Overseas businesses put off by UK tax regime, Brown told | Business | guardian.co.uk .
There was a conference yesterday at which Gordon Brown and Lords Mandelson "welcomed 250 international leaders to London to reassure them the UK remained a competitive place to do business despite the turmoil of the financial crisis and recession."
The response of business may be typified by that of George Buckley of 3M (maker of the post it note - which the world could easily survive without) who said:
Britain has a stable government and good education and innovation, but it also has high taxes and the trains and roads are not as good as in continental Europe
So George wants the state to provide him with the infrastructure so he can make money. But as he argued:
Companies are not taxpayers, but tax collectors
So let's be clear then: he thinks business does not pay tax so what he's demanding is that the people of the UK provide him with the opportunity to make money in the Uk from which he has no intention of paying a return to them as his company does not, according to him pay tax. It's a one way deal on that basis, isn't it? Why should we bother if this is true?
Well, for one good reason - which is that he's wrong. Let's say it loud and clear: companies do pay tax. I agree - they do their best to pass the bill on to others. Some goes to shareholders. Some claim it's passed on to customers, but given that's only possible in the odd world of the economists who argue companies don't pay tax if you're a monopolist there are other more important issues to address in that case. Some argue that companies pass on the cost to labour - but the paper that claims to prove this by Mike Deveruex at Oxford has to assume to get to this result (quite extraordinarily) that a company facing a strike can move its production from the UK to another country without disruption to output and without cost incurred - showing how absurd the hypothesis is in the form in which economists present it (although I do not deny that in some situations - such as when a financial transaction tax might be imposed on a bank such a situation might arise).
The reality is that Buckley is pushing a line of argument that is not true that has been created by economists who have propagated the delusion, based on misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. In the real world companies pay tax.
How do I know this. I do so for three reasons. First they think they do. That's pretty powerful evidence. Either business is staffed by people who are all deluded or economists are: this may be a genuine case of one or t'other.
Second, if business did not pay tax it would not spend nearly so much time trying to avoid it. There's no evidence they do so on behalf of shareholders to whom they have no relationship. They appear to only do so on behalf of management who wish to command resources which they otherwise perceive as lost to them i.e., yet again they act as if they know they cannot pass the bill on elsewhere so they must avoid the bill itself.
Third, if tax compliance is 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 then we can say with some assuredness that business spends a great deal of time seeking to pay too little tax in the wrong place and later than they should by ensuring that the form in which transactions are declared is inconsistent with their economic substance. That's because companies pay tax.
Mt Buckley denies an obvious truth. What credence should we give to anything else he said?
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Richard
I think the argument would be much better understood if you didn’t use the words ‘pays’ and ‘incurs’ as interchangeable concepts. They are distinct and I think this is at the heart of the confusion.
Yes, companies pay tax. The tax money leaves the company’s bank account. Uncontroversial.
But for some of us, that isn’t the most interesting question. The more interesting question is how the payment of tax by a company (or indeed any cost) affects live human beings connected with that company — employees, ultimate shareholders etc.
The reason we find this interesting is that live human beings are the ones who need to eat, raise kids, take holidays etc. Companies are just intangible vehicles that don’t need to do any of those things, and do not have value of themselves in the same way humans do. If you wind up a dormant company (i.e. one that no longer serves human beings) there are no mourners at any funeral.
If a company last year had £100 in the pot, but this year only has £90 (whether due to a tax increase, rise in the cost of raw materials, or any other cost shock), there is still a £10 hole there that will burden a live human being somewhere. Whether management consciously decides who will bear that burden is irrelevant — it still needs to be ultimately borne by someone. The empirical question is: by who and by how much?
The flip side would arise if taxes/costs fell, so that the company now had £120 in the pot. Who will enjoy that increase and by how much?
The arguments you used to refute ‘incidence’ are (as I understand what you have posted):
That ‘they’ think the company is paying tax. I don’t quite understand who you mean by ‘they’ — I assume you are not suggesting a company is capable of conscious thought independent of the human beings involved. In any case, I think we all agree companies pay tax — see above. But this doesn’t refute the fact that tax is ultimately incurred by live human beings — it is a different question.
That companies wouldn’t bother trying to minimise tax if the company didn’t pay tax (I think your 2nd and 3rd points are essentially the same). Well, we agree the companies do pay tax — see above. But if that tax minimisation is done, it still does affect live human beings, as per the example above. This will be case regardless of the motive of management in doing so.
In a recent post you recognised this yourself on how certain credit card costs are being pushed back on to low income customers. You recognised incidence in that context. The logic here is no different — we need to know which human beings benefit/suffer and by how much.
Adrian
We agree companies pay tax
Let’s accept that companies ‘exist’ and are more than a bundle of contracts. You cannot argue that a major multinational corporation is that
Nor can you say it is closely associated with any person – whether its CEO or a dominant owner. Major MNCs have a continuing existence beyond any person. They also have cultures that are identifiable. If one person does not make a decision then another does. That person need not be identifiable: a group called management makes the decisions. They can think they are making the decision for the entity for itself, not for a person.
I dispute therefore that the entity does not make decisions for itself – it does, and can, and can refrain from providing the benefit of its resources to an identifiable person for so long that for all practical purposes we can assume that person does not exist.
In addition, the identity of the person who may or may not benefit or not from the company paying tax is in very many cases unidentifiable, either because incidence cannot be proven or because ownership of the entity is unknown. In the case of MNCs the location of incidence can also be changed, as can timing.
In this case your interest is abstract and irrelevant, like much theoretical economics. The unknowable is not of interest when all we know is that the existence of the unknowable shifts tax burdens in a knowable and foreseeable fashion, from capital onto labour. In that case to assume the company incurs and pays the tax is an entirely reasonable assumption and your theorising adds nothing to knowledge
For that reason I dismiss your arguments as inconsequential
Richard
“Let’s accept that companies ‘exist’ and are more than a bundle of contracts.”
Sorry, I don’t agree. It is the same for a £2 limited company or Shell. It is intangible — indeed a bundle of contracts as per the memo and arts. It has no life of its own in any way comparable to human life. If I asked you to my house for dinner and asked you to bring Shell with you, you couldn’t do so.
“Nor can you say it is closely associated with any person”
I didn’t say it is closely associated with any person. Companies have stakeholders — people affected by them. Proximity in itself doesn’t matter. It might be (for example) the employee of a customer of a customer who lives 10,000 miles away. But my guess is that those closest to the company (e.g. employees, shareholders) are likely to be affected most.
“Major MNCs have a continuing existence beyond any person”
OK, that’s true in a legal, abstract sense, but the question is: who cares about the MNC independently of the human beings it affects? I don’t particularly. if the assets of company X (even if a MNC) were transferred to company Y in (say) a reorganisation, so that company X no longer had assets or liabilities, as far as that entity goes, I couldn’t care less what happened to it. This is not an abstract or theoretical position to say that what happens to live human beings is more important than what happens to intangible entities.
“I dispute therefore that the entity does not make decisions for itself – it does, and can, and can refrain from providing the benefit of its resources to an identifiable person for so long that for all practical purposes we can assume that person does not exist.”
How can a company make decisions for itself, independently of the human beings involved acting individually or in groups? It can’t. A company doesn’t have a brain. People have brains. I am sure if you went to a company and sent everyone involved in it on vacation for a month, no decisions would be made by that company for the entire month.
When you say it can refrain from providing the benefit of resources for so long etc, you are right. The incidence of tax (or any cost) can indeed be delayed (but not for too long – the hole in the bucket has to be dealt with eventually). But that doesn’t mean the incidence doesn’t exist or is irrelevant.
“In addition, the identity of the person who may or may not benefit or not from the company paying tax is in very many cases unidentifiable, either because incidence cannot be proven or because ownership of the entity is unknown. In the case of MNCs the location of incidence can also be changed, as can timing.”
In my example above, a company had £100 last year, a tax increase resulting in only £90. There is £10 less this year compared to last year. It is a real hole — cash, not any accounting entry or theoretical.
Are you saying that simply because we don’t know who bears the loss (i.e. that person can’t be identified) then that £10 can’t be borne by anyone (i.e. the incidence thing is just a myth) and we should all just ignore it?
On that logic, why not push corporation tax up to 100%? Plenty of tax with no human beings being affected. Somehow, I don’t think human beings would be unaffected.
“In this case your interest is abstract and irrelevant, like much theoretical economics. The unknowable is not of interest when all we know is that the existence of the unknowable shifts tax burdens in a knowable and foreseeable fashion, from capital onto labour. In that case to assume the company incurs and pays the tax is an entirely reasonable assumption and your theorising adds nothing to knowledge.”
I am sorry, but I don’t understand this at all. Can you please explain? It seems like you are saying we don’t know much about this incidence thing, and therefore it is abstract and irrelevant and not of interest to anyone — is that right?
I’d suggest it is worth investigating and being thoroughly understood. It is at the heart of any pronouncement of taxation of companies. In particular, if it is true that incidence falls on low paid labour, then advocating higher corporation taxes is somewhat counterproductive the interests of low paid labour.
My own thoughts are that this incidence thing probably isn’t uniform across the economy, and is usually pushed onto the human beings with the least room to manoeuvre. In a small private company employing highly skilled individual, I’d think it fell mostly on shareholders (i.e. the boss is last to be paid). In a large MNC with lots of low paid, immobile employees with little bargaining position where it was difficult to pass the costs onto suppliers or customers, I’d think the workers would get the hit.
@Adrian
I have little to add – you have ignored much of what I said
The reality is simply stated: in small businesses tax incidence is easy to understand – these are the scenarios economists love
In major entities your view of the corporation is too simplistic to be credible – so I ignore it
And in those instances, some odd situations aside the actual incidence of tax is theoretically impossible to compute and in practice unknown to those making decisions in the corporations in question – and therefore and therefore tax is an exogenous variable as far as they are concerned except to the extent the corporation is able to avoid it in an identifiable way – which is the issue I tackle
I know no accountant who thinks otherwise. candidly I know few in any tax authority who think otherwise
The only people who use your argument are libertarians and neo-liberal economists seeking to undermine all charges to tax – in this case by obfuscation
The cash value of their arguments and yours are so limited as to not be worthy of further consideration
This debate with you is closed
Richard
Two things:
1) Tax incidfence. I know, you keep going on about this. But here’s some references for you. No, Mike Deveraux isn’t one of them.
http://www.voxeu.org/index.php?q=node/4363
Please note the “since 1899”. Please note in para 2 of section 2 the reference to “Stiglitz”. Yes, Joe Stiglitz, Nobel Prize winner. Yes, I know you want to be able to prove all these economists wrong. But really, can’t you just accept that they’re all lined up against you?
2)”Let’s accept that companies ‘exist’ and are more than a bundle of contracts. You cannot argue that a major multinational corporation is that”
Before you leap in, no, this doesn’t change the above tax incidence argument.
I’ve used this very point several times in arguing about your idea of country by country reporting. You are trying to insist that a miultinational is nothing but a collection of national companies bound together by contracts…..or at least, you’re trying to get them to report and be taxed as such.
And as Coase (another Laureate) pointed out, the very existence of the firm is proof that there is something there more efficient or at least different from a collection of contracts. So by trying to tax them as a series of such contracts we are not recognising the economic reality of the firm.
@Tim Worstall
No not Devereux – but Jim Hines is a pretty close substitute so let’s not split hairs
And so what Stiglitz is on the list? Tell me what the cash value of doing this incidence work is? One day, somewhere, someone will pay the tax which a corporation settles as if an agent. But we don’t know where, when or who they will be. So we are no further forward.
And no – country-by-country reporting does not treat the entity as a bundle of contracts – it treats it as a dynamic, interactive single entity that should be taxed on a unitary basis to ensure reward from its activities goes to the source location from which such benefit arises on the assumption that this is the community whose interests should be advanced by any such payment. Country-by-country reporting provides the data to allow that to happen.
“And so what Stiglitz is on the list? Tell me what the cash value of doing this incidence work is? One day, somewhere, someone will pay the tax which a corporation settles as if an agent. But we don’t know where, when or who they will be. So we are no further forward.”
You’re still not getting the point about incidence. We’re not trying to say that the corporation decides to stick someone else with the tax bill. We’re not imputing desire here at all.
What we are saying is that taxing something changes behaviour. Such changes in behaviour can have effects on other people. If those effects on other people make them worse off then we say that they are carrying some of the economic borden of the tax.
For example. Other things being equal, adding more capital to labour makes that labour more productive. More productive labour gets paid more.
If we tax the returns to capital in a specific place then less capital will be added to labour in that place. Labour there will thus be less productive and get paid less. So, some of the burden of the taxation of capital will be carried by the workers in the form of lower wages.
We’re absolutely not trying to insist that managers of corporations try to stick workers with the tax bill. We’re just noting that the imposition of such a tax changes behaviour and thus changes other things as a result of that change in behaviour.
The Stiglitz paper is worth mentioning precisely because he says the same thing that Mike Deveraux does. That the burden upon labour in lower wages can be (note, can be, not necessarily is) more than 100% of the tax raised.
So we are further forward. We find that, in certain circumstances at least (one of which is an open economy with fre (ish) capital movement) that capital taxation is, far from being progressive as many think, it can be regressive. That is a step forward in our understanding.
“source location from which such benefit arises on the assumption that this is the community whose interests should be advanced by any such payment.”
But if it’s a dynamic unity then we cannot establish which location, each specific part, of that unity provides the value can we?
You keep telling us, for example, that every transaction has to be treated as an “arms length” transaction. As if it were between two unrelated companies, bound only by contracts. Only then can we see whether someone is fiddling the transfer pricing.
But if at the same time we’re insisting that a multi national is not simply a group of unrelated companies, bound only by contracts, that there is some dynamic unity which is more valuable than the sum of the parts (which is what Coase is telling us is the reason such multi-nationals exist) then we cannot allocate that value to those parts, can we?
To say the same thing another way. We can organise multi-national business activities in two different ways. One is a series of national only companies which then trade with each other. The other is a multi-national which trades in many places.
From Coase’s theory of the firm, sometimes it is more efficient to use one method, sometimes another. Depends upon transaction costs.
Now, let us, just as an example, take an industry where the multi-national one company form is more efficient. OK. We now know that this form of organisation, being more efficient than the single national companies for, is going to be making higher profits. Not because of any difference in the activity undertaken, not because of anything different in any one location. Purely and simply because of the form of organisation. So, how do we allocate the value of that form of organisation over the different locations? Given that there is nothing related to any location which produces that value?
If we say that because more value is created then each location should get more tax….well, we’ve just decided to tax the more efficeint form of organisation more than the less efficient one. Whcih doesn’t sound all that sensible. We generally think that efficiency should be rewarded, not punished.
Leaving aside the issue of whether companies are payers or collectors of taxes,which seemed to be an off the cuff remark, there is a lot of truth in this statement.
“Britain has a stable government and good education and innovation, but it also has high taxes and the trains and roads are not as good as in continental Europe”
He is quite right about the transport system and the UK corporate tax regime is probably the most complex in the whole world, with very ungenerous rates of capital allowances for companies like 3M, so his comments are not surprising.
[…] is not paid by companeis he can’t help but reveal the duality of these people’s position, saying: [George Buckley of 3M] is quite right about the transport system and the UK corporate tax regime […]