Shareholders cannot be taxed on a company’s profits

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As I mentioned in my previous blog, the fourth question thrown into the debate I had with Dan Mitchell last night in Montreal was whether we could ever believe that the time would come when technology would permit the income of companies to be assessed on its members. The question was premised on the assumption that corporations cannot pay tax and only real live, warm-blooded people can.

I ran though a number of the usual reasons why this could not happen now. There's the obvious one that we do not know who the shareholders are. And then I mentioned the problem of stock lending. And of course shares are owned by companies in turn owned by companies, owned by trusts, and so on. Plus there is the inconvenient problem that some shareholders do insist on owning their shares for fractions of seconds which is going to make meaningfully attributing income a touch difficult.

I also mentioned that if Gabriel Zucman got his way with the idea of a global register of financial asset holdings we may be able to overcome some of these issues, and I rather hope he does (and am willing to help), but I actually said I hoped for that register because that would let us effectively tax capital, redistribute it and so liberate it for use by people who need it.

But the real problem with the suggestion made was simply the most obvious and most practical and it is this: the shareholders do not have the company's money to pay the tax. Nor do they have any legal right to claim that money. It's not theirs. Shareholders cannot force companies to pay dividends: what, if any dividends the company pays is decided by the directors, who are supposedly elected by the members (I know) but who rarely have any relationship of any meniningful sort with most of those shareholders in a company of any size.

All of which simply means that the premise on which the question was asked was just wrong. You can't in any form of tax ethics I know ofexpect people to pay tax on income they not only do not have but do not even have any legal right to claim (although I am aware all the Crown Dependencies have tried doing this, which almost goes to prove my point on ethics). And the reason why the shareholder's can't claim the money the company has made is quite simply stated: they and the company are legally distinct and wholly separate from each other.

The idea - stated by several speakers yesterday - that companies do not exist is nonsense. Legally they do, and they own property which is not, cannot be and as a matter of fact is often not ever transferred to their memebers to enjoy in any way that they can be taxed upon over any reasonably foreseeable time horizon.

So, taxing the shareholders would be unjust.

It could, in fact, lead to moral hazard: the company might deliberately prejudice some minority shareholders, for example to force sales on their part.

And the reason why this is possible is that the company does exist. And it is wholly distinct, legally, practically and for taxation purposes from its members.

Which really means it is time we stopped hearing the peddlers of this fantasy that companies are just the fictional representation of their members at serious tax conferences. It's insulting to the intelligence of those who attend to have to listen to such drivel whose perpetuation serves only one purpose, and that is the profoundly political objective of seeking to reduce or entirely eliminate the imposition of tax on capital. I profoundly object to that, most especially when those making the claims do at the same time suggest that there is no morality to tax. Oh yes there is, I suggest, even when it is only evident by its absence.