I posted Alex Cobham's review of Gabriel Zucamn's paper on corporate tax reform last week. I re-read that paper this weekend and noticed this comment:
No country in the world has a well-functioning individual income tax and no corporate tax at all.
I think that true and please ignore tax havens because virtually by definition they do not have well functioning income tax systems.
The reason why this observation true is itself obvious: unless you have the back-stop of an effective corporation tax the opportunity for anyone to avoid income tax by shifting their income into a company is a wide open gaping opportunity for abuse available to anyone.
There is, though, a good reason for highlighting this quite obviously true comment and that is that there is serious opposition to corporation tax, not least at the Oxford University Centre for Business Taxation, and because of that Centre's influence in the Institute for Fiscal Studies, there too. Indeed, Prof Michael Devereux, who directs the Oxford Centre and who was a key author of the Mirrlees review on corporate taxation wrote in the FT in December 2012:
Now why would you argue that if you wanted an effective income tax system?
Or, is it that you don't?
It's a question worth asking.
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This is a fallacy that my clients keep falling into. They seem to come to me with the idea that by having their income go into a company they can pay no income tax, and they get rather disgruntled when I tell them that if they actually want any cash in their own hands the tax position is going to be much the same whether there’s a company there or not.
NI is a different matter (another reason to fold it into income tax), but with income tax all you can do with a company is defer it. Or convert the retained profits into capital and claim Entrepreneur’s Relief, but that’s normally rather too long a deferral (never mind the anti-avoidance rules that kick in).
If there were no corporation tax then yes, you could have all your income untaxed by trading through a company (absent IR35, agency rules, and all the other anti-avoidace) – but you’d not be able to pay your gas bill. This is not normally a position people are trying to be in.
The underlying principle is surely that general taxation on earned income should be the last measure. Unearned income should be the first and at the highest rate. Profits are unearned by those who benefit since there would be no profits or any wealth without labour – land and capital are passive factors.
I am happy with the idea – buit we can’t possibly run a modern state without taxing income
I agree. And very high incomes are just economic rent, so need to be taxed as unearned income.
surely then won’t the reverse come true ? those who invest capital will take out as lower taxed salary than investment income ?
I am only asking for equity
exactly the point i was making , capital nor income should have the advantage but carol was suggesting labour be taxed lest .
How about replacing Corporation Tax with some kind of tax on say cash and bank balances? Would be a lot simpler than on basing tax on the shifting sands of profit calculation and might lead to more investment, (Dividends paid also to be subject to witholding tax).
Open to massive abuse: don’t pay creditors at year end and save tax….
Do you remember stock relief?