The New York Times had an excellent blog on who really pays corporation tax whilst I was on holiday.
As regular readers of this blog will know this is an ongoing issue for discussion here. The argument is whether the tax is paid by corporations themselves, their owners, their employees or someone else — for example their customers.
This is an issue to which I will be returning quite soon — because it has some significance for the recent reviews on some aspects of corporation tax recently announced by HM Treasury. Suffice to say I take the view that all these outcomes are possible — which puts me in marked contrast to those from the political right who argue that corporations can never pay tax and as such should not be taxed (although they’re rarely quite so bold as to specify it quite like that — but there’s no doubt that’s what they seek). Those from the right also like to argue that corporation tax charges always end up being paid by labour — although the evidence for that is, I think, based on extremely implausible foundations, using somewhat suspect methodology.
As such it was good to see that the NYT blog was conditional in its conclusions. It said that if a corporation tax was charged in a closed economy then the charge would end up being paid by the owners of capital — whether by reducing the retained earnings of the company or by reducing distributed earnings. On the other hand in an open economy — one without capital controls and where trade is wholly or largely unregulated- then it is possible that the charge can be transferred onto labour.
The reality is that we do, of course, live in open economies. But the fact is that tax has, by and large, sought to create the environment of a closed economy whilst allowing free trade so that the benefits of tax being charged on capital can be secured at the same time that trade can take place. This was the underlying direction of travel of a great deal of tax policy for the last thirty years, and rightly so.
This is now in danger. The important combination of residence based taxation, controlled foreign company rules, the taxation of dividend income from overseas subsidiaries and the application of strict transfer pricing rules was not chance: it deliberately created a closed economy for tax. Dismantle any one of those elements and an open economy for tax is created. This appears to be the objective of the ConDem coalition government — and it is profoundly dangerous. It might remove forever the chance to tax capital.
That may be what the Tories and the Orange Book Liberals want — because it ensures that a whole raft of funding for government is eliminated for good — but the result is either a massive increase in the taxation burden of ordinary people or a loss of well being on their part. Put simply, the dismantling of the closed economy of taxation means that the gap between the richest and poorest in society is bound to increase, whilst the means to address the resulting problems are denied to society.
That is why these reforms have to be opposed by all who care about social justice.
And it is why I will be returning to this issue, soon.
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“… but the result is either a massive increase in the taxation burden of ordinary people or a loss of well being on their part.”
If the government is getting less funding through tax (in any form) then is should reduce expenditure to match (if it had any sort of sense). This new market that isn’t dominated by the government can allow private enterprise to operate.
Have you considered the idea that a private business or charity could fulfil a function that government once did, for less of a cost and better quality for the consumer? Therefore the ordinary person would receive a double benefit, improved service at a lower cost…
@Bobski
I have considered it and
a) there is no evidence business does fill the gap – which is why there is massive unemployment ion the Uk and US now even though corporation are awash with cash
b) there is no evidence private sector is cheaper – e.g. UK healthcare which is chronically inefficient
c) Charities do not have the resources to do this work – don’t patronise us by saying they do
Note also the CBO study that the NYT story points to, which estimates that
“This review suggests that the assumption of an open economy is not sufficient to conclude that
much of the burden of the corporate tax is shifted to labor. Indeed, assumptions of highly mobile capital
and highly substitutable products, internationally, are needed to ensure that the majority of the tax is
borne by labor. Relaxing the assumptions of perfect mobility changes the burden allocation to indicate
that, even in an open economy, a majority of the corporate tax burden, perhaps 60 percent, is still borne
by capital.
http://www.cbo.gov/ftpdocs/115xx/doc11519/05-2010-Working_Paper-Corp_Tax_Incidence-Review_of_Gen_Eq_Estimates.pdf
@Nicholas Shaxson
Thanks for this
I didn’t draw it out – but implied it in my reference to poor methodology
The paper that argues that a corporation tax increase results in a more than proportionate increase in taxes on labour assumes in reaching that conclusion that if there is a strike all production can be transferred instantly and without cost to another country, and then back again when the strike is over. The sweet naivete of Oxford economists, eh?
@Bobski
This implies that private business wants to do what the state does. In many cases that is highly unlikely. And it avoids the question “who pays?” If government is not paying, then presumably you believe the poor will pay for their essential services. Where will they get the money? Your argument is shoddy even by right wing standards.
The reality is that without state intervention capital is increasingly concentrated in few hands. Inequality increases. The poor get poorer and less able to pay for the services currently funded through taxation .Tax is redistributive. It may not be a brilliant redistributive system, but it is the best we have at the moment.
@James from Durham
Well said
@Richard Murphy
1) Are you giving me the ‘liquidity trap’ argument? Not all corporations are awash with cash. Liquidity is also good, it let’s you respond to changes in the market faster and gives you the means to come out of a recession faster than your competition. Back to the point, everyone loves a new untapped market because the best profits can be made in ‘virgin territory’. The speed with which private industry can respond to a new market is based upon capitol goods, it takes time to engineer/build/buy the equipment or premises required.
2) Have to disagree with you on that one Richard, especially the healthcare example. It is cheaper for someone my age to have private health insurance than rely on the NHS; I can get seen quicker, the hospitals are better, I know that I can get the treatment I need and the experience as a customer is better. Competition also drives down prices, the health and media industries in the UK are the worst possible example of private vs. state funded because in each of those markets there are giant pink elephants that have non-consumer related funding so they have no need to compete against others in the market.
3) Yet some charities have the resources to spend hundreds of thousands pounds on advertising campaigns… my cynicism aside. Most charities do a LOT of good work on very limited resources, if you could chart resource expenditure against effective outcome then you would probably find that charities are more efficient than government.
@James from Durham
“Who pays?” – the consumer, that’s who. Unavoidable truth is that competition drives down prices (obviously as long as the competitors stayed competitive, and a more frugal attitude by consumers aids that), so in a Free Market the prices are coming down as more efficient methods are used. So are you judging the price of ‘essential services’ on their current price or their potential price?
“Where will the poor get their money?” – market/industry regulation only favours those with the liquidity to respond to it, i.e. big business likes regulation because it squeezes out smaller competitors. Deregulate, increase competition, decrease unemployment, people are employed and can afford ‘essential services’. Add to the fact that most businesses are realising the concept of “Be good to your employees and they will be good to the employer” so most ‘essential services’ become fringe benefits of employment.
“Your argument is shoddy even by right wing standards.” – I held back in my first comment, Richard usually deletes my comments if I do the full right-libertarian spiel.
“Inequality increases.” – Another truth is that even in a socialist paradise the power and wealth is concentrated in the hands of the few, look at how much better the senior Communist Party members in the Soviet Union lived compared to the ordinary person who was left to starve thanks to state management of food supplies. The difference in a free market society is that people are ABLE and ENCOURAGED to improve their situation. Hand outs and government control don’t work, let the individual decide how they want to live.
Surely, irrespective of the administrative alignment of current tax processes, all taxes are already levied in economic terms out of a wider definition of gross profit; the profit gap between the consume value of the utility created/added/enclosed by enterprises (for which read gross prices), and the disutility of the labour input to enterprises (for which read net wages). Thus, the total value of all tax revenue should be included in that wider definition of gross profit, and all tax revenue should be seen as being levied out of that wider definition of gross profit. However, taxes are levied out of that wider definition of gross profit in one of two radically different ways:
1. Turnover taxes (on gross profit) are levied ‘up front’ in proportion to turnover, irrespective of the profitability of that turnover. In the UK at the turn of the millennium, turnover taxes included Income Tax on ‘normal’ earned income, employee and employer Contracted-Out National Insurance Contributions, and Value-Added Tax on payroll costs. For an enterprise to break even, that enterprise had to be able to charge almost £2 as the gross price for the utility created/added/enclosed through each £1 of net wages. Thus, turnover taxes pre-empt propositions which cannot create/add/enclose almost £2 of utility for every £1 of net wages, and impose a (relatively) penal rate of tax (and risk of tax-induced loss), on high-employment enterprise.
2. After-the-event taxes (on gross profit) are levied in proportion to gross profit net of turnover taxes. In the UK at the turn of the millennium, after-the-event taxes included Income Tax on ‘super-normal’ earned income, Corporation Tax, Value-Added Tax on gross profit net of turnover taxes, Income Tax on un-earned income, Capital Gains Tax, Capital Transfer Tax, and Inheritance Tax. After-the-event taxes do not distort economic activity. Profitable enterprise remains profitable.
Unfortunately, without global cooperation, productive nations have to compete with tax havens for the divertable tax base (i.e. gross profit net of turnover taxes), in a downward beggar-thy-neighbour spiral to the point where gross profit net of turnover taxes becomes virtually untaxable. In order to maintain tax revenue to fund (re-)distribution and communal spending, socially enlightened nations find themselves in a further downward spiral as they have to increase the punitive burden of turnover taxes on the utility added by a working population shrinking as a proportion of the total. Thus, contrary to all natural justice and economic efficiency, the effective rate of turnover taxes is almost invariably higher than the effective rate of after-the-event taxes.
However, with global cooperation amongst the powerful nations on an increasing minimum effective rate of after-the-event taxes, and on measures to exclude tax avoidance and tax havens, each nation could reform its tax base in a revenue-neutral way by ‘inverting and rotating’ the tax base from turnover taxes to after-the-event taxes, and thereby reduce or even eliminate the destructive effects of turnover taxes.
Bobski – OK, maybe I was unfair with the “shoddy” remark if you were fighting with one hand tied behind your back .
However, whatever age you are, I suspect that your medical conditions may not have been critical. Of course, I don’t know and I hope you don’t take offence at this but when my father had cancer, despite Bupa insurance, it seemed that only the NHS actually had the expertise to deal with the problem. When the shit really hit the fan private enterprise did not seem to cut the mustard. Again maybe I am being unfair because I don’t want to insist on your full medical history!
Your idealism about benevolent employers is touching. There are very few employers offering fringe benefits to many staff these days. I suspect your argument only holds good when dealing with very specialised, very mobile, high wage staff. Most people are not in this position. I myself have recent experience of employers attempting to treat me like dirt. I could and did move on. Not everyone has my advantages.
I am afraid I don’t see the evidence you apparently see that deregulation is going to make things better for the less well off. And the less well off, not to mention the downright poor will always be among us.
Soviet Russia is an interesting example. However, I don’t want to live in a totalitarian one-party state nor do I hanker after any paradise. I am quite comfortable in a mixed economy with multi party elections (even if all the parties are a bit crap!). Unlike a soviet system I would rather argue and debate rather than send you to a Gulag. In other words, the soviet references are a bit of a straw man.
@Bobski
Most of this is utter nonsense filtered through an unquestioning and bigoted lens
I think it my duty to say so
Take health care – for the healthy health insurance is great
But have any form of mental illness and try to get it you’ll find you can’t – even for physical complaints (a problem my wife has encountered time and again when people ask for referrals for private medicine and are not accepted because of mental health conditions quite unrelated to the procedure to be undertaken)
Your assumptions are fanciful and false. As James says, the result is you present straw men
Richard – your supercilious manner is unbelievable. You are unable to debate any issue properly without being offensive in the extreme. Any comments, like this one, will be deleted but you are happy to vent your frustrations to everybody without a right to reply. I agree with most of what you write but your manner has now moved me elsewhere. Good luck in your crusades.
@Paul Smith
I think my comment wholly objective
Anyone who thinks the private sector and charity is really capable of taking over state activity is stating “utter nonsense filtered through an unquestioning and bigoted lens” based on the assumptions of right wing economics which do not relate to any reality currently known in society
That’s not being offensive – that’s saying the rhetoric this economic mantra gives rise to is as I describe it and fundamentally dangerous to a majority in society
If you don’t agree – move on by all means. That’s your right
But unless you’re willing to challenge – and robustly challenge on this issue then you are part of the problem
@James from Durham
No offence taken, I have been on the internet long enough to know that words without vocal inflection and body language always come across as more harsh than intended.
My own health history has nothing to do with my opinion. As for the NHS and experience, the problem is that the government’s (regardless of party) system for doctors is another measure of state control. Almost all hospitals are owned and run by the NHS, therefore almost all jobs for doctors are either in NHS hospitals or government funded GPs surgeries, therefore a majority of the experience and knowledge is in the NHS. So ‘man-power’ and experience is locked up in the NHS.
So why don’t private healthcare companies just build their own hospitals? This is due to the unique way that the NHS is funded. Everyone in the UK has to pay tax/NI otherwise they face imprisonment which is coercive. Now think about low income individuals, they HAVE to pay income tax and NI whether they use the services provided or not. Gross pay minus tax, NI and the basic cost of living and you haven’t much left so are you going to pay for something that you are forced to pay for already? When people are forced to pay for healthcare through the government there aren’t many potential customers left for private companies.
http://www.annaraccoon.com/politics/health-economics/
I may sound naive about employers (I’ve had a few and none have been terrible), but I think it is better to be an optimist that a pessimist because pessimists never see the good in what they have.
It depends on the company and it relates to competition. My company offers health insurance to every employee (not temps or contractors) regardless of wage, they have a good pension scheme where they pay in double what you do up to 10% and they have a wide reaching discount scheme to name a few.
As for employer to employer competition; you said so yourself, your former employer treated you like dirt so you left (I assume to somewhere better). In the bust side of the economic cycle the ball is in the employers court because there are many possible workers and few jobs but in the boom side there are few unemployed persons and many available jobs, so companies are going to have to offer more, for example, I was unemployed for 6 months after I left Uni, finally got a temp job with the biggest employer in the town, I was paid less by the agency than people who were hired one month before me because they were tightening their belts (I had no problem with this because I needed the job more than I needed the extra £1/hour), fortunately for me another company saw my CV and they were on a massive rebound hiring loads of people and they were offering me a better wage, and better long-term prospects, easy choice there. People need to realise that when they take a job they are selling their time, expertise and experience (the company I went to needed my knowledge so they were paying me almost twice as much as the first temp job). To demand more pay you need to increase one or more of those things then negotiate your socks off, it is a sellers market later in your career.
I believe what I believe about employers because of ‘enlightened self-interest’ (fluffy I know, but I use the principle in my everyday life and most people use it without realising). The motivational theories of McGregor (Theory X/Theory Y) and Maslow (Hierarchy of Needs) also tie in with it nicely.
The drawbacks of regulation (Warning: some swearing): http://dickpuddlecote.blogspot.com/search/label/Transport
Must read -> http://dickpuddlecote.blogspot.com/2010/02/labour-kill-all-businesses-in-end.html
A couple of those posts are about the effects of UK/EU legislation/regulation on his coach business and other local coach companies.
Okay the starvation point was a straw-man (it is true though) but my point is still valid, it doesn’t matter what system of government or political philosophy you use, the law makers will always draw power and wealth to themselves and their associates. Therefore inequality is unavoidable. What is better though, a system and philosophy that is constantly dragging the least ‘well-off’ along, unable to actually better their lives or a system that encourages them to make their own life?
Just because Anna Raccoon is an excellent blogger and this is an excellent post that relates to our discussion: http://www.annaraccoon.com/politics/marxism-v-capitalism/
@Richard Murphy
RE: Healthcare – The present system of private healthcare isn’t great (in terms of providing for those already with some condition), and it isn’t what a free market system would be like because as long as there is a customer base and a profit to be made there will be a business.
I am also not against NI per say, it would be great if our NI worked like Australia with the opt-in/opt-out choice, and NI was just a state-owned insurer that was had no reason to turn people away.
“Most of this is utter nonsense filtered through an unquestioning and bigoted lens”
I think that it is my duty to ask, ‘how is life in your glass house?’ Isn’t it inherently bigoted to call someone a bigot? I am entitled to voice my opinion, you (or anybody else) are under no obligation to listen. You are correct that this is your website (to do with as you please) and I am under no obligation to comment other than my desire to spark up a discussion (which I think I have done).
For that matter, you have no idea how I reached my opinion. You probably think that I am rich, greedy and self-interested, you would be wrong but you are entitled to have that opinion. If I told you that through out my life I have been deeply interested in many political and economic theories, seen the benefits and the weaknesses to them and concluded that my current opinion is the best fit for me, if not everyone.
@Bobski
You don’t change my opinion one iota
I stand by what I said – and the reason is this:
“If I told you that through out my life I have been deeply interested in many political and economic theories, seen the benefits and the weaknesses to them and concluded that my current opinion is the best fit for me, if not everyone.”
Now I form my opinion on the basis of what I think is best for society as whole
You form yours on the basis of self interest – regardless of what is best for society as a whole
As such you promote solutions that suit you
I promote solutions that may not best suit me but create congenial conditions for all
So I want health solutions for all – you don’t care that the market excludes the poor (who would be much poorer in your society, the chronically ill and the elderly – who are of course in most need
That is why what you propose is ” utter nonsense filtered through an unquestioning and bigoted lens” – and the difference in our positions is why I am entitled to say so without the criticism being returned.
You have had your say – further comment from you on this issue will not be accepted
@Richard Murphy
“You have had your say – further comment from you on this issue will not be accepted”
Just to clarify
What am I no longer allowed to comment on specifically; economic theory, social welfare, the provision of healthcare or this a blanket ban?
@Bobski
Under the moderation policy of this blog all of them, if I so wish
What I am saying is this current correspondence is closed
@Bobski
Bobski you are talking total rubbish. I think Richard is reasonable to be rude to you. Your arguement is based on dogma. Why don’t you do some research before you start posting.
(Per OECD data for 2009) The US spends 16% of GDP on healthcare – public and private. The UK spends 8.7%.
There are an estimated 11 million illegal workers in the US who receive no
heathcare except emergency treatment. Furthermore, one in six US citizens has no health insurance due to its cost.
In comparison, the NHS provides universal care of a standard equal to that which most US and european citizens enjoy.
Many of the savings occur because the NHS is a monopoly, so is able to negotiate very reasonable prices for drugs and other supplies. The above points show that this more than outweighs any supposed lack of efficiency due to it being not for profit.
You want to throw this away, for a system which will cost more and provide less. Either you are a moron or a very selfish person. Which is it?
@Alex
Appreciated
Glad I’m not alone
Bobski – you may reply as someone else has joined the debate
This comment has been deleted. It failed the moderation policy noted here. http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision on this matter is final.
This comment has been deleted. It failed the moderation policy noted here. http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision on this matter is final.
I considered the comments made offensive to NHS staff