Who pays corporation tax?

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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.