This budget was notable in that for the first time that I can recall we saw the Treasury subscribe to the Laffer curve.
As has been shown time and again, the chance that this has any impact at the tax rates used in the UK is minimal. The idea that cutting rates can increase tax yields or stimulate economic growth has always been a statement of right wing dogmatic belief for which, like mush else in the right wing economic lexicon, has no evidential support. Of course you can supposedly construct maths to support the idea of its existence - but that maths is an abstract from reality critically dependent on the assumptions you make. Unsurprisingly if you assume there is a Laffer effect you can prove there is one. But that doesn't prove there is actually a Laffer curve for any meaningful tax range. It just says you believe there is, which is not the same thing at all.
Now, at the meeting at the Social Market Foundation I attended this week HMRC director Judith Knott confirmed that HMRC have accepted another key element of right wing tax dogma - which is that companies can't pay tax and only people do. She explicitly questioned as a result why we have a corporation tax.
Well it's an interesting idea. So let's explore it for a moment.
First, imagine there wasn't a Marks & Spencer when you went into a store marked M&S. That's what you're being asked to believe. You're being told M & S and all other companies are just make believe. You're told they're just a bunch of shareholders. Except that's not true. You don't contract with the shareholders. You do contract with M&S. And you do that because there would be no M&S without there being a limited liability company. No one would have taken the risk of creating M&S but for that limited liability. So not only is it not true there is no M&S, the reality is that the company called M&S facilitated something no person would have done. It's real therefore. The claim that company is just an agent for its shareholders is wrong; it's something much more than that, and its limited liability form has an impact for beyond anything that the shareholders would do, so it is an entity in its own right, and not a mere agent. That makes it taxable in its own right. It has profits all of its own, not due to anyone else that should be taxed - and the existence of retained reserves in almost all companies is sure indication of that fact. Denying this - as Judith Knott did - is simply an excuse not to tax a form of capital that has been captured by the management of these companies for their own gain.
Second, no one knows who a company represents. Most of the time a company has no idea who owns it. Some people own the shares in companies for fractions of seconds. How would we attribute profit to them to be taxed? Others hold their shares through other companies. How far do we have to go to find a person? Others record their ownership in tax havens to seek to avoid or evade tax. Why should we encourage them to do so? And how do we tax ownership where no person can be identified as having ownership rights - as in a discretionary trust? The argument that only people are taxed is simple to roll out - and impossible to apply. Knott should know that and yet she offered this glib explanation when there is in fact one excellent reason why we must tax companies - which is that they are by far the cheapest and most effective agent to tax to ensure that their owners, whoever, wherever and whatever they might be, are taxed to at least some degree on the income they derive from the company.
Knott would, presumably, rather lose the income to tax havens or tax avoidance: that's the only reasonable interpretation of her adopting this trite argument that looks good on a blackboard at the Oxford Centre for Business Taxation and whose real world application is to encourage tax abuse, the shifting of the tax burden from capital to labour and from rich to poor and which will mightily increases the income and wealth gaps; all of them aims I am sure Oxford's Centre is delighted to share. You would not consistently fail to point out the flaws in the argument if you didn't believe in those consequences that have to flow from promoting it if that was not the case.
But it's worrying we're now hearing it from H M Revenue & Customs too. Anyone would think they were beginning not to to want to tax Osborne's mates.
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So what is the point of have a director of a directorate of corporation tax with a such a slant on corporations?
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So that the director for corporate tax can abolish corporate taxes….
[…] yet the UK government and tax authorities appear now to have signed up to this farrago of economic […]
Richard can you explain the following sentence:
“It has profits all of its own, not due to anyone else that should be taxed”
Are you saying this is purely down to it being a limited liability company and if so how would that then apply to a co-operative?
A cooperative attributes profit to its members
A company specifically does not
I thought the issue was about tax incidence? The reason corporations don’t really pay tax is because they “pass on” their tax burden to their workers/customers in the form of lower wages or higher prices?
Isn’t the same argument used very simply to prove that public sector workers don’t pay income tax?
Public sector workers do pay income tax
The evidence companies pass on their tax bill is rigged – candidly
And the Laffer comment is curious – I realise that the Laffer Peak is very difficult to identify but claiming there is no evidential support is surely barmy?
For you to be correct, we’d have to accept that when workers/companies fold, retire, emigrate, decline to work overtime, or simply don’t come here in the first place and they blame the tax regime as a contributory factor, they are simply all lying?
That sin taxes don’t change behaviour after all?
Have I understood that correctly, or have the US-centric studies that depend so completely on low mobility clouded the issue?
Do you agree that as the ability to move from one tax jurisdiction to another becomes less and less difficult so might Laffer’s work become more influential?
Look, very obviously at the fringes Laffer has to be right
But we’re not at the fringes
And in that case the evidence that there is a Laffer effect – that can be identified let alone be shown to be significant – is sparse
I’d accept “We know the Laffer Curve is real and we can prove it at the fringes right now, and if we had better techniques for gathering data we’d be able to prove even more than that” but arguing that our temporary (or even permanent) failure to gather data accurately undermines the theory entirely is not really acceptable, is it?
Ah – so let’s live in the land of faires and make believe – is that what you’re saying?
Climate scientists call them “projections”.
you cant prove that God exists either, but that dosent stop millions of people believing he does !
To a lot more beneficial effect, overall, I’d say
And yes, I know all the exceptions
Richard, there’s an interesting argument here about “only people pay taxes, not companies”, which might, in light of the current brouhaha about political Parties being propped up by dirty money, result in a Tory u-turn on this issue.
As you will surely know, a US Supreme Court decision in 2010 came the EXTRAORDINARY conclusion that corporations, as legal entities, are therefore also persons! This allows corporations massively to fund the candidates and campaigns they wish to promote (see http://www.care2.com/causes/bob-kerrey-on-the-supreme-court-election-funding-decision.html, for something on this).
I can easily see the Tories doing a speedy volte-face on this, and allowing corporations the same rights of donating to causes they wish to promote. They will surely claim that this is no different from what Labour already does, via their links with the Trade Union movement, despite that fact that moneys given by Trade Unions to the Labour Party are the subject of choice (you can opt out of the political levy) and of democratic control (via TU Branches and the Annual Conference) – a VERY different matter from so-called “share-holder democracy”, which has proved totally unable to rein in the culture of excessive pay and bonuses.
Indeed
Good point
If Corporations are the masks that Plutocrats wear when they steal from the commons, shouldn’t the mask be taxed at the point of sale?
A Corporation is a taxable good, just like yachts and private jets. Another larceny tool for the Privilege Class.
@ Ivor: Re the Laffer curve , there is a very considerable literature about it, in paricular challenging the assumptions used by Jim Mirrlees to come up with the 0.46 estimate for the TIE. See for example an excellent summary by Howard Reed: http://touchstoneblog.org.uk/2012/03/did-the-50p-tax-rate-really-raise-less-than-1-billion-in-201011/
Maybe HMRC see things this way:
As Richard Murphy points out thousands of companies don’t file returns let alone pay taxes. Other companies as well as wealthy individuals employ an army of accountants to avoid paying taxes helping to render the blackboard theory of income taxation amost unworkable.
The Murphy solution to deal with this is to employ an army of tax inspectors.
Maybe HMRC note that companies, their shareholders and employees all spend money so improving the efficiency of VAT with better benefit targetting is the future?
Except they admit that they’re much worse at collecting VAT….
Blows your theory apart