Economia magazine, the Institute of Chartered Accountants in England and Wales official journal has published a comment piece by me on corporation tax today in which I address the issue of the problems with that tax and the demands some are making for its substantial reform or even abolition. I argued as follows:
Corporation tax is a core part of our tax system. On average it raises 10% of UK tax revenues. Calling for its abolition reveals a lack of understanding of its importance
First, corporation tax is a backstop to income tax: without it anyone who could incorporate would pay tax at will. We cannot afford that.
Second, tax-free companies would allow those with wealth to accumulate more in a tax-free environment, exacerbating wealth inequality.
Third, a tax-free business sector would distort competition, providing much opportunity to large business, but little or none to small enterprise.
Fourth, corporation tax is source-based. It taxes profits made in or attributable to the UK. If it was abolished and instead company distributions to their recipients were taxed, the ownership of shareholdings would flee the UK and the tax base will collapse.
Fifth, in many cases we don't know who the owners of companies are — so have no other way of taxing them. Sixth, source-based corporation taxes are the contribution paid for the right to trade in and make profit from UK markets. We grant that right by offering limited liability. As a result society shares the risks of capital communally, as the banking crash of 2008 showed.
Corporation tax is a distribution to society for the right to have limited liability; as compensation for the costs it imposes, and for the costs of market failure. Unless business pays that, ordinary people will.
Abolish corporation tax and the outcome would be increased inequality and bias against small business. Reform is needed, with an emphasis on changes to transfer pricing rules, tax residence and permanent establishment. We need a proper anti-avoidance principle and to revert to a residence and source basis for this tax: the territorial basis introduced by the government is a licence to abuse offshore havens. Last, we need companies to account for the tax they pay — so full country-by-country reporting is essential.
Corporation tax can work. All that is needed is political will.
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I’m worried that corporation tax will be abolished but small companies will be exempt from the new rules! I cannot see it being applied to small businesses for the very reason you outline above (number 1).
Interestingly, Stephen Herring of BDO is starting to talk about tax transparency for all businesses with a turnover of less than £250m (scroll to the bottom of the article) http://www.taxjournal.com/tj/articles/peers-launch-inquiry-corporate-taxation-27032013
No smoke without fire?
I’m of the mind that corporation tax shouldn’t be available to close companies under the small profit level. They should always be taxed as LLPs.
The benefits of the corporation tax regime are only really warranted for wider held companies or those that employ third party staff.
I would have thought the opposite argument would hold more water. Corporation tax should be high, but investment and employment can be written off against the tax generously. Otherwise surely you get cash hoarding and dividend extraction.
I argued in favour of your first point in 2007 I think
The Treasury liked the idea
But it was too radical
To stop the race to the bottom and to facilitate fair trading, why can’t the EU harmonise corporation tax rates?
The EU has no such power
Unitary tax overcomes the need
I’m still left wondering whether a better method of taxing more equitably and in a more redistributive fashion would be some switch to a LVT based system. Bearing in mind that due to incessant lobbying and international competition, regulatory capture and so on which has already massively diminished the proportion of tax paid by corporations and the wealthiest in our societies, would not a switch to property/land taxation offer more hope for a less regressive form of taxation.
How would they avoid/evade taxes if they were based on land values rather than profit or even income?
LVT is important
But it is utterly impossible for it to replace all existing taxes
And much income would go untaxed
Why should we care where taxes come from as long as government services (preferably more) are funded?
Completely wrong
Tax is an instrument of social and economic policy too
Redistribution, repricing and fiscal policy are all key to tax policy
It’s not just money raising
LVT could replace all current property taxes plus income tax for all but the top 10% of earners (who pay over 50% of income tax now). That would provide a huge stimulus. Also the fact that all good public investment feeds into land values means that, with frequent reassessment, a virtuous circle of increasing public expenditure, increasing land values, increasing revenues from LVT.
LVT is not a trivial policy, but neither is it a single-tax one, because, as you say, Richard, revenue raising is not the only purpose of taxation.
My problem with an LVT, on its own, replacing Corporation Tax, is that it would worsen the already terrible imbalance.
A big corporation that makes things can’t help to be based where it is, be it Myanmar or Wigan, but a big corporation that makes markets can be based in (say) Singapore while having big offices & a horribly large foot-step in London.
LVT is a tax on land rent. Rent in its fuller economic meaning is unearned income. Excessive salaries are rent as are returns to capital, since capital is inanimate and cannot ‘earn’ anything. Only labour can ‘earn’ its return, wages. In effect ‘capital’ is financial capital, i.e. money, and capitalism is money making money. So a socialist LVT campaigner sees no problem in taxes on profits and high salaries.
Any discussion of corporation tax is meaningless without a careful analysis of its incidence.
There is a well established consensus among taxation economists that (especially) in small, open economies like the UK, the economic burden of corporation tax falls on labor in the form of reduced employment or lower compensation.
Seen under this light, corporation tax is actually highly regressive. Furthermore, it fails to perform any of the redistributive functions you ascribe to it.
And like a lot neoliberal economists have done that work is fundamentally flawed because the assumptions made and methodology used are designed to produce an outcome
Which is why a substantial body of literature that you ignore suggests the incidence is on capital
Which is why as tax rates have been cut returns to capital have risen and to labour fallen
Mr Murphy
Could you please point out to some academic literature that supports your position.
I am aware of some research commissioned by the Congressional Budget Office that challenges the consensus among economists and shows that under very specific conditions a significant share of the burden of corporation tax may fall on capital. However, this only applies to the United States, which is an economy exponentially larger than the UK, and much less open. The findings are not applicable to the UK.
Please feel free to link.
Academia has been captured by neoliberalism
I change th world despite Rge vested and usually rigged view of academics
And I do so from prima facie evidence: if academics were right UK wages should be rocketing righ now as ct is cut
Please who me the evidence?
Ther is none, no least because almost all the academic Vince was done on ax rises – almost unknown for ct
You can’t draw conclusions from up unidirectional analysis
See chapter 7 of Over here and Under Taxed
Mr Murphy
It was you who wrote in an earlier post that there is a “substantial body of literature that […] suggests the incidence is on capital”.
It would be genuinely interesting to look at some examples of that literature and in particular to understand the underlying assumptions leading to its conclusions.
Read chapter 7 of Over here and under taxed
And start to answer the straight questions presented to you
Tell us why wages are not rising in the UK if you are right
MRubio
So what you’re saying is, if there were no CT Companies would use the saving to pay their staff more ?
Lets all pause for a minute & think of 5 reasons why that is, obviously, untrue.
I’m afraid that if “eminent” economists come up with findings that run obviously counter to common-sense I’m more inclined to trust common-sense bearing in mind the recent record of “eminent” economists.
Mr William
This is not the way that taxation economists analyze the incidence of corporation tax.
In simplified terms, the models they use assume that, consistent with the situation in small open economies like the UK, capital is mobile between jurisdictions but labor is not (the models are slightly more complicated than that and look at the marginal impact of capital allocation decisions, but this is a detail).
So capital will flow to the places where it can achieve the highest after-tax return (assuming the same risk). This in turn means that if a company has investment opportunities with the same pre-tax returns, it will chose the location that has the lowest rate of corporation tax. The workers in the higher-tax country will be penalized because they will not have access to the income-earning employment opportunities associated with the capital investment.
And their assumptions are wrong
Take one mike Devereux used to reach his conclusion – which was that in the event of industrial dispute resisting imposition of the cost of the tax production could be moved abroad ( and be returned when the dispute was won ) at no cost
Shall we get real? Assuming labour has no power and employers have no cost does lead to the conclusion any cost can be passed on
If the incidence of corporation tax were all on wages, with profits unaffected, there would be no point in companies (whose goal is to maximise profits, not wages) lobbying for reductions in corporation tax. Whereas in fact, corporations spend very large amounts of resources lobbying for reductions in corporation tax. This fact, in itself, is a very powerful piece of evidence that the burden of corporation tax falls at least partially on companies, not workers.
MRubio
So there should be a direct correlation for every country that the higher the CT rate the lower the average wage. We can see that in real life can’t we ? Can’t we ?
Mr William
These analysis generally conclude that labor suffers the impact of corporation tax in the form of lower returns.
But they do not say whether the lower return comes in the form of lower wages, higher unemployment, longer working hours, reduced benefits etc. etc.
It is too simplistic to look only at average nominal or real wages.
Ah, what should we look for then? Fear, servitude, poverty, or (the Tory view) denial of hope?
Please enlighten us as to how corporation tax enslaves the working person
And cuts in it liberate them
We’re all ears
Oh, and provide academic refernces whilst you are about it or your argument is clearly without substance
Mr Murphy
The tone of your post is not conducive to a constructive discussion. I question whether it complies with your site’s comments policy.
I am still hoping to see from you some example of the “substantial body of literature that […] suggests the incidence is on capital”. If you are going to ask me for some academic references, it would be fair that you first answer my initial question.
I have limited knowledge of the UK economy but can see that net job creations, total employment and nominal wages have remained very resilient in recent years (even though real wages hand disposable income have suffered due to inflation), despite the overall economic weakness.
Answer the questions
I have referenced sources via my work
Now deal with the issue
Mr Murphy
I do not have access to your book and therefore am not in a position to review your sources. Please be kind enough to list them here for your wider readership.
Unlike you, I believe that I have already answered the questions you asked with respect to the components of the total return to labor.
The following academic references should be interesting.
The seminal paper in this field is Arnold C. Harberger (1962) “The incidence of the corporation income tax”, Journal of Political Economy 70(3): 215—240. The most up-to-date paper on the topic, which includes the impact of open economies and assumptions about the relative elasticities in markets for goods and capital, is Arnold C. Harberger: The Incidence of the Corporation Income Tax Revisited, 61 National Tax Journal 303-12 (June 2008).
I think you may find this summary interesting as well, even though it is not academic: http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/ota101.pdf
The most comprehensive summary for the UK is in Devereux, Michael P. and Loretz, Simon, “Corporation tax in the United Kingdom”, Oxford University Centre for Business Taxation, February 2011
May I suggest you adopt a more appropriate tone for this conversation.
You can buy my book
£1.83
Devereux’s work is based on wholly unrealistic premises
That Treasury document is, of course, the Treasury view, and we all know what that means
Answer the questions or you will be deleted
All your questions have been covered. However you have failed to provide a single reply. Your tone is unpleasant, which I assume is your way of admitting you have no further argument.
This conversation is now over. Have a pleasant Easter or Passover.
Oh don’t be silly
I and others have pointed out the glaring evidential flaw in your obviously rigged theory and your defence is ‘Mike Devereux said so’
Candidly, if that’s all you can say please do not bother to call again
As Richard points out, much of economic academia has either been captured by a neoliberal cabal or adheres to standards of evidence that are several degrees below the hard sciences.
It’s called the dismal ‘science’ for a reason.
Citing ‘references’ to economics papers, particularly if those economists are of a neo-classical bent, is analogous to one homeopath peer reviewing the work of another homeopath.
Until, I think, about 10 years ago, no-one even questioned that Corporation Tax fell on capital, that was seen as a given. That is why Company A/Cs are set out as they are.
I thought the argument that Corporation Tax fell on labour seemed doubtful but was prepared for some clever analysis. However, it seems, from what MRubio says that all it is based on is the age-old cry of right-wing spivs “if you make us pay our fair share we’ll leave”.
As Richard has pointed out, this almost never really means “leave”, almost always it means “stay exactly the same but claim our Head Office is in ….” So the answer to that isn’t lower CT but CBC reporting.
“I thought the argument that Corporation Tax fell on labour seemed doubtful but was prepared for some clever analysis. However, it seems, from what MRubio says that all it is based on is the age-old cry of right-wing spivs “if you make us pay our fair share we’ll leave”.”
Absolutely spot on.
Well said.