Theresa May is playing a very silly boy's game today. It is called anything you can do I can do better. So if Trump says US corporation tax will go to 15% presumably she will aim to go one better.
Let's ignore for a moment the fact that there is no economic reason to do this: big business already has, or has access to, all the cash it needs to invest, but won't, for reasons I explore here.
Let's instead think of reasons why such a move is really bad for the UK.
First, it increases social tension. Why should big business have a tax rate less than the basic rate of income tax? Where is the logic in that? Of course people will be aggrieved.
Second inequality will rise. Dividends are assumed to have had basic rate tax paid in them at source. That is, in effect, assumed to be settled by corporation tax but this will now be lower than the income tax rate. The effect will be that investment income will be even more lowly taxed, and it already enjoys much lower rates than income from work. And since dividends are very largely enjoyed by the better off (and yes, most pensioners are better off) this will automatically increase inequality.
Third, there will be an increase in tax avoidance. Small business will have every incentive to incorporate to avoid tax. Unless the cuts will not apply to them this will be a straight gift to the tax avoidance industry. It's hard to think of anything more bizarre.
But most important there is no evidence we win any gain as a result.
So Theresa May will be announcing a policy solely intended to give money to the already well off and tax avoiders. That's not an industrial strategy. And that's not a new compact with business. That's just a continuation of a policy of showering favour on the better off at cost to the rest of the country.
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“Dividends are assumed to have had basic rate tax paid in them at source.”
That is not correct.
It was effectively correct a while ago, when the lower dividend rates of tax (after the tax credit) meant that the total income tax plus corporation tax paid on a dividend was the same as the income tax which would have been paid had those profits arisen to the shareholder directly.
However, now that dividend tax rates have risen that symmetry has been broken, and tax on corporate profits is higher.
That would still be true at 15% corporation tax rates.
Say a business has £100 of profit, which would suffer £40 of tax if received by a taxpayer in the higher-rate (40%) income tax band. If it arose in a company and were then paid to that individual, then there would be corporation tax at 15% (£15), followed by income tax at 32.5% on the balance. £85 at 32.5% is £27.63, so that’s total tax suffered of £42.63.
Companies mean there is less in the way of National Insurance, but a reduction in CT rates would not affect the NI position. And once you get above the upper threshold, the difference is pretty small, and doesn’t compensate for the additional tax.
You’re right that decreasing the CT rate would help companies, but only by decreasing their tax disadvantage, not by giving them an advantage,
So my argument is appropriate
No, your argument (leading to your second conclusion) is incorrect because you have the tax treatment completely wrong.
This may then have an impact on your conclusion, which is that inequality will rise because tax on investments will lower. As it will actually be higher, that conclusion is in doubt. The fact that it will not be as much higher as it currently is may still support your conclusion, or it may not.
To have a quick look at how this might affect your conclusions:
1) Tax rate exceeds basic rate (and indeed income tax rates at all levels), so presumably there will be no social tension.
2) Tax rate on investment income exceeds that on other income, therefore presumably reducing inequality
3) Incorporating actually increases the tax burden, and this is only partly compensated for by the NI benefits. For example, in several cases recently my clients have decided against it, partly because of the tax cost. So it does not seem to give an incentive to incorporate for avoidance purposes.
Oh dear
You ignore NI
Will yo ever get anything right?
I’m not ignoring NI, no. For example, at the point where I said “this is only partly compensated for by the NI benefits” I was taking NI very much into account.
I factor NI into the calculations when helping clients decide which is the best structure for their business. It doesn’t make a huge difference.
Not having to pay Class 4 is a saving, so long as you can get your stamp somewhere. But the tax is a cost, and the burden of running a company is a cost, and NI doesn’t always make up for it.
Unfortunately, you are basing your argument solely on the headline CT rate, and not looking through to the practical impacts on businesses.
Although I do find it quite odd that you now seem to be saying that the impact of a change in CT rates is due to NI, which is not changing… 🙂
No I’m not….
But let’s not bother
We won’t agree
Dividends are no longer assumed to be taxed at basic rate. From 6 April 2016 the 10% notional tax credit was abolished and dividends over 5k are taxed at 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate).
The personal allowance of 5k means that a higher rate tax payer needs to receive about 21.6k in dividends for the original income of the company to have been taxed at an effective rate of 40%.
However if they did reduce corporation tax to 15% a higher rate taxpayer would need to receive about 49.5k in dividends before the original income of the company had been taxed at an effective rate of 40%.
It is the 5k allowance that causes the distortion, otherwise the combination of tax on the dividend and corporation tax would be higher than income received personally in every case.
So for most people my argument is correct
And when NI is taken into account totally so
Even more so if the funds are retained
Where funds are retained there are definite advantages, but the people that benefit the most are those that are not UK resident.
I personally think it would be far better if a dividend came with a tax credit equivalent to the tax actually paid on the dividend distributed.
I appreciate that it might be difficult to calculate in some cases, in which case perhaps a notional small tax credit could be available by default.
It would certainly eliminate some of the benefits of tax avoidance at a corporate level.
I agree: a proper imputation system where tax actually paid was imputed against the IT liability
But an imputation system is horrible to operate (which profits are being distributed, for example?) and, given that the current system has higher effective rates, would actually result in less income tax being paid!
It has nothing to recommend it except that it seems elegant in the abstract – elegance which disappears completely as soon as it hits the real world.
As ever you’re wrong Andrew
It’s about ensuring the right amount of tax (but no more) is paid in the right place at the right time
And you object?
I object to a laborious system where it is impossible to say that the amount of tax levied is objectively correct, the calculations are complicated, and the outcomes are uncertain for all parties.
The current system, for all its faults, is at least simple and straightforward, and gives a reasonably close approximation of the results of the imputation system. Paying slightly more than the “right” amount of tax, but in a clear and simple way, seems to be a decent solution.
It is impossible to say more than the right tax is paid
Most companies do not pay the right tax
“It is impossible to say more than the right tax is paid”
Quite right. It’s usually impossible even to say that the right tax is paid, or what the right tax is.
It works beautifully in exam questions, but have you ever tried to apply an imputation system in practice? With varying headline rates, varying effective rates, losses in some years, reserves accumulated over many years…
I see no great problem
ETRs are remarkably easy to calculate – I suggest they be used on a three year rolling average
It appears difficult to operate a system whereby you work out how much tax has actually been paid on dividends distributed, but in reality it certainly wouldn’t be any more difficult to operate as the current remittance basis of taxation, but people seem to manage to do that.
The UK even operated something vaguely similar following the whole 0% corporation tax debacle on the first 10k of profits. Small companies were expected to know what tax had been charged on the funds they were paying out as a dividend, so it doesn’t seem unreasonable to expect larger companies to be able to do work it out.
Agreed
Remittance basis is hard to do, too.
As with many things, they look easy on paper but when you apply them in practice they end up very complicated.
The argument “small companies are expected to do it, so it can’t be hard” is one that would get many a hollow laugh from those who deal with small companies’ tax affairs 🙂
Post Brexit/Trump it is becoming clear that we will now keep all the worst parts of neo-liberalism (reduced tax on wealth and starving public investment) whilst loosing the benefits of free trade and free movement in the EU. Let’s not forget that before the Conservatives first came to power in 2010 the UK corporation tax level was 28%. Since then they have doubled down on cutting taxes for business and the rich, consistently underfunded the NHS, and failed to invest in the UK economy.
The one positive I saw in the pre-budget teasers was a commitment to invest £2B in UK research and development, but I now understand this is likely to be in the form of more tax breaks for big companies, rather than any real public investment. Why can’t we learn anything from German management of industrial policy? Research projects, largely funded by public expenditure in public-private partnerships, have helped make German SMEs some of most successful in the World.
https://www.asme.org/engineering-topics/articles/manufacturing-processing/how-does-germany-do-it
Meanwhile nothing has been said about housing policy, after a BBC news report that UK construction of affordable housing has hit the lowest level in 24 years.
http://www.bbc.co.uk/news/education-38015368
This budget will be the first acid test of Teresa May’s claim to want to help the JAMs and create an economy that works for all. So far all the signs are that it will simply continue the same failed policies of the last 8 years, and working people will continue to pay the price.
Richard, as per my comment on tax the other day, you make progress, things look positive and wham you’re pushed back two steps to the one you made forward. I’ve read through your piece and the comments above and all that jumps out is complexity. I know you favour simplicity where appropriate, citizens income to replace benefits for example.
I know you’re not keen but removing other forms of tax and reducing the tax take to LVT, PAYE and the movement of money. The encouragement of behaviours via tax breaks to be replaced by a grant system. That’s just my idea but there are a lot of other suggestions out there as well. What the alternative views all agree upon is that business taxation favours the big boys, gets passed on, complexity is a problem and is an overwhelmingly corrupting influence on our body politic.
I am not sure what your argument is?
That I think we’re whistling in the wind if we think that incremental changes are ever going to create a fair tax system. When the game is so rigged and the player corruption so deeply embedded, I think a rip it up and start again approach is worthy of consideration. Every time tax campaigners seem to make real progress the process of regulatory capture manages to negate it or do an end run around it.
Take away business taxation and place all of the tax burden on LVT, PAYE and a transactional tax around the movement of money. Pull the rug out from under them and, in one fell swoop, negate all the tax advisors, shell companies and offshore locations.
But you won’t do that around the world all at once so you do not defeat the problem…