Guido Fawkes has commented on this blog this morning, saying:
“If the Tories get in business will be decimated.”
Crass and ridiculous. Labour is crushing business with taxes cheered on by you.
He confirmed his belief by adding a further comment, saying:
NI hike for a start.
But his fellow right wing blogger, Tim Worstall argues in a comment also aimed directly at me:
businesses don’t pay taxes. People do.
Come on guys. You need to agree a line. You can’t both be right.
Rather curiously on NI I agree with Worstall.
For much of the rest Worstall is just wrong and Guido’s instincts are right. Whilst on the economic blackboard of so-called rationality Worstall lives by which bears no relationship to reality it is true that it can be shown that a limited company cannot of course pay tax — the reality is that they do change where, when and by whom tax is paid and at what rate — as all tax planning and offshore proves. In which case Worstall is wrong and Guido is right in his instincts about whether companies pay tax — but fundamentally wrong in his analysis.
The simple reality is that wages and earnings have fallen as a percentage of GDP over the last thirty years, profits have risen as a proportion of GDP and tax yield from profits has not risen to match. So labour has been taxed more heavily — as people know — and it’s time for this trend to reverse. Business does pay tax and has to pay more.
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It would be wrong to think that the proportion of tax to be raised from the taxation of business profits should revert to a historic value. The world is a very different place to the nineteenth and early twentieth century. Industries that might have been based in the UK before have now relocated elsewhere. Setting corporate taxes at rates higher than international norms would drive more offshore, or more likely would deter incremental inbound investment.
@Alex
We’re not talking 100 years here.
We’re talking change over a few years here
And tax does not induce relocation of actual economic activity – just where it is recorded
So this analysis is entirely irrelevant
They might not both be right but they can certainly both be wrong. 🙂
Tim seems to have a good grounding in neoclassical economics, which is deeply flawed but at least means he’s taking a coherent worldview. Whereas Guido doesn’t really seem to have much grounding in any kind of economics – he just repeats phrases from George Osborne (who also seems to have little grounding in any kind of economics). As George is likely to become Chancellor of the Exchequer, I’m more worried about his lack of knowledge than I am about Guido’s…
Worstall *dreams* of a world where people provide all of the tax revenue, while businesses go untaxed. I can see why tax exile businessmen would champion plutocratic madness like that, but I can’t understand why people who are just as much wage slaves as I am would want that.
Worstall himself doesn’t even live in the UK, so I don’t give a shiny sh*te what he thinks, to be honest.
Adam Smith: no, I think Tim’s point is simply that when we talk about business taxes, what we’re talking about is taxing the *owners* of the business. You might call it a nice distinction, but it’s worth making if only to bear in mind that any tax will always hit a real person.
You may think that it’s fair for business owners to be hit by a particular tax — that’s a different debate — but even business taxes hit individual people.
Philip
Tim makes much of this point
I note you are from the same camp
And the point is irrelevant
Even if tax always falls on a real human being in the end corporations can change which category of people, in which jurisdiction, at what time, at what rate and so on. None of these behaviours can be predicted accurately – and some of the studies on this (e.g Devereux’s that Tim loves but which is based on flawed and distorted methodology since he never tested what happened when corporation tax rates went down, and not up – and the latter hardly ever happens now) are biased, if I am kind to them
So the reality is that incidence has to be ignored because it is neither predictable or known. In which case it is a waste of time considering it for all practical purposes and taxes on business are essential, as is tax compliance on their part where tax compliance means seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.
In which case all tim crows about is as irrelevant as just about everything else he says
Richard
“And the point is irrelevant”
The point is highly relevant.
As I read Tim on this, he is specifically talking about companies as an entity. As I understand it, he is saying this:
Companies pay tax in the sense the tax leaves their bank account.
Companies can’t incur or suffer the burden of the tax because companies aren’t tangible entities. They don’t eat, raise children or take holidays. Human beings do. Therefore, when there is a hole in the company’s bank account as a result of paying the tax, the company must pass that burden along to its shareholders (lower returns), suppliers (lower orders, less paid for them), customers (higher prices) or workers (lower wages). It must do so – it can’t internalise them because it is not physically capable of doing so.
In the case of the first 3, they may in turn be companies so you need to move it along until you find a live human being who needs to eat, raise children and do whatever.
This is the interesting bit, because we are interested in what happens to live human beings, not to intangible entities.
The question is: when there is a hole in the company’s bank account, how is that shared? Who suffers the most? If the answer is the low paid (whether in the form of lower wages, higher prices at the till, or lower returns in their pensions), then raising taxes on companies would sound like a pretty bad idea from the perspective of the low paid.
It’s an empirical point. I haven’t a clue how it is borne but I do think it is an essential piece in the jigsaw before anyone can make any pronouncements on taxation on companies, especially a group like the TUC. To suggest it is a point to be ignored simply because it can’t be known is just reckless. The TUC would otherwise be running the risk of advocating taxes to make their members worse off (whether as workers, customers at the till or as pensioners).
In your capacity as advisor to the TUC, can you confirm one way or another whether you have taken into account the impact or burden borne by its members in advice you have given on the taxation of companies?
Yes
Sorry Richard, am confused.
You told Philip above ‘So the reality is that incidence has to be ignored because it is neither predictable or known’ but you are telling me that you did take the issue into account when advising the TUC. Why did you take it into account when it ‘has to be ignored’?
It is critical to any pronouncements someone like the TUC makes on corporation tax, and am glad you have taken it into account in the advice you have provided. And you may not believe it, but I am on the side of progressive tax here – I really hate the amount of tax those on lower incomes have to pay – it is a scandal.
What were your findings about how the burden or taxes paid by corporations is allocated amongst stakeholders? Did you/the TUC conduct its own study? Is there a link you can provide. Is it available to the public?
I am genuinely interested and don’t know. I am not looking for a fight.
Corporate taxes are most harmful to long term economic growth according that august body the OECD. See: http://www.oecd.org/dataoecd/30/53/42045882.pdf
The Girrl
But then the OECD has promoted the Washington Consensus for a long time, so it would say that, wouldn’t it?
@Juliet
Of course we have looked at this
I reiterate: the studies on incidence, and especially that of Devereux oft quoted, are flawed as they look at the impact of CT rises on wages which they claim gives rise to a fall in wages
However, CT rates have fallen persistently for well over a decade so the finding even if true is largely meaningless and simply leads to doubt as to why Devereux did not look at the impact of tax cuts on wages – we know they don’t result in pay rises
At best the impact of incidence is skewed, unpredictable, and uncertain. Since corporations can also readily change where, when and at what rate they pay tax and to some degree choose the incidence (as the current bonus tax shows) there is also no reliable basis to assume that incidence is a relevant factor to consider. certainly, all my discussions with many, many managers involved in pay negotiation is that not one of them takes changes into corporation tax into account when negotiating pay – ever.
I happen to think that highly likely to be true.
I also happen to think the whole debate ignores the obvious fact that corporations are not mere agents. It is a fantasy to ignore the reality of corporations as synergistic entities that create worth in their own right – if they did not they would not exist. And they are also long term repositories of wealth – the model economists use assumes that there is direct link between corporate earnings and shareholder well being. This is nonsense of course – partly because no one knows what real corporate earnings are, secondly because earnings and cash are not the same thing, thirdly because corporate worth is only vaguely related to individual company worth and much more to broader, usually irrational, sentiment and
finally because corporations do not, almost universally distribute all their profit – again with no obvious link to corporate value arising as a consequence because of other more pervasive and independent variables.
In which case the only rational thing to do is assume as is prima facie the case that the corporation is the taxpayer, does bear the burden of the tax and is as uncertain as to how to pass it on as I am (I have been a director of numerous companies and am probably amongst the few who have considered this).
In that context it’s wholly fair to say a) corporate profits have risen as a share of GDP b) labour share has fallen c) tax shares have not followed suit d) corporations are under taxed as a consequence
The TUC does say that, and entirely rationally
The opinions stated are however my own
Richard
Richard,
But then the OECD has promoted the Washington Consensus for a long time, so it would say that, wouldn’t it?
I’ll bite on the red-herring. Precisely which part of the Washington Consensus does TR-UK have issues with?
Georges
I think Wikipedia reasonably notes:
The term Washington Consensus was initially coined in 1989 by John Williamson to describe a set of ten specific economic policy prescriptions that he considered should constitute the “standard” reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the International Monetary Fund (IMF), World Bank, and the US Treasury Department.[1]
Subsequently, as Williamson himself has pointed out, the term has come to be used in a different and broader sense, as a synonym for market fundamentalism; in this broader sense, Williamson states, it has been criticized by people such as George Soros and Nobel Laureate Joseph E. Stiglitz.[2] The Washington Consensus is also criticized by others such as some Latin American politicians and heterodox economists. The term has become associated with neoliberal policies in general and drawn into the broader debate over the expanding role of the free market, constraints upon the state, and United States influence on other countries’ national sovereignty.
Let’s start with market fundamentalism
But don’t bother to debate it
As recent events have proven to be the case – market fundamentalism is fundamentally misguided
Richard
Richard,
So, the problem is not with the actual Washington Consensus but with people mischaracterising and referring to things they do not like as the Washington Consensus?
Georges
You mean market fundamentalism is good?
Please don’t waste my time
Richard
I accept that it is unlikely that managers explicitly sit in a room and decide how the hole created by a tax rise is to be allocated amongst stakeholders in order to reach live human beings. That doesn’t mean that allocation doesn’t have to happen. Eventually holes in a company have to be passed down to live human beings. They can store it for a while, but eventually it will affect live human beings.
“In that context it’s wholly fair to say a) corporate profits have risen as a share of GDP b) labour share has fallen c) tax shares have not followed suit d) corporations are under taxed as a consequence”
Not sure I get the logic.
Why would labour’s share increase through a tax increase (which I assume is at the heart of the interest of the TUC)?
The fact labour didn’t participate in reductions in tax decreases suggests to me labour (compared with other stakeholders wanting a slice of the action) was way near the back of the queue when the bounty of the tax reductions was handed out. Others (shareholders?) got served first.
If tax rates go up, why will labour still be near the back of the queue when it comes to inflicting the pain of that tax rise? If their relative bargaining power is weak (particularly in a recession), doesn’t that suggest labour will now shift to nearer the front of the queue when it comes to the sharing of the pain — and that ordinary workers will be worse off?
I accept the modelling of this kind of thing is a) very difficult and b) given tax rates have been going down rather than up in the past decade or so, there is little recent history to help us on what happens when rates go up.
Juliet
All you say is predicated on a flawed logic – which is that eventually arises in the short term
It does not
There is no reason why it is not in the long term – which in economics is not nearly as long as you’d think once discount rates are applied
And as Keynes said, in the long run we’re all dead
So why worry?
The reality is that over any realistic planning horizon business pays
Richard
@Richard Murphy
You might also want to consider this paradox. Corporations can readily change where, when and at what rate they pay tax. They do this by relocating transactions and whole businesses, tax avoiding and tax arbitraging. If they were not liable for the taxes they pay there would be no logic ot any of these actions, and it is reasonable to assume they are rational.
They are only rational in undertaking these actions if they actually pay tax.
So who is right? the economist who argues they don’t or the business that believes they do? Like Guido and Tim, they can’t both be
Richard
Richard @ 11
I worry that this is one of your knee-jerk approaches that is seen fairly frequently.
The OECD research referred to in the tagged presentation appears sound enough to me, is evidence-based and is therefore worthy – at the very least – of debate. To dismiss it out of hand under cover of a spurious (as Georges noted – red herring) appears a little silly.
There is no fundamental reason why any person (natural or legal) ought to be taxed. That states need revenue to fund services goes without saying. Where to seek taxation revenue, by what means and at what rates is surely always a political choice?
The Girrl
@Jersey Girrl
What an absurd comment
Of course there is no reason to tax
Unless you want to live in a society with a reasonable chance of not dying a violent death at a very young age
It is very hard to take your comments seriously when you utter such twaddle
Richard