. The current rate in the UK as a whole is 26% of large companies who earn more than £1.5 million profit year and 20% small companies. Northern Ireland is set in this rate because the Republic of Ireland has a 12.5% corporation tax rate.

It looks as though the Scottish Government might want to match any tax rate that Northern Ireland sets, in which case Scotland could have a 12.5% corporation tax rate.

Is this good news for Scotland?

It is claimed by those supporting reductions in corporation tax rates that these cuts will have beneficial effects on the economy. The argument is that one or all of these things happens:

Existing businesses in the country have their tax rate cut so they have more money left to invest in new jobs;
Because the tax rate has been reduced the return from running a company is increased and so more new businesses are created, which in turn means more jobs;
Reduced tax rates encourage foreign companies to relocate to the country because they can make a bigger, overall, rate of profit as a result – this brings in new investment, and that in turn creates new jobs.

No one, least of all a trade union, wants to turn down the opportunity of new jobs. If these promises could be delivered then such a change might be good news for Scotland.

Can the promise of new jobs be delivered?

This is where the problems begin to arise, and there are lots of problems:

There is no guarantee that existing companies in Scotland will invest their increased after-tax profits in new jobs – they might just pay them out to their shareholders. The tax increase would in that case simply make some of the better off people in Scotland better off still.
While there is some undoubted evidence of a link between lower corporation tax rates and higher rates of employment, the relationship between the two is very weak indeed. Research has shown that only 7% of additional employment can be explained by low corporation tax rates in the countries that have them. In that case there are many better, and more cost-effective, ways of creating new jobs. Grants remain one such option.
It is undoubtedly true that for a while the Republic of Ireland appeared to benefit from having low corporation tax rates that increased employment. This process has, however, come to an end. The Irish economy has collapsed, unemployment has risen, people are emigrating, major employers have left including companies like Dell computers, and hardship has followed on. If the model did work – and that is highly questionable – it doesn’t any more.

But isn’t it worth a try?

There is always an argument for taking a risk when there is no cost in doing so. Unfortunately, if Scotland cut its corporation tax rate there would be a considerable cost, no one is quite sure what it would be, as yet, but there are complex European rules that would have to be adhered to.

This would mean that the amount of money granted to Scotland by the Westminster Government would have to be cut by the same amount as the corporation tax cut. No one has ever calculated precisely the total value of corporation taxes paid by Scottish companies, and no one is sure how they could precisely calculate this figure. But, it is presently estimated that Northern Ireland will lose £300 million a year if it cuts its corporation tax rate. It is safe to assume that the cost to Scotland would be much more, and could run into billions of pounds a year.

But if the right number of jobs were created wouldn’t it still pay to take that risk?

We can only decide that by looking at the evidence. The best, and most optimistic, evidence currently available comes from those promoting this reform in Northern Ireland. They have suggested that losing a grant of £272 million a year from Westminster will generate 4500 new jobs a year in Northern Ireland. But note the cost: that’s almost £61,000 a job. Average pay in Northern Ireland is about £22,000 a year.

A generous estimate of the amount of tax that each new job will generate is £8,000 a year. Northern Ireland is allowed to claim credit for that additional tax paid, but it will still be losing £53,000 a year on the jobs created in the first year.

Now admittedly, presuming those jobs continue to the second year the loss in that year will only be £45,000 per job created. But on this logic (which those promoting this idea have accepted as correct) and assuming no jobs are lost it will take up to 15 years for this cut in corporation tax to be paid back in terms of extra revenue earned from new jobs created in Northern Ireland. Put in that context this is a risk not worth taking, and a cost that’s unreasonable for each job created.

So is there any remaining reason to cut corporation tax in Scotland?

Not that we can find. But we can find lots of reasons why Scotland should not cut its corporation tax rate. For example, as the UK’s Chartered Institute of Tax has pointed out, any such change would massively increase the administrative hassle for companies which were trading in both England and Scotland. In fact, the additional costs of proving that a business has allocated their profits correctly between the two nations could more than offset any tax saved.

And on top of that England would have to pass laws to prevent profits being artificially relocated to Scotland. This would make it harder for companies to relocate to Scotland. We might actually see obstacles being put in the way of investment in Scotland just because we have a lower corporation tax rate. That would be a particularly perverse outcome of any such change.

Finally, and most importantly, there is the issue of social justice. The fact is that, as has been proven time and again, societies work best when they are equal. The most likely outcome of cutting corporation tax rates in Scotland is that the richest in our community will get richer, whilst the rest of us will become worse off. Scotland will be worse off because of the cut in services that would result from the reduction of the grant from Westminster. Inequality in Scotland will, in all probability, rise. This is an outcome that we can’t accept as being just, fair or good for Scotland as a whole.

This special economic brief has been produced in cooperation with Unite Scotland by tax expert Richard Murphy, in response to the launch of the Scottish Government’sCorporation Tax Discussion Paper, ‘Options for Reform’ .

A Robin Hood Tax is deliverable says IMF

IMF, Transaction Taxes, TUC 1 Response »

Aug 122011

As Owen Tudor at the TUC has noted:

The IMF has issued a working paper which explores the practicalities of implementing Financial Transaction Taxes.

His analysis is well worth reading. But as he notes, the IMF concluded:

In principle, an FTT is no more difficult and, in some respects easier, to administer than other taxes.

As some of us have argued for quite a long time.

Now, please do it.

Fairness and Prosperity

Economics, TUC Comments Off

Jul 202011

The TUC published a new pamphlet by friend and sometime co-author Howard Reed yesterday. As they said of the pamphlet, which is entitled Fairness and Prosperity:

The UK is a far more unequal society now than it was 30 years ago, and three-quarters of the public agree that the gap between rich and poor in the UK is too high. But if policymakers were to enact policies to reduce inequality, would this jeopardise the UK’s economic performance?

Today’s new Touchstone Extras pamphlet, written by Howard Reed, reviews the latest evidence on the relationship between inequality and economic performance across countries and finds no support for the idea that there is a ‘trade-off’ between inequality and prosperity. Indeed, there is strong evidence that countries with higher inequality have worse performance on a range of health and social outcomes.

The report also discusses theories that can rationalise these findings, and recommends policies which would help reduce inequality from its current very high level in the UK.

Well, I think that undersells it. As Howard says in the report:

This Touchstone pamphlet asks whether a more equal distribution of income would jeopardise the UK’s economic prospects. Indeed, is more equality just what we need to improve our prosperity and well-being?The assertion that less inequality is “part of the good society” resonates strongly with most people on the left and centre-left.

This pamphlet shows that this is a sensible belief:

• The UK is a very unequal country, and this inequality is the result of a major shift in income distribution in the 1980s and 90s.

• There is a conventional economic view that asserts that inequality is a price a country has to pay to achieve economic success. But a comparison of the performance of equal and unequal countries does not back this up.

• Indeed, there is evidence that some redistribution enhances economic performance.

• International comparisons provide very strong evidence that inequality is linked to poor health and social outcomes.

• The theories to explain this relationship are still being developed. This pamphlet outlines two of these – that inequality has harmful psychological effects and that poor outcomes follow on from deprivation, which is more common in unequal societies.

I warmly welcome this report – which I think is a valuable contribution to debate – and which also strongly complements the thinking in my own forthcoming book.

The blatant untruth at the core of Conservative corporation tax policy

Conservatives, Corporation Tax, Tax avoidance, TUC 14 Responses »

Jul 122011

David Gauke MP, the Tory Exchequer Secretary, and a man for whom I have little regard (a feeling which I know is reciprocated) was speaking at the Oxford Centre for Business Taxation yesterday and said:

We are prioritising reform of Corporation Tax because it is the most growth impeding tax there is.

In contrast there are those who insist we increase Corporation tax and reduce the deficit on the backs of business.

As if “business” was an entity separate from society, distinct from employees, and irrelevant to growth.

The argument is made – I heard it last week from the trade unions in Northern Ireland – that cutting corporation tax favours the wealthy over the rest of society.

But of course the economics doesn’t stack up.

We all know that higher business taxes feed through to a combination of prices, dividends, pensions, profits…and for an open economy like the UK, wages in particular.

Higher taxes on profits reduce the return to investment, leading to lower levels of investment. And a lower level of investment undermines productivity which ultimately feeds through to lower wages.

Ever increasing tax rates would simply serve to make the UK’s business environment internationally uncompetitive….to the detriment of our private sector, and to the detriment of our wider society, rich and poor alike.

Cutting Corporation Tax encourages investment. As the Chancellor said last year, reducing the headline rate signals that we are committed to creating a competitive environment for business.

There’s no other way to describe this but complete and utter nonsense. Unless of course you call it a lie – with a gratuitous insult for my work (he likes delivering them) for unions in Northern Ireland thrown in.

The explanation is very simple. It’s that right now the world’s corporations are sitting on an absolute mountain of cash. Martin Wolf notes it often in the FT. The FT recently noted it in a video cast. Paul Krugman did too the other day.

The reality is that there is not one iota of evidence that a) investment is being impeded by a shortage of cash as a result of tax paid by corporations b) changing tax rates will in any way encourage more investment when companies are already refusing to do it and are lending their cash to governments instead (how else do you think the deficits are funded?)

But despite this Gauke carries on saying that tax cuts are the way to encourage investment. Which is flagrantly not true, as the evidence shows.

So why does he promote tax cuts then? Because they make the rich richer. Precisely as the unions in Northern OIreland say. It’s the only obvious explanation there is. And it’s at the core of his government’s philosophy.

Gauke like me believes there is tax incidence - corporation tax is paid by someone else than a company at the end of the day. He however hides behind the convenient claims of the Oxford Centre for Business Taxation that the charge falls on labour (an argument contrived on the basis of exceptionally dubious and bluntly biased analysis that only looked at the consequence of corporation tax increases and not decreases – which is what Gauke is delivering). The reality is as I say – that tax cuts deliver wealth to shareholders and no one else. Not once, not ever, has a manager turned round and said “we’ve had a corporate tax cut – have a pay rise”. Nor, candidly, have they ever turned round and said “we’ve had a tax cut – let’s invest more” – indeed the evidence is that higher taxes encourage investment and lower ones don’t.

And that blows his whole policy apart.

Which is not surprising as his whole policy is about increasing the wealth gap in the UK and nothing else.