I recently noted Duncan Weldon's assessment of a new economic paradigm and economic relationships that no longer hold true. I have a strong suspicion that there may also be tax relationships that no longer hold true in the new economic circumstance we now face. Let me suggest a few.
The first is that tax cuts work by making space for the private sector to invest. This is the old 'squeezing out' argument. With business now almost universally acknowledged to be sitting on a mountain of cash amounting to hundreds of millions of pounds and with a massive pile of resources just waiting to be used in the economy - most of them human - this suggestion is now ludicrous.
It's as ludicrous to suggest that cutting corporate taxes are necessary to boost corporate investment. Business already has more cash than it knows what to do with and profits as a share of GDP are rising. If business is not investing it's because it is bereft of ideas, not because it is in need of funding at enhanced rates of return. There is no economic excuse for corporate tax cuts.
And whilst still on corporation tax let's put to bed that age old (well, rather more recent, actually) myth that the cost of corporation tax is largely paid by labour. This myth is almost entirely the work of Prof Mike Devereux at Oxford who studied corporate tax increases (themselves a rare phenomenon) and suggested when they occur wages paid fall. He forgot two things. First he didn't notice countries did in the past only increase tax rates when they were in economic distress, of which falling wages are a sure sign. Second, Devereux forgot to check if the relationship he supposedly found worked in reverse i.e. did wages increase when corporation tax rates fell? Real wages have fallen steadily since 2008 and so have corporation tax rates. If Devereux had been right then falling tax rates should have boosted wages, but they very clearly have not. The evidence of any significant link between tax rates and corporate tax dates has been shattered for good. Devereux should have realised that correlation does not necessarily indicate causation.
Come to that so has any link between corporate tax rates and sales prices should be forgotten now. When the argument of those who say that labour bears the cost of corporation tax fails them they instead argue that corporate taxes are paid by customers instead, to whom the price of the tax is, in their view, passed on. Now, that's true in the UK water industry where for some reason the competition regulator in this monopoly sector permits this to happen, but it is the exception that proves the norm. There is pretty good evidence that taxes on sales in the form of VAT impact on prices (unsurprisingly) but there is also ample business evidence - not least from the pronouncements of managers themselves - that they focus their business reporting on earnings before interest, tax, depreciation ANC amortisation. In that case most managers having any pricing decision making powers are very unlikely to have any knowledge of corporate tax on activities they undertake, or even of where, when, how and why their company pays tax. So they will not take corporate tax into account when make pricing decisions. There is almost no chance that this argument is true for major companies.
Next, lets drop the argument that tax management is for shareholder benefit. Of course, it may be in the owner / director business where the interests of management and shareholders are consistent because they are one and the same but that still does not prove that the tax management that the company undertook was in the interests of the shareholder. It can be just as readily argued in that case that it is in the interest of the management and since by far the most common tax management scheme in such companies is to substitute dividends for pay to avoid national insurance and management have to be proactively involved in this sacrifice I think it entirely reasonable to argue that it is in fact the management viewpoint that prevails.
I happen to also think that the case in big business. When we have major companies like Apple borrowing to pay back members there is clear evidence of two things. First, the absurdity (admittedly) of the US tax system but second that shareholders have come second on this issue and earnings manipulation first. That, I have no doubt, is because of the wish to trigger bonus schemes. That is what most of this avoidance is about, I have no doubt.
But what all that means is that much of what is said about corporate tax is just mumbo jumbo that if it ever held true does not do so now.
We're in a new paradigm. It's time we realised it.
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There is a vast body of empirical research showing that corporations pass most of their taxes on to their consumers in labor, certainly not unique to Devereux.
For example, http://www.sciencedirect.com/science/article/pii/S0014292112000451 for Europe and http://ntj.tax.org/wwtax/ntjrec.nsf/175d710dffc186a385256a31007cb40f/785c5ab0cac6167985257b35007320ca/$FILE/A08_Altshuler.pdf
in the U.S.
It’s important to get this right. The decline in income equality which has allowed the top 1% to capture all of the productivity gains since the early 1970s is mostly because of slashing the top *individual* income and capital gains tax brackets, and has virtually nothing to do with the marginal corporate tax rates.
Oh dear.
the first was a Devereux article
The second from Oxford Centre for Business Taxation – which he directs
I think I might rest my case if that is the alternative evidence
You last point is real – but the reality is that CGT is a low tax way of capturing the benefit if CT cuts for individuals
Richard
This remains a very controversial point, has been for many years, and I think you’re at risk of over-egging your case to put in the categorical language that you use. I just don’t think that it’s as clear as you say that the tax always falls on capital. I’d be equally suspicious of anyone who said it always fell on labour or was passed on to consumers. It depends.
Work in this area pre-dates Devereux and I’m sure will post-date him eventually so you can’t place this all at his door.
Here are some non-UK, non-Devereux references (all in English sadly):
Congressional Budget Office (2010):
http://darp.lse.ac.uk/papersdb/Gravelle_(CBO2010-03).pdf
NBER (2001):
http://www.nber.org/papers/w8280.pdf?new_window=1
Tax Law Review article (2011):
http://piketty.pse.ens.fr/files/Clausing2012.pdf
Paper in International Tax and Public Finance (2010,paywall sorry):
http://link.springer.com/article/10.1007%2Fs10797-009-9116-1
Some original work, some reviews. Some say mainly capital, some mainly labour.
It’s an open question.
I’m aware of them
The US studies are clearer, usually
the impact is on capital in the short term
In the longer term they do not know
And there’s good reason for that – another short term has happened by then
So let’s look at what business thinks happens….
Then I am 100% spot on
Mr Salsman,
The tax incidence argument is a neo liberal myth for 3 main reasons:
Companies are separate legal entities. They pay the tax. Nobody else is affected. One of the main international accounting bodies said so (I can’t remember its name — Richard mentioned them a couple of weeks ago). Surely they know more about these things than you do, with the greatest respect.
Second, as an real life example, my wages aren’t dependent on how much tax is paid. Therefore, how am I affected? Not a bit.
Last, as Richard has already said, nothing from Professor Devereux and his Tax College in Oxford can be believed. They receive donations from big companies. In return for these donations, he publishes ‘research’ to say what they need him to say. Nice work if you can get it.
Chris
Your wages aren’t dependent on how much tax is paid? Really? What’s your view on employer’s NI incidence?
TP
You will find remarkably few people’s wages go down when employer’s NI goes up
Maybe over time…but then there’s the problem of linking cause and effect
Richard
I think you’re being a little bit naughty here on employer’s NI.
Agreed that wages don’t tend to go down when NI goes up. I’d say that’s mainly nominal wage downward rigidity though (unlike you though I do tend to believe that there is a medium & long-term for things to work through). Agree absolutely that correlations are not cause/effects.
But on employer’s NI itself, I think it’s clear. I’ll quote no less an authority than you, from your blog on 21 April last year:
http://www.taxresearch.org.uk/Blog/2012/04/21/cbi-tax-misinformation-employers-do-not-meet-the-cost-of-employers-national-insurance-contributiuons/
“And quite emphatically not a penny of the £55.9 billion employer’s national insurance — the whole cost of which it born by their employees.
If the CBI wants to talk tax it would become it to present data honestly. But that’s not happening here because their real tax bill is way under £100 billion however properly calculated – and it is unbecoming for them to say otherwise.”
TP
I agree – but it’s a long term effect
In this case the cause / effect may be enough to disentangle
But …. even then we need to be cautious on correlation
Economists over rely on it
Corroborating evidence needed
Here it is likely to be found
On CT….no, I suggest
Wages don’t obviously fall when NI goes up because employers cannot reduce the wages they pay existing employees: to reduce their pay requires a change in contract, and a change requires the employee’s consent. So any downward pressure would be felt only on the starting wages for new jobs (mitigated slightly by pressure to keep these in line with existing employees’ wages) which would be quite a diluted effect, and a reduction in future pay rises.
If NI were to go down then there could be an immediate effect. Again it would be filtered through new jobs and pay rises, but in theory one might see a change.
I note however that it has only gone down very marginally in the past – the trend is most definitely upwards – and so it is always going to be hard to draw conclusions from the changes that have been made.
Ni reduction schemes have almost always failed, completely, to incentivise pay or jobs
“If business is not investing it’s because it is bereft of ideas, not because it is in need of funding at enhanced rates of return. There is no economic excuse for corporate tax cuts.”
Investment to generate growth comes, more often than not, from small and medium sized businesses. They are not the ones with the giant cash piles.
I think I agree that tax cuts aren’t especially likely to promote investment – but I don’t think pointing towards the fact that Apple (et al) can’t find useful ways to spend their cash allows us to conclude that private enterprise as a whole has run out of things to do. If it had then we wouldn’t have so many people complaining that the banks aren’t lending enough to SME’s.
But if tax cuts don’t work, why give them?
I’m not saying that we should… just that citing the cash piles of multi-nationals (who aren’t generally a source of innovation) doesn’t tell us anything about whether the private sector, as a whole, could do more if it had more.
So your argument is that Corporation tax rates have no effect on wages, prices or investment decisions by shareholders?
You could increase Corporation tax to whatever you want and nothing else would change?
Are you really sure you want to put that argument in print?
If you wish to make absurd points you may
I don’t
A Google search gave the link below and 16 separate studies. Were these Oxford/Devereux sourced/influenced?
The main article (March 2013) is based on American evidence and the summary says “labor bears a significant portion of the burden of the corporate income tax”.
All tax has to be paid. Other than capital, labour or suppliers where else can it fall?
http://scholar.google.co.uk/scholar?client=ms-android-google&espv=1&um=1&ie=UTF-8&lr=&q=related:dAfceaH-dXB98M:scholar.google.com/
Many of those names e.g. Fuest, are linked to Oxford
The idea has its epicentre there
What is wrong with the idea capital pays?
After all, that’s how business behaves
I think your point re EBITDA is absolutely relevant to privatly owned businesses. The point is arguably less relevant for listed companies due to the (frankly bizzare) focus on P/E ratios etc which are driven by post tax profit.
An excellent blog – posted on Facebook.
Many may be linked but not all. It also seems unlikely that Oxford is at the centre when the Business School was not set up until say 10 years ago but some of the ideas/papers (like Auerbach) date back before then.
No problem with saying that capital pays. But I thought all the recent evidence was that a falling share for wages was matched by a rising share for profits.
Falling share of wages is matched by a rising share of profit
But that’s not a tax effect
Richard
You have previously said on this blog that all economists agree (all economists!) that NIC increases are passed entirely on to workers in the form of lower wages.
You do still stand by that don’t you?
Yes
But, it’s not a short term effect
And that means the relationships are not as simple as many like to suggest they are
That’s my point
Well then, if the long term impact of NIC is suppression of wages there is a moral and economic imperitive to reduce and even eliminate employers’ NIC contribution from the tax mix isn’t there.
I’m also slightly surprised that VAT merits only a passing mention in this piece. The UK take from VAT dwarfs CT and evidently impacts on consumers in the short term.
I agree re VAT
But blogs are best cut off by 800 words
And you agree on the need to eliminate NIC?
Absolutely not
Unless we have a citizen’s income and integrated tax to replace it
So in one blog you say:
“You will find remarkably few people’s wages go down when employer’s NI goes up”
So employers bear the cost and in another blog you say:
“employer’s national insurance — the whole cost of which it born by their employees.”
So employees bear the cost.
Short term
Long term
Different things you know
Time you realised
Which one is long term?
In the short term the impact of an NIC increase is on employers: wages are inelastic downward
In the long term there is likely to be an impact
“Time you realised”
You made no reference to a timescale when you made your first comment. There’s no need to be condescending if I can’t guess that everything you say has a hidden caveat to be pulled out whenever it suits you or you want to change your mind.
Oh heavens above
I am allowed to assume some intelligence on the part of a reader
Next you’ll be asking me to explain the alphabet
“In the short term the impact of an NIC increase is on employers: wages are inelastic downward
In the long term there is likely to be an impact”
Quite. The same is true of the incidence of corporation tax. In the short term it’s on shareholders, obviously. It is only over time that the lower level of investment in the taxing jurisdiction leads to lower wages.
It is exactly the same argument. It still surprises me that you’re happy to agree with it on NI but not corporation tax.
No it isn’t
Because in that case the evidence simply does not exist
Evidence of wishful thinking does, but nothing else
But if you think otherwise Tim please tell how recent cuts have stimulated wage increases. Pray, elucidate