I was asked today by a journalist why there might be problems with a zero rate corporation tax - which is an idea many on the right are now promoting. I replied that zero corporation tax creates many problems.
The first is that companies would then make no contribution at all to society despite the enormous privileges they enjoy, including limited liability, which literally means they can dump their losses on the rest of us.
Second, such a tax rate means companies would not pay for the services they use paid for by taxation and there is no obvious reason why they alone should get this advantage. Do we really want to subsidise in such arbitrary ways?
Third, zero corporation tax would let anyone with excess income shift it to a company and have it accumulate tax free, so increasing the already massively problematic income and wealth inequalities in society.
Fourth, tax authorities are the main and most effective regulators of companies. Without tax being due no one would really look at company's accounts at all and fraud and crime using companies would escalate.
Fifth, the burden of tax would then all fall on labour and not capital - leading to massive economic distortions.
Sixth, if companies were not taxed most significant capital gains would then also fall out of tax, so undermining another tax.
The list could go on, but the fact is zero corporation tax is actually about undermining the effectiveness of the tax system, the cohesiveness of society, the ability of the government to deliver the services expected of it and so eventually the rule of law and democracy itself because it would declare some income outside the scope of that law and the need to contribute to society. If you want to tear our society apart this is the way to start doing it.
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“a zero rate corporation tax — which is an idea many on the right are now promoting”
Who are these people on the right promoting a 0% corporation tax rate, then? Or are you just setting up straw men to attack? I’m sure you could find a few cranks if you really tried (just as you could find a few cranks who support personal tax rates of 90%+), but to my knowledge this is not a serious proposal with anything like the remotest chance of becoming law.
In fact the only person who I can think of who believed in a 0% corporation tax rate was one Gordon Brown.
It is being heavily promoted in the USA
It exists in many tax havens
It is very real
The Taxpayers Alliance – who are, astonishingly, regarded as not being cranks by a number of widely-read newspapers – have argued for it.
Companies don’t have limited liability. It is the shareholders’ liability which is limited. The losses aren’t borne ‘by the rest of us’ but by creditors insofar as they can’t recover from shareholders (and who ought to be well warned about the limited liability issue).
“companies would not pay for the services they use”
Companies don’t exist in any tangible sense. They are an abstract notion to describe shareholders as a group, given artificial legal personality. If you disagree with me, please publish a photo of a company to prove me wrong. I have never seen a company, nor met anyone who has.
When you say benefits are enjoyed by companies, what I think you really mean is that they are enjoyed by the shareholders and/or other stakeholders of the company – eg employees, suppliers, customers etc. Ultimately, only humans and other animals are capable of ‘enjoying’ anything.
This is such nonsense
If you don’t think Tescos exists just pretend you contract with its shareholders
Do you know them?
No, of course not
Tescos is, I can assure you, very real. You can delude yourself if you wish. The rest of us won’t
And, yes it does enjoy limited liability as it is made up itself of many limited liability entities that trade hidden behind a parent company.
Your claims are all, respectfully, wrong, including enjoyment. Companies enjoy property rights and even human rights.
So stop talking what is best called twaddle
Companies have limited liability in their capacity as shareholders of other companies (the Tesco scenario you suggest) but not in their own right. You can empty them out to the last penny.
If Tesco is real (and the word I used is ‘tangible’ – I assume you are saying the same thing), please publish a photo of Tescos.
Companies ‘enjoy’ property rights in the same way the chair I am sitting in enjoys me sitting in it. It doesn’t feel a thing. It’s inanimate. Unlike Tescos though, it is at least tangible.
I hope you realise how crass your argument is
If something is intangible it’s unreal, you are saying
Please then send me photos of love, hate, faith – or to be more economically relevant, debt or intellectual property
If you have to reduce debate to the level where vast aspects of human behaviour and many economic assets cease to exist to make your point I think we can safely assume you have lost
Adrian ,What you say is theoretical. In practice there is an actor which is almost independent of the shareholders. Shares in Anglo -America are held -on average for months. High frequency trading can meet that many shareholders have no idea where their money is at any one time. It is often handled for them by various funds. Those actors are management. Shareholders do not influence companies as they did in the 1900s and when the economic models were written.
Modern economists like Galbraith have pointed out that management today often act as the owners and do so for their own ends. Look at the super high salaries and stock options which are current these days -in the big companies but the smaller ones are gradually disappearing. Family firms are a smaller and smaller percentage of traders.
I suspect-I’m not as well informed as Richard-that they are pushing this idea so they would be able to make even more money.
If through their greed, they pursue short term gains they are likely to be long term losers. How many formally large British companies no longer exist? As they go out of business or abroad we all lose e.g exports, employment (unemployment costs the state) often in sub contractors.
My argument is that companies exist de facto and their healthiness or otherwise does affect us all if only indirectly.
Ian, I don’t disagree with what you say. I get the idea that the whole can be greater than (and have a distinct identity from) the sum of the parts.
But Richard’s argument is that if X enjoys a benefit, we should tax X.
My response to that is that if that link holds (between enjoying a benefit and taxing – and I have no strong view either way), you really need to find out who is enjoying the benefit and tax them. If ‘X’ is just an abstract concept, how can it enjoy anything? Surely someone else (‘Y’) must be enjoying those benefits. If Richard’s argument follows, then we should be taxing Y, not X.
If shareholders are getting stonking rich from the company, tax them!
Read this
http://www.taxresearch.org.uk/Blog/2014/08/08/we-need-a-corporation-tax/
And stop bullshitting. Pretending companies are abstract concepts is lying
There is nothing abstract about a legal entity that can hold, use, relocate, deny and advance proprrty
It’s just lying to say otherwise
Read this:
http://www.research.leiden.edu/luris/academics/company-formation/legalentity.html
or here
http://www.lawteacher.net/business-law/essays/a-company-law-essays.php
Just a couple of sites that popped up on a simple Google search. They seem to agree with me.
Yes, companies have separate legal identity, can enter contracts, hold property etc. But a company is a ‘legal fiction’ – ie it only exists because statute says so. There is no tangible ‘thing’ that is any way separate from the flesh and blood human beings (ie ‘natural persons’) involved in the company.
There are plenty of neoliberalism fantasists
You’re not alone
But that does not make you right
Nicolas Shaxson’s piece on the reasons for corporation tax persauded me back in 2011.
http://www.theguardian.com/commentisfree/2011/mar/15/tax-corporations-treasury-large-companies
His first point – “Corporate profits depend on tax-financed public goods: healthy and educated workforces; good infrastructure; publicly enforced respect for contracts and property rights, and so on”, this made me wonder about the new idea abounding about devolution for local authorities.
http://www.publications.parliament.uk/pa/cm201415/cmselect/cmcomloc/503/503.pdf
At the moment local authorities cannot raise council tax above 2% without a referendum, and are suffering savage cuts. My thoughts were that would it be helpful if they were given greater tax raising powers on global corporations and banks in their respective counties, and methods of collecting it that make it hard to avoid such as land occupation. I ask this as some are now calling for more devolution but I cannot see that working with the system of tax and grants that they have now. Would this work? Or would government end up devolving responsibility without power?
I M working on ideas
I agree with everything you say, Richard, except, to be pedantic, corporation tax is not the only tax companies pay towards the public services they benefit from. I’m talking about business rates (National Non-Domestic Rates) which can be a major burden on small businesses. Conversely, because they are paid by the occupier, not the owner (like Council Tax), the owner of rented premises gets some of the benefit of local and national public services in the form of higher rents.
Carol
That’s right. If you look at taxes collected by HMRC then CT is 9% of the total over the last 10 years
(https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/364579/20141010_Sepreceiptsbulletin.pdf)
Business rates are a big contribution: about 60% of size of CT
(http://www.ifs.org.uk/bns/bn09.pdf) and then there is bank levy, landfill tax and so on.
It will be interesting to see what happens to these relative sizes post BEPS. I think we’ll always have CT though, although worldwide the longer term trend is towards more and higher rates of indirect taxes so CT is in relative decline (notwithstanding that rates seem to have more or less stabilised over the last few years).
TP
How convenient to use different bases for your two claims
One source is HMRC one is the IFS. I couldn’t find both the taxes in one reference. Perhaps you have? Both pretty reliable sources though and all I did was divide business rates into CT. Then I speculate a little about where the direct/indirect trends that we’ve seen in recent times might go post BEPS. I’m not making claims or passing judgements so I don’t really see what “convenience” has to do with it.
“The first is that companies would then make no contribution at all to society despite the enormous privileges they enjoy, including limited liability, which literally means they can dump their losses on the rest of us.”
Ignoring the fact that providing jobs, goods and services is in itself contributing to society, Tesco does NOT enjoy limited liability for reasons Adrian pointed out above.
In fact in mentioning limited liability, the logic of what you are saying actually points towards the profits of a company being taxed directly on their shareholders (and thus implying a 0% rate corporation tax). Which I’m not sure is quite what you had in mind.
Tesco does enjoy limited limited liability – it’s trade is not in the parent company so it does enjoy limited liability.
You need to stop lying
It does not create jobs, goods and services out of goodwill for others. Read Adam Smith
Again, stop lying
Read this http://www.taxresearch.org.uk/Blog/2014/08/08/we-need-a-corporation-tax/
We have no idea who the shareholders of many companies are
Arguing for shareholders to be taxed is promotion of tax evasion
“It does not create jobs, goods and services out of goodwill for others. Read Adam Smith”
Whether it does so out of goodwill or not is irrelevant. In the same way that I do not supply my labour to my employer out of goodwill for him. I supply my labour because it benefits me (I gain cash I would not have otherwise had), and my employer hires me because it benefits him (it enables him to supply goods and services which he can turn to cash). And that is the point – if two parties enter into a contract freely, both will benefit from it. Goodwill or charity doesn’t come into it. In fact Adam Smith would agree with me – from Wiki: “individuals’ efforts to maximize their own gains in a free market may benefit society, even if the ambitious have no benevolent intentions” (of course, “persons” (natural or legal) can be substituted for “individuals” in modern times).
I am sorry: this is so naive I have no idea where to start dealing with it
Do you really think all such relationships are freely negotiated or voluntarily entered into?
If you do go and look at the real world in 2014
Banks are a special type of global corporation, who if they were paying no tax, would quickly grind the economy to a halt. At the moment they are grinding it to stagnation. Reason is obvious to anyone who is aware that they create over 97% of the money supply as debt.
If they do not pay taxes they would gradually cause debt deflation as their taxes recycle the interest on money creation. Money is destroyed on repayment of the debt, and if they keep all of the interest, debt growth would increase and the money in the real economy would shrink even further. It would cause a depression through debt deflation, worse than is the case now.
Government would be forced to create money and just spend it into the economy for it to survive. There would be two choices – social unrest or serious reform of the banks and money supply.
I’m sorry, but banks put very little of their interest earnings back into the economy. Most of it goes to their shareholders.
The fact that there is such a high level of debt shows that their is little interest money in the economy to be captured and earned by borrowers.
That’s why loans are compounded, as people are forced to take out more loans just to pay the interest.
Richard
On your 4th point I really don’t believe that one. I’ve been practising tax exclusively for over twenty years now and I struggle to recall an occasion where HMRC have asked a penetrating or even sensible accounting question. On the other hand I’ve lost count of the number of times that I’ve had to waste clients’ money explaining very basic accounting principles to inspectors.
TP
I don’t believe you
Your privilege of course.
I once had prolonged discussion with a number of Inspectors about provisions in a client.
“Are they made in compliance with FRS12?” they asked.
“No, they’re under SSAP 9” we answered.
“Then they can’t be deductible” said the Inspector, “All provisions should be made under FRS 12; if you’ve not followed proper accounting principles then you have to add them back.”
Me: “These are stock provisions: FRS 12 doesn’t apply, and SSAP 9 is the relevant standard.”
Inspector: “All provisions must be made under FRS 12. It says so in this memo I got the other day. If it’s not FRS 12, add it back.”
At last we asked them to bring one of their in-house accountants along to the next meeting. They grudgingly agreed; after two minutes of that meeting the issue was resolved in our favour. Why they couldn’t have asked him in-house, without wasting time setting up a meeting, I’ll never know.
Sorting that basic issue out took months, several letters, and several meetings.
One case does not make a rule
At last outside court
Tobin Pigou,
I daresay you’re right, not my field. Were HMRC to ask a penetrating question what would you feel bound to admit to?
I’m not, remotely, expert on tax.
I do like a fair playing-field.
If Tescos do something deeply bad, whether it be despoiling the countryside or paying below the minimum wage or allowing some highly toxic substance to go out in their Lasagna (insofar as there is anything untoxic in there)
plaintiffs will be told to sue Tescos. They WON’T be told to sue the individual shareholders that own it.
In the unlikely (actually, if you read the papers, maybe not that unlikely) event that Tescos were to go bust, I’d put anyone’s chance of pursuing the individual shareholders at 0.0000001% if that.
So, you can’t have it both ways can you ?
Salomon V Salmon demonstrates that Companies are legal bodies in their own right
That takes us back!!!