Robert Peston has looked at the Oxford Centre for Business Taxation report on corporation tax in commentary on his BBC blog and come to some very strange conclusions.
Peston's main arguments are (and I edit to reduce to this list):
1) Multinationals have contributed 85% of all UK corporation tax revenue over the past 10 years. in 2007 UK owned multinationals paid £16.5bn of corporation tax, foreign-owned multinationals paid £17.7bn, and "domestic groups" paid only £1.1bn. So, Peston argues that without corporation tax paid by multinationals, British multinationals and foreign ones, there would be little revenue at all from this source. So it seems to make sense to encourage them to stay here.
2) However, the research also indicates that as a proportion of trading profit, the tax liabilities of the UK's 100 biggest companies are lower than for other businesses: unsurprisingly, big companies have the wherewithal to engage in sophisticated tax planning that reduces their tax bills.
3) Even so the biggest 1% of companies pay 81% of all corporation tax. So although in an ideal world, some may want the corporation tax system to be more progressive, in this less-than-ideal world big businesses are making a non-trivial contribution.
4) Although the UK's corporation tax rate has been well below the average for the G7 biggest economies for more than 25 years, UK corporation tax revenues as a proportion of GDP have generally been well above the G7 average. Peston claims that this provides some evidence, therefore, that lower headline rates which reduce the incentives for avoidance or for relocation abroad increase the overall take from companies.
Unfortunately Peston's analysis is simplistic, too accepting of the arguments and prejudices in the underlying report and fails to look for the external factors that influence the claims Oxford make, but twhich they have not drawn attention to themslves. In other words I'm arguing he's reporting and not analysing what they had to say.
To summarise my counter arguments they are:
1) Of course multinationals pay most tax, but there are numerous reasons for this. These include:
a) The UK has the largest financial market in Europe clustering financial, oil, mining and other companies in a way that no other centre in Europe does. It probably has more multinational companies per head of population than anywhere else in the wold. Of course they make a disproportionate contribution.
b) The proportion of profits within the UK economy has risen over recent years. I show this here. Almost all of this will relate t multinational corporations - so unsurprisingly they are paying more tax. But this may not be a cause for celebration - remember this means that labour is getting a smaller share and that means the wealth disparities in the UK have risen. I don't consider that good news.
c) Multinationals earn more for a number of reasons - first they can exploit developing countries (and I think they do); second they can transfer price to increase yield; third many create monopoly profit by eliminating domestic competition. Domestic companies are disadvantaged as a result. This theme could be developed - and I do not have room to do so here - but the finding is, I suggest unsurprising. The issue is not that multinational corporations pay more - wherever earned - but that they use their power to oppress local competition. That oppression is not necessarily good for the UK economy. UK companies employ more people in all likelihood - and that generates more tax and more added value.
2) Let's be clear about the second point - that large companies pay lower rates of tax than smaller ones. I have argued this previously and it has been denied - but Oxford has now confirmed my findings. But I have made this an issue for good reasons. They are:
a) This reverses the policy direction of successive UK governments. We have decided to have a progressive taxation system - and that continues to be what parliament endorses, and yet that is not what we have got. That creates what I have called an 'expectation gap' which rightly gives rise to protest. That this exists is confirmed by the newsworthiness of the story Peston picks upon. The gap is real, and I'll assess its size in another blog, later.
b) If the intention of parliament is not being fulfilled and the messaging that it is intended to deliver to the UK population and business community that there is a deliberate bias in our tax system to help small business overcome the disadvantages it faces when competing with large business is not being delivered in practice then very clearly our corporate tax system is not working as expected, and that is enough reason to demand change in it.
c) If allowances and reliefs, however legally claimed, bias in favour of banks and large companies then those allowances and releifs are not working as intended;
d) If large multinational corporations pay no more tax tha small local companies, despite the intention otherwise, the evidence of international tax planning is high;
e) As Peston himself says, the evidence that access to expensive advice distorts outcomes is also high - and also evidences that th outcome is not chance, but deliberate and clear evidence of the tax planning that I and others allege takes place.
3) Peston's argument assume i) progressivity does not matter ii) it's not achievable and c) if w tried to introduce it then business would leave. All three are wrong. We bias small business because it has additional costs over large business. By implication we now have a tax system that biases against domestic small business. In addition, we have a tax system that may well increase and not reduce inequality - and theRight hate this being said, but inequality harms all in a society. It's also just not true business will leave the UK. The fact is people are here. Markets are here - including the financial markets tat have nowhere else to go in our time zone - and skilled people are here. Business is not going anywhere else. And for good reason. This is where money can be made. That means we could increase the non-trivial contribution business makes without changing the business dynamic.
4) This is where Peston really shows his lack of knowledge. Tax yield is a three part function. It is:
(Tax rate x tax base) - Tax avoided and evaded = tax yield
I will leave evasion aside now - although it is an issue I will return to soon. The existence of avoidance is already accepted by Peston. It's the remaining function he shows he does not understand. Countries have a choice on tax base. That's how they define the profits subject to tax. The UK has chosen a residence basis to 2009 - when this data was valid. Now it is moving to a territorial basis - which is the basis of tax heist George Monbiot, I and others have written about.
Let's leave the tax hesit aside for a moment and make clear why the UK tax base is so big - which proves why it is not rate that gives rise to our realtively high tax take. The base is big precisely becasue we have included world wide income in the tax base. So we collect more tax and rightly so - which is another issue I will return to soon. Our base gives us a big yield.
The fact that London is in the UK gives us another boost - nowhere else proportionately has the same boost - as I note above. And it's not going anywhere else, so that's also a fact to consider. But that's base again, not rate.
And we should also not ignore the fact that the number of small companies in the Uk has jumped by more than a million in a bit over a decade - giving us by some way the largest number per head in Europe, more obvious tax havens apart. And some of them do pay tax, although the more interesting question (on which more later) is why so few do.
Put these facts together though and Peston's claim that a low rate works is just pure Laffer curve fantasy and he should know better than that.
The truth is much more prosaic. Go back to Peston's blog and what he was trying to prove was that Monbiot was wrong to say that the latest Tory reforms on overseas branches, dividends and controlled foreign companies are not a tax heist. And yet Oxford confirm otherwise. Labour, they say, increased corporate taxes in 2008. The Tories have undeniably they say reduced them in 2010 - and that's before the new rules on offshoring. Add those in and something much more important happens. As Oxford notes, few companies have overseas income but those that do have a lot - indeed the credit for overseas tax was £8.1 bn in 2008-09, the last year for which data is available. To assume that this gave rise to just £100 million of additional UK tax that will be the sum total now lost from changes now made is absurd: it must be more than that, because we're fundamentally changing our tax base.
The result is Peston is wrong, and maybe very wrong. He clearly needs a crash course in tax. Because on this story he's bought a line that is utterly misleading, and it's not the job of the BBC to repeat such things in such unquestioning fashion.
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Thanks Richard, I was looking for someone to expose Peston’s schilling for the top 1%, and you have done that admirably.
It’s often said that if we tax these ‘hard working’ people too much then they’ll leave the country and we, as a country, will be worse off but, as Simon Hughes said when faced with the same comment, good riddance to them. What kind of example is it setting to our society and our children to hold people with that kind of attitude in any kind of respect? They should be treated with the contempt they deserve and be shown the door.
I hate the ‘hard working’ appelation because it’s one thing to work all the hours the gods send to earn a small fortune, but ask them if they’d do the same hours for the minimum wage? That’s real hard work!
I don’t care if profits made overseas are taxed overseas, but profits made in this country should be taxed in this country – and if that’s not good enough for them then they can take ther business, all of it, somewhere else: They should be prevented from trading here at all.
If there is money to be made here providing a service or making something then someone else, with maybe a more societal based attitude, will be able to provide it, make a healthy profit from it and pay a fair amount of tax on it.
1 Surely in terms of your frequent arguments, multinational have the greatest ability to reduce tax relative to domestic companies given the various jurisdictions they operate in, but don’t seem to be.
With foreign multinationals paying 50% of tax, it appears our relatively low taxation jurisdiction is encouraging them to base themselves in the UK.
The proportion of profits to GDP is irrelevant to this argument which is whether large companies are paying their taxes. Amnd anyway, the falling share of labour to GDP would be expected as economy become more advanced and less labour intensive.
Why should we care whether a business is owned domestically or by a multinational provided it gives us good proucts/services at the right price. If they are out competing domestic companies, then they are achieving this.
2. The fact that large companies pay a small % of trading profit in tax proves absoltely nothing as this is before the effects of capital allowance . It also ignores the impact of the funding structure, with small companies more likely to be equity funded with larger companies using debt as they grow, and especially to finance bigger capital assets.
3. This is not evidence that our tax system is biased against small business, rather given the incredibly (supposed) lack of profitability of small business, I would think it more likely that small businesses are evading on a far greater scale through understatement of profit.
4. You argue that it is not the rate that is important but the base. But given half our tax is paid by foreign owned multinationals, then part of the reason we have a big base is because of lower rates. It is a fallacy that companies need to be located here, the centre of the economic world is shifting to the East, and companies will follow it. London’s days of glory due to its geographic position will slowly come to an end.
The £100m refers to the effect of the change in branch taxation, whilst the £8.1bn would include the signficantly higher amount of tax credits on foureign source dividend income pre 2009. So you are not comparing the right numbers.
@PaulF
Respectfully, I think you utterly miss the point in every case
I believe my argument clear – and yours just very confused or wrong
So much so I see no point in repeating myself in rebutting them
“If there is money to be made here providing a service or making something then someone else, with maybe a more societal based attitude, will be able to provide it, make a healthy profit from it and pay a fair amount of tax on it.”
@Psycho B Delic, you’ve hit the nail on the head. Transnationals are not necessarily more efficient but small businesses just can’t compete on equal terms. I’m sure we’d have a much better economy if we protected our own businesses. Our competitors in Europe and Asia do this in a pragmatic and subtle way. There is no such thing as fair free international trade.
Hi,
Could you post a source for that £8.1bn please? I’d like to check that you’re comparing like-for-like.
@Iain
http://www.hmrc.gov.uk/stats/corporate_tax/11-3-corporation-tax.pdf
@Richard Murphy
Thanks!
How much, if any, of that £8.1 bn do you think is accounted for by the 2009 dividend exemption change?
@Iain
None – this is pre-change data
That’s my point. How much of that £8.1 bn is tax credits for dividends which would have been tax exempt post-2009?
@Iain
Nit possible to tell – sorry – but my point is the loss is surely more than £100 m
hard to believe not
Ok! np, and thanks 🙂
The corporation tax take from overseas dividends coming into the UK pre the dividend exemption was never as large as people thought it was. The main reason for this was that the rules were so complex in terms of working through the analysis of whether double tax relief would apply that everyone structured repatriations of cash as repayments of capital which fell within the substantial shareholdings exemption, so no UK corporation tax!!!
This is great stuff. Thanks Richard! Interesting that the reason for the larger recouping of corporate tax from multinationals in the UK relative to the other G7 countries partially boils down to the fact that London has more registered multinationals than most other G7 nations and that the UK taxes on worldwide income – while (if I understood correctly) other G7 countries do not (such as Netherlands, Germany and France – who employ a territorial system of tax).
Thinking out loud (and with plenty of ignorance) – it seems strange that multinationals would then decide to ‘register themselves’ in the UK (not that I understand how multinationals do such a thing) if they know that would mean paying corporate tax on their world-wide income – whereas in Germany, France and the Netherlands they would pay only territorial tax? It seems to counter the claim that multinationals register themselves here only because they know they can pay less corporate tax – introducing the idea that they come here for a number of reasons, in turn countering the claim that increasing corporate tax would act as a discincetive to multinationals to remain registered in the UK.
Unless this means that the sheer volume of money(and thus subject to corporate tax) coming in and leaving the UK is so enormous relative to other territorial based tax systems that in fact as a proportion of the money coming in multinationals do end up paying less corporate tax than they would in France, Germany and the Netherlands.
Perhaps I need to buy your book to understand more!
Anyway cheers.
Yours sincerely,
Chris Moye
I wonder if Peston will respond?
“Respectfully, I think you utterly miss the point in every case
I believe my argument clear – and yours just very confused or wrong”
Still looking for the respect. Anyone disagreeing with Murphy gets squashed.
@Eric Grobb
I squash arguments that do not hold water – and rightly so
I respect people
Now go and read Tom Worstall and see where the real abuse (verbal and otherwise) is centred and respectfully stop being silly when making comments about me – because that’s what this sort of comment is – small minded silliness from those unable to make a point
Surely you can do better than that – if only by not wasting your time?
“many create monopoly profit by eliminating domestic competition.”
Indeed. Adair Turner recently spoke about the City’s ability to earn economic rents, in great detail, here. Not just about eliminating competition, though that’s an element of it.
http://treasureislands.org/adair-turner-answer-to-financial-failure-tax-banks/
I am glad that you persist despite the lies of the ridiculous Peston and others.
What is happening in the UK is what has already happen in the US. Tax and personal wealth secrecy is being used to hide the mugging of poor consumers by rich businesses and individuals who use secrecy, legislative and regulatory capture, and non-criminal tax evasion to accumulate and hide gargantuan amounts of wealth.
Meanwhile, the right wing press helpfully ignores what has happened. Its proprietors distract attention from what is really happening by selectively exposing minor exploitations of the benefits and immigrations systems. Voters think their real enemies are the immigrants and claimants they see on the streets and in the press, rather than the “below the radar” super realty who have somehow managed to accumulate vast amounts of wealth in secret, opaque foreign bank accounts without anyone noticing who has been robbed and who are the robbers.
Despite all the energy put into distraction tactics by hysterical liars in the right wing press, the attacks on Richard and the likes of Polly Toynbee are starting to show just how worried the super wealthy are now that people are starting to join up the dots and work out what’s really going on.
Hi Robert,
Great stuff! and almost a pleasure to read.
Any chance you could post more links to what you are referencing and perhaps a link back to George Monbiot’s original article will help as he has linked to yours? Also it would would be a lit less distracting a read if you had somemone proof read your work before posting it up. Maybe I’m just a pedant but I do find all the spelling and grammar mistakes distracting and they really detract from what is a well researched article by making it look like it has been written in a hurry.
Really look forward to the further research and writing you are promising..
@BruceHeagerty
Apologies if there are typos etc – this stuff is always written in a hurry – and yes I do miss them, apologies
The fact the new coroporation tax regime planned will mean only MEDIUM to LARGE companies will be allowed to pay just foreign jurisdiction tax without a top-up to 28% in this country will definitely affect all of us through:
1. Reduced revenue overall and a direct reduction in services that most of us imagine a government is in office to provide its citizens.
2. More companies will be encourage to offshore more of their business to jurisdictions with lower rate of tax, lower labour costs, lower standards around H&E etc, which will reduce jobs in this country.
3. The smaller companies not eligible to take part in this are more likely to merge to make themselves eligible and this activity always ends up with a reduction in jobs for the sake of efficiency.
4. The fact the busineses can claim tax off-sets in this country against the cost of foreign based elements of the business again squeezes the local tax base. In effect the rate of tax they pay is only the foreign jurisdiction rate minus off-set tax relief in the UK
5. As more jobs are off-shored, this will force down paye rates in this country, especially when unemployment levels are kept high. Again this reduces the tax revenue.
6. As this ultimately results in further profit for the multi/trans-nationals they will have more power to alter domestic state policy for their benefit. This has always been the case particularly in poorer countries, especially if the IMF or World Bank have provided any money with all the pre-requisite privatisations etc. But developed countries governments are definitely very much now dictated to by the multi-nationals.
@PeteW
I think it important to say that this is not solely restricted to large companies
But in practice that is highly likely because of anti-avoidance rules to be the outcome
Nice expose of Preston. good work!
Re, the faux exodus argument oft repeated on this. (which even if true ignores any attempt at international action and solidarity…)
see the linked paper below by Cristobal Young and Charles Varner, “Millionaire Migration and State Taxation of Top Incomes”
http://www.nakedcapitalism.com/2011/02/quelle-surprise-tax-increases-on-rich-do-not-lead-to-exodus.html
“A solid paper by Cristobal Young and Charles Varner, “Millionaire Migration and State Taxation of Top Incomes” (hat tip Matt) helps debunk the idea that high income individuals will pull up stakes if their taxes go up. The case study is an interesting one: New Jersey’s tax increases on top earners. New Jersey made the biggest increase of all US states, and also has the distinction of having a low income tax state (Connecticut) nearby, meaning that tax-sensitive residents had an option of moving not all that far to escape the increase, which presumably would allow them to maintain family ties…..”
[…]]
“From the abstract:
This paper examines the migration response to a millionaire tax in New Jersey, which raised the tax rate on top earners by 2.6 percentage points, becoming one of the highest rates in the country. Drawing on complete NJ state tax micro-data, we estimate the migration response of millionaires using a difference-in-difference strategy. The results indicate little responsiveness, with semi-elasticities mostly below 0.1. Tax-induced migration is higher among people of retirement age, people living off investments rather than wages, and potentially those who work (and pay tax) entirely in-state. The tax is estimated to raise $1 billion per year and modestly reduce income inequality.”…
“… it’s not the job of the BBC to repeat such things in such unquestioning fashion.”
I’m afraid that you are probably wrong on that count as it would be consistent with its performance on other topics.