The IFS is showing its political colouring in reaction to Labour's corporation tax plans, suggesting that:
All taxes are paid by people and corporation tax is no different. Higher rates can reduce the returns to company owners (shareholders), but there is also evidence that a significant share of the burden is passed to workers in the form of lower wages.
First let me make the obvious comment that has to be said that only economists, living in their own fantasy worlds, could make a comment so obviously factually wrong. That's because companies are separate legal persons, distinct from people. And as a matter of fact only they can pay the corporation tax a company owes, so this statement comes from imaginations that cannot face legal (and practical) reality. It is a myth that undermines the credibility of economics, but which far too many economists propagate anyway, that companies are just collections of people when in reality they legally exist, are distinct from their owners and do change the actual taxes due, how the income is categorised, the rate at which taxes are paid, where they are paid, when they are paid, who pays tax as a consequence, and that they also disguise who those who should pay tax might be, sometimes deliberately. The economists' myth is dangerous in that case because it ignores reality and means that much of what they say on this subject is deeply flawed, as is the case with this IFS statement on Labour.
Second, if companies thought their workers paid their corporation tax for them there is little doubt they would give up tax avoidance overnight. They don't.
Third, if corporation tax was paid by workers we should have seen a significant impact on real wages that should have increased as a result in recent years. We clearly have not.
So, fourth, the IFS is then relying, I suspect, on a study by Mike Devereux at Oxford University that claimed that this link with wages was found. But I think that study is flawed. It only looked at corporation tax increases, and that is a false sample base: if the relationship is true the hypothesis should also have been tested for cuts, of which there were many more. Then as I recall the study was not corrected fir the fact that most corporation tax increases arise during periods of economic stress in a country and unsurprisingly at these times wages tend to fall. So a correlation was found, but I am certain causation was not established. What was found were two consequences of economic downturns. They are not related.
The IFS still trots this stuff out though, maybe because it is so costly linked to Oxford. It should be more questioning, and stop using absurd assumptions, like the fact companies do not really exist, that have no relationship to the real world. It likes to think it is credible. It isn't when it says things like this whilst ignoring the glaringly obvious fact that the people who might know - those who run companies - very clearly think shareholders bear the burden of corporation tax. They are very largely right in the main, one major exception being noted, which is that in the case of monopolies like water the customers undoubtedly do pay the company's tax.
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“It likes to think it is credible” – it might like to think that – it’s track record suggest a blind adherence to the ideologies of Friedman and Von Hayek (The Road to Serfdom) & support for Tory polices that over the last 40 years have got the Uk to where it is now: exporting about the same amount of manufactured goods in $ terms as Belgium (+/- $500bn). So that experiment worked out well didn’t it? The IEA & empty vessels – is there any difference?
I think they are talking about the burden of taxes
not who legally pays. Imagine you are running a business and your expenses go up because of a corporation tax increase and so post tax profits are likely to go down. You want, however, to maintain your shareholder returns as that’s your duty. Are you going to take the tax cost on the chin or are you going to be a little more conservative with recruitment and pay levels (or rises) to mitigate the increased tax cost and maintain shareholder returns? If you don’t take it on the chin, who has taken the burden of the CT rises?
There is no such duty
Your hypothesis is just wrong
Show me the law that creates this duty
I guarantee you can’t
The point is not whether there’s a legal duty to maximise profits. It’s whether management would take practical stepsto pass the extra tax costs into staff or reduce staff numbers. I know where my money is. They will pass at least some of the costs on staff to maintain the return on capital.
I have asked managers many times if they woud ever consider corporation tax when determining pay or staffing
I have always received bemused looks in response
Of course it does not happen. Why would they spite the business in response to tax due and so doubly penalise themselves?
Have you ever run a business I wonder? Fir the record, I have, and have advised many hundreds
Actually I have and still do run a business. I would definitely manage my costs to maintain my return from my business. It’s not spitting the business it’s a matter of explaining times are hard when the tax costs rise and I have to be more conservative. You might not like my attitude but that’s the reality. (By the way that’s what happened in the professional partnerships when the income tax rate went to 45%.).
What’s your staff turnover like?
I am sure those you employ don’t feel your pain
Since you asked staff turnover is pretty low. I often refer to it as the Hotel California, “you can check out any time you like, but you never leave”.
I hope you appreciate the irony in that
I suspect not
Barry, don’t bother. Richard thinks that because there’s no actual “legal” duty to return as much profit to shareholders, that’s not what the primary motivation is for companies.
“I have always received bemused looks in response”
Yeah, because it’s such an obvious question – but it’s the opposite answer you think it is I’m afraid.
The IFS has an article on it here…
https://www.ifs.org.uk/uploads/mirrleesreview/design/ch17.pdf
But the IFS article says:
However, neither separate legal identity nor limited liability provides a rationale for a tax on company profits
And very politely, whoever wrote that was delivering a load of complete neoliberal nonsense that says the role of the state is to deliver private gain to a few
You no doubt share that deeply anti-social and destructive view
But it’s also just wrong – the vast majority of companies are run by human beings with the sense to realise life is more nuanced than your schoolboy view of economics implies
Barry
If you have a duty to maximise profit then you will pay your workers the minimum you possibly can. Obviously market forces will require you to pay up to a certain level to retain the quality of staff you need.
Those market forces will still be there when the Government increases CT rates so you will be forced to continue to pay your staff as before. The rate of CT will, & can, therefore, make no difference whatsoever to the rate you pay your staff.
It follows, as every sane person knows, & as the format of the Company accounts itself requires, that the cost of an increase in CT will fall on the shareholders.
Cheers
You are right
Barry’s position reveals two things
Either has not maximising beforehand (which is embarrassing fur his claim)
Or the market is not operating and so profit maximisation will not be optimising returns to society (which is equally embarrassing as this is the only justification for profit maximisation)
This blog preserved a standard of courtesy and decorum; I shall confine myself to saying that such self-serving dissimulation in is better answered by a curt dismissal than engaging with a lengthy rebuttal in detail.
There will always be more details to invent, and more subtle dissimulations to infect the public discourse.
Thank you!
The lengthy rebuttal in denial may be underserved by the OP, but Richards more detailed reply is instructive for other readers, providing them with ammunition for other debates, and, as such, is very welcome, above and beyond decorum.
It is a legal reality that a company is a separate person, but is it a ‘practical’ reality as you suggest?
Companies don’t eat, raise children, seek entertainment or get sick or do the other things human beings do. If it ‘dies’, nobody goes to the funeral.
Companies are nothing more than abstract ideas artificially given legal status.
If I am wrong, please post a photograph of a company.
I have a challenge for you first
Please provide a photo of love
Trust
Friendship
So they don’t exist because you can’t?
Why don’t you note what I said?
And raise the quality of your thinking?
Of course love friendship and trust exist. They are important to a marriage, for example. When they go the marriage ends or is empty.
But love does not get married. People do. Trust would not lend me a book, a person would, friendship would not go down the pub with me, a person would.
Your reasoning is absurd unless you are suggesting that love friendship and trust can pay taxes.
You really do need to raise the level of your thinking.
You said things that cannot be pictures do not exist
But you agree they do
Now go and look at M&S and tell me it does not exist
What is more, I suggest it exists independent of any person
It is mire than the sum of its parts
That excess is its reality that is taxed
When we say ‘exist’ we mean exist in a tangible, physical way. Intangibles can’t bear economic incidence. Even tangible, non-living things can’t either. Your car cannot do so.
Only, tangible, living humans can.
M&S does not exist in a tangible way (and as such, cannot be photographed). It is an abstract collection of things (with artificial legal personality. Some of those things exist in a tangible way and can be photographed (eg buildings, staff) and some of which do not exist in a tangible way (eg IP).
Janet
I think you should go and enjoy your Ayn Rand view of the world elsewhere
In the world where I live – the real one – and the academic one – what you’re saying is considered risible for good reason
And I can’t be bothered entering into discussion with fantasists. You have your won websites and I suggest you play there
Janet G
You’re right to say “Intangibles can’t bear economic incidence” but quite wrong to say that means a PLC can’t be taxed.
Firstly, most PLCs are huge organisations with an enormous amount of tangible assets & money in their names. So far as I’m aware there are no assets or bank accounts or intangible property held in the name of love, friendship or trust.
Since they have assets they can, & most would argue should, be taxed.
Secondly, if you’re right that a PLC, being intangible, couldn’t bear the tax itself that would not mean it could not meet the tax from the assets I previously mentioned. I.e tax would not be impossible. It would only mean that the eventual cost of the tax would fall elsewhere. As I have explained to ‘Barry’ elsewhere on this thread it would fall, inevitably, on the shareholders, nowhere else.
Now, run along, the philosophy wasn’t good enough
On your point that wages do not increase when corporation tax falls, doesn’t this assume that companies are nice enough to pass such windfalls on to all of their workers? I would have thought they are more likely to pass on the negative impact of a corporation tax increase to workers than they are the positive impact of a decrease.
So it’s not a credible theory then
More a measure in vindictiveness?
Unfortunately ‘georgists’ also live in ‘their own fantasty world’ They are actually just neoliberals in many ways. Which is why they want LVT to replace not only other property taxes, VAT and income taxes but corporation tax as well. I’m quite happy with the VAT replacement but would prefer a proper consumption (of non-renewables) tax instead. OK, too much information. But this is a good blog and will be shared.