We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.
Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]
|
Samizdata quote of the day Not paying corporation tax is an advantage to those who don’t pay it as against those who do. Which is what we’ve been saying about corporate and capital taxation all along. If you tax corporations then there will be less investment in them in your economy. This makes everyone poorer – the deadweight costs are high. This is indeed exactly the same reasoning which leads us to insisting, as a result of optimal tax theory, that we shouldn’t be taxing the corporations at all.
Which is interesting, even amusing, don’t you think? The EU’s justification for why they just must tax companies is the very reason basic theory says we shouldn’t be taxing corporations at all.
– Tim Worstall
|
Who Are We? The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling.
We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe.
|
I’m underimpressed by Tim Worsthall’s “gotcha !”
It’s obviously true that taxing corporate profits reduces the expected rate of return to shareholders and so reduces the amount of investment by shareholders in businesses. That taxes reduce the quantity of what is being taxed doesn’t tell us which taxes are better or worse than others. The question about any tax’s hit to economic activity is is “how much hit per dollar of taxes raised ?” – compared to other ways of raising the same tax dollar. And if you are in charge of the government of X-Land, you have the further question “if we levy this tax, and if it results in an overall hit of 100 to all players (before we consider the benefits of the tax in terms of our wonderful plans for government spending) how much of that hit is going to be borne by X-Landers (to whom we have a duty) and how much by foreigners (to whom we don’t.)”
In the extreme case. levying an X-Land tax on, say Google, will reduce Google’s investment in X-Land by zero, because
(a) Google’s investment plans may be very inelastic – ie the X-Land market may be worth investing in at taxes rates anywhere from 0% to 70% and/or
(b) Google’s overall tax bill may be completely unaffected by X-Land’s taxes, because the US will give a foreign tax credit for any X-Land taxes paid
The division of tax spoils between competing national tax authorities is a serious business, and it’s the most obvious reason why eliminating corporate taxes is never on the radar in the real world. In the fantasy world of academia and libertarian think tanks, the problem of how taxes are actually collected never looms. In the real world it’s yuuuuge. If X-Land abolishes corporate taxes, then that will simply allow foreign tax authorities to scoop up much of the tax that X-land has foregone. And
then the “we don’t need to tax corporations, because we can scoop it up from shareholders when they take it out” paper solution, fails to the 1001 ways clever folk can avoid and minimise taxes on profit extraction.
A UK tax resident controlling shareholder of a UK company can, without enormous difficulty, extract all his profits without paying any UK tax. So no corporate tax would mean no tax at all. Sure, that might turn out to be a good economic answer; if so, argue for no tax at all. Not no corporate tax cos we can get it from shareholders.
There really is no such thing as a corporate tax, as it’s really a tax on the consumer, as are all taxes. The bottom line is that there is no justification for taxation of any sort. Thare other ways to collect revenue.
Ah! lots of fine theory; but the old Scots verity prevails:
“plucking the goose to get the most feathers with the least squawks”
“A UK tax resident controlling shareholder of a UK company can, without enormous difficulty, extract all his profits without paying any UK tax”
Really? That seems unlikely if you are resident for tax purposes. It’s going to get caught somewhere on the personal side, either as income tax on dividends or as CGT. There may well be some time shifting (especially if it is extracted as capital gain) but the profit is going to appear as income somewhere.
“That taxes reduce the quantity of what is being taxed doesn’t tell us which taxes are better or worse than others. ”
There are entire libraries full of work discussing exactly this point. I even refer to optimal tax theory which is the discussion of this very point.
As you say – although I’ll translate it into the jargon – all taxes have deadweight costs. There is some economic activity that doesn’t happen as a result of our taxing. Higher deadweights are worse – we destroy more economic activity with some taxes per unit of revenue raised than we do with other taxes. We’ve also a spectrum here, one we already know. Lowest deadweights, sometimes even negative (as a result of the ghastly inefficiency of land use in some places), are repeated taxation of immovable property, land value taxation that is. Then consumption taxes (VAT, sales tax etc), income taxes, capital and corporate taxes and at the top, entirely ludicrous ways of raising money, transactions taxes (an FTT say, stamp duty etc). Sin or Pigou taxes stand a little outside this as part of the point is to limit certain economic activity (say, part of the point of a carbon tax is to reduce carbon emissions).
This is all entirely known and near no economist would disagree with the basics here. They might think that other things are more important (tax capital because equaliteeee!) but the basic set up is well known.
Unless there is some manner of double-taxation agreement (forgoing thereof) between two nations, by that logic every nation in which a multinational operates should be asserting their right to ‘scoop up’ that tax regardless, no? And there are a great many places in the world without double-taxation arrangements.
Yet there is really only one nation prone to do precisely that and try to tax based upon worldwide operations rather than just when the exchanges are taking place within their sovereign territory, even if none of the parties are resident within said sovereign territory and merely have some uninvolved branch within the would-be taxers foetid lands (Hint 1: it is one of only two nations that asserts essentially unlimited extraterritorial ownership of its subjects’ assets. Hint 2: it is not neo-Stalinist Eritrea, due to a lack of ability to enforce its claims).
I’m obviously missing your point, Perry de H. Every nation in which a multinational operates is always scrabbling to increase its share of any taxes the multinational pays.
In the simplest – but very common – case, BigCo headquartered in Ruritania owns a subsidiary in Lilliput. The Lilliput subsidiary’s profits are taxed in Lilliput, and then when distributed to Bigco in Ruritania the dividends are taxed in Ruritania (and sometimes there’s a dividend withholding tax levied by Lilliput too.) A double tax agreement between Lilliput and Ruritania may reduce any withholding tax, and Ruritania may give a foreign tax credit against Ruritanian tax on the dividend, for Lilliputian taxes paid. Consequently if Lilliput were to abolish its corporate taxes (and withholding taxes) the Ruritanian foreign tax credit for Lilliputian taxes paid would be correspondingly reduced, and the net result would be that the Bigco group would still pay the same amount of tax overall as before, It would just be collected entirely by Ruritana on the dividends, rather than split between Lilliput and Ruritania.
As a rule, high tax developed countries don’t make double tax agreements with tax havens, nor do they apply their double tax agreements to income from high tax countries which have special low tax regimes for some kinds of income. So if Lilliput were to abolish its corporate taxes, all its double tax agreements would lose most of their value to Lilliput. In fact most of its double tax agreements would get cancelled by the other side. Why would Ruritania any longer want to grant Lilliputian companies an exemption from Ruritanian dividend withholding tax ? If Lilliput isn’t going to tax Ruritanian companies on their dividends from Lilliput anyway, double tax agreement or no double tax agreement, what benefit does Ruritania get from granting a concession to Lilliputian companies ? It’s quid pro quo. You give your quos away for free, you won’t get any quids.
Some countries use an exemption system for incoming dividends rather than a foreign tax credit. But again it never applies to tax havens. So Lilliput abolishing its corporate tax would simply ensure that Ruritania taxed divdends from Lilliput. Ruritania 1 Lilliput 1 simply becomes Ruritania 2 Lilliput 0.
That seems unlikely if you are resident for tax purposes. It’s going to get caught somewhere on the personal side, either as income tax on dividends or as CGT. There may well be some time shifting (especially if it is extracted as capital gain) but the profit is going to appear as income somewhere.
You can finesse UK tax residence pretty easily when you get to retire or sell your business. Much easier since they changed the rules a few years ago. Spend thirty years building up your business in the UK, then stop being UK resident for a bit when you sell your business or hand it over to the children. You don’t even need to hand over the reins, you just need to have a few long holidays and maybe buy a second home somewhere else. Not easy for a wage slave but for a chap with a business worth £15-20 million or so, it’s not hard.
Or you can do a P Green and send the wife abroad for a bit.
Arguing the toss about what tax system is fair, efficient or morally acceptable is missing the leftist strategy, all they care about is “punishing” people for earning too much (or being the recipient of too much), and hiding their taxation (which is eventually paid by all of us) by disguising the victims as abstract entities (“corporations”, “the rich”, etc). The logic of social justice is so far up it’s own arse that “complexities” such as taxation are way down the agenda, no-one on the left gives a crap, a good example is Corbyn’s declaration to return the top rate to 50% despite that it has already been demonstrated it would probably not raise that much more cash (if any), it’s just the politics of envy at play.
Lee Moore,
I can disprove your point about nations scrabbling to increase their tax share from a particular company, simply by pointing out that many nations have reduced their corporate tax rates to attract investment, but in so doing have reduced their tax share of any particular country operating there. So when Ireland reduced tax rates, other countries did not increase tax rates to compensate; instead they moaned and complained of tax competition.
I think your overall view point falls into the pessimisstic trap of assuming things won’t get better. But actually reduced tax does tend to mean reduced tax – it is only politicians saying “reduced tax” which does not.
I hope that Lee Moore will reply to Tim Worstall?
Actually I think I Ireland helps demonstrate my point, rather than refutes it. Ireland had a tiny corporate tax base when it had a high tax rate. It was just a small farming economy after all. So by cutting their tax rate they attracted international companies who were happy to put profitable businesses (mostly financial) into a low tax country – taking it out of higher tax countries. So Ireland’s corporate tax take went up despite the lower tax rate. Other countries tax take went down – hence the whining and bullying directed at the Irish. The competition for tax dollars is real, and fierce. Ireland won that round.
tomsmith – I don’t disagree with Tim Worsthall’s comments about theory at all. The question is about reality.
So for example suppose we stipulate that consumption taxes are less economically destructive than income (inc corporate) taxes. Tick, all agreed. So we (that is to say X-Land) reduces its income and corporate taxes to a very low level. Or nil. And increases its sales taxes / VAT / other consumption taxes a lot.
So how do you stop folk earning their tax free dollars in X-Land, and saving lots of it (I mean lots of it, cos there’s no income tax right ?) and then…retiring to Y-Land which is (a) sunny and (b) hasn’t got ferocious consumption taxes ? X-Land’s tax revenue is not looking so perky now. But that’s OK, because in theory, it’s got a wonderful tax system. Of course during their working lives in X-Land, X-Landers will be taking lots of foreign holidays. They’ll probably also be bringing quite a few purchases back from their holidays too.
I think Clausewitz said something like “In war, actual battle is rare, but when it happens it’s decisive.” Somebody wittily extended this to “In business, cash settlement is rare, but when it happens it’s decisive.” Tax collectors work on this principle to. Which is why they’re called tax COLLECTORS.
Meanwhile, US corporate, and “other”, tax is “under review”.
I’M NO AWARD WINNING ECONOMIST, BUT…..
My money will be on the corps. that decide to repatriate overseas “branch” shelters cash willingly,(probably with a one time amnesty) rather than the ones later penalized when (ie)Baroda, and Thailand, are no longer “cool”.
Gotta get cash to “borrow” for the US$ 20,000,000,000,000+ (a familiar sounding arbitrary number) debt interest payments SOMEWHERE!
Isn’t the real issue just levels of taxation in general? As far as I am aware, low tax economies have always enjoyed higher levels of economic growth and better levels of social mobility than their high tax counterparts. At a more basic level, if the government takes a proportion of my income and then spends it on things that I didn’t ask for and that I don’t want and don’t need, then this will obviously make me poorer. Poorer because if I was allowed to keep it I would spend it on things that I do want and do need and then I would obviously be better off.
Lee, I don’t think that you refuted the Ireland example at all. Ireland cut its corporate taxes, attracted a host of new industries (and their attendant jobs; don’t forget those) and ended up collecting more gross euros in tax revenue. All in accordance with Laffer. But the foreign countries which lost those industries did not respond by raising their taxes to “scoop up” the difference, as your theory predicts. And the reason, of course, is tax competition. There is a limit to how high a country can tax foreign businesses (any businesses, for that matter) before they simply exit that market. And countries are almost always attempting to hit that magical peak marginal tax rate. That inflection point in the Laffer Curve does not shift downward merely because industry is attracted away to another country. This is precisely why they are reduced to impotent whining about the Irish “unfairness”.
In a world of (relatively) free movement of capital there is a limit to how high tax rates can go before you kill the goose. Most countries are there already. Trying to raise taxes beyond that point will only succeed in driving away business, shrinking the domestic economy, and reducing tax revenues.
Even your argument against consumption taxes fails where it intersects with practical reality. Most people spend all, or nearly all, of their income. Those who can save any significant amount to expatriate to Belize or wherever upon retirement are vanishingly few, and even among them most people are extremely reticent to abandon the home where they have built their entire lives, and where all their friends and family still live, merely to save a few taxes. They have more than they need anyway, and although they would certainly like to be able to leave more to their heirs, and will structure their affairs with that in mind, the net effect to the country is negligible.
I’m sorry to be off topic or at least at a bit of a tangent to it, but I came across this post at Paul Homewood’s climate change blog and thought that this forum would be a good place to have it dissected.
jim PERMALINK
September 25, 2017 2:28 pm
Paul, I have read your superb blog for ages, but only recently decided to contribute. I am a Physicist by training , now retired after years in the UK electricity and gas industry.
I admire your and most other contributors dedication in pointing out the lack of scientific substance behind the CO2/ global warming/climate change scam. However I don’t believe it will make a scrap of difference to the direction the western world ( in particular) is moving. The ‘establishment’ made up primarily of financial institutions, very wealthy individuals and their political lackeys are well aware of the intellectual deficiencies of the warmists. However they are encouraged to continue with their dire predictions whipped on by the subservient MSM. It serves the useful purpose of reinforcing the fear factor and virtue signalling required to keep the populace ‘paying’.
And that is what it is all about, the populace paying through taxation and utility bills for the debts of governments and bankers, whilst at the same time creating the vehicles for the very rich to extract more rent from the rest of us.
The Central Banks’, Central Bank, the BIS based in Switzerland has produced investment criteria ( under the chairmanship of Carney) for every CB in the world, who in turn lay down the requirements for every commercial bank, insurance company and other financial entities. These criteria now have at their heart the requirement to include decarbonisation and climate effects on every investment decision made. This is in turn supported by every government ( including that of Trump) by default if not actively.
Are the financiers suddenly environmentalists? No of course not. But they have embraced climate change as a means to an end. All those $bns created after 2007/8 to keep the banks afloat have to be absorbed in the economy. Also the banks have still catastrophic debt levels that have yet to be solved, rather than kicked forward into the long grass. What better way to solve these problems whilst at the same time creating brand new investment opportunities for the 0.1% than the world saving change to energy production and use. There is little or no risk involved as all governments will cover the income stream required for returns by taxation and utility pricing.
It also has the positive ( as far as governments are concerned) effect of helping to create a future society which is more controllable, far better to ‘save the world’ than allow the continuation of all those pesky ‘freedoms’ enjoyed by far too many of the proles.
The question is; is it already too late? is the die cast? I hope I am wrong, but I have a horrible feeling that it may be.
Laird : the foreign countries which lost those industries did not respond by raising their taxes to “scoop up” the difference, as your theory predicts
I don’t think you have understood my “theory”. The scooping happens automatically without any need to change tax laws. Less foreign tax, less foreign tax credit, more tax on incoming dividends. That, of course, is why large multinationals keep vast sums of profits in offshore locations and try to avoid repatriating them. Until – in the US case – they get a nice friendly GOP government which allows a “special” low rate tax on dividend repatriation for a brief time to “stimulate” US business.
In a world of (relatively) free movement of capital there is a limit to how high tax rates can go before you kill the goose. Most countries are there already. Trying to raise taxes beyond that point will only succeed in driving away business, shrinking the domestic economy, and reducing tax revenues.
I don’t disagree at all. I’m simply pointing out that in the real world, if you have a large corporate tax base and you cut corporate taxes, a goodly chunk of the benefit of the tax cut will go to foreign governments. So if you’re tailoring your limited tax cut dollars to maximise the boost to your own economy and your own voters, an across the board corporate tax cut isn’t necessarily the best idea. Cutting payroll taxes, especially at the low end, is likely to concentrate the benefits on your own voters, more than corporate tax cuts. Unless you’re somewhere like Ireland in the 1970s, where your existing corporate tax take is, to the nearest decimal place, zero. In which case cutting corporate taxes to attract business costs you nothing, and can’t do anything else than create jobs.
Even your argument against consumption taxes fails where it intersects with practical reality. Most people spend all, or nearly all, of their income.
Sure, but most people don’t pay much by way of income tax. The people who pay the great majority of the income taxes are the people who save a lot of their income.
Those who can save any significant amount to expatriate to Belize or wherever upon retirement are vanishingly few, and even among them most people are extremely reticent to abandon the home where they have built their entire lives
I appreciate that as an American you perceive ceasing to be tax resident in your home country as an abandonment of citizenship and a journey into lonely and mosquito ridden exile. But the US is pretty much the only country in the world that continues to tax its citizens wherever they live. For other people it’s nothing like as big a leap. A UK businessman, on retirement, can keep his house in England, buy a second house somewhere else, and divide his time between the two plus a few holidays and cruises and not pay tax on selling his UK business. He needs to keep up this appallingly oppressive lifestyle for five years or so, making sure not to visit the UK for more than, oh, three months a year during those five years, and then if he gets tired of it, he can go back and live full time in the UK. Other European countries have different rules but they also allow rich businessmen to organise their life and their taxes without the need to say goodbye to their families and go and live in a Central American swamp.
Do I win a prize if I answer your question correctly, Perry?
“So how do you stop folk earning their tax free dollars in X-Land, and saving lots of it (I mean lots of it, cos there’s no income tax right ?) and then…retiring to Y-Land which is (a) sunny and (b) hasn’t got ferocious consumption taxes ?”
Sooooo, people change their behaviour because of tax rates?
Which is the entire basis of optimal tax theory in the first place. At which point, you can’t refute a theory which assumes that people change their behaviour because taxes by noting that people change their behaviour because taxes.
you can’t refute a theory which assumes that people change their behaviour because taxes by noting that people change their behaviour because taxes
Of course I can.
I can refute a theory which incorporates the (correct) assumption that people change their behaviour because taxes, if the theory in question does not adequately predict how people will change their behaviour because taxes, and does not propose good solutions for those changes in behavour. As Laird pointed out, not all geese are equal. Some have income that is easier to pluck, some have spending that is easier to pluck. A theory that predicts a consistent “best pluck” technique across all geese is too simplistic to work well in reality.
Tax policy is engineering not physics. Theory will guide you only so far. Then you have to rely on heuristics.
Lee, “You can finesse UK tax residence pretty easily when you get to retire or sell your business” – so you were only talking about capital taxes? So the owner took no salary and paid out no dividends, bought no goods nor services, no fuel and had no employees and used no premises and lived nowhere while he was creating those profits? In the UK, income tax, NIC, VAT, fuel duty, council tax and business rates amount to 77% of the tax take. Corporation tax is a mere 9% on top and capital gains tax is under 1%. And the deadweight costs of collecting Corp Tax are massive – the Corporation taxes Act I believe is the longest Act in UK law at about some 2000 pages.
Imagine if you will this happy thought for you Brits. Your fabulous Prime Minister rings up Junker and said — we don’t want a deal, nice to know you, we hope to use the magic of trade to make everyone richer, join us in that please. Oh, and BTW we are lowering all tariffs for importing goods from Europe into the UK. Then next day she also cuts the corporate tax rate to zero.
Businesses would flood into the UK. Any big tariffs Europe set up would be offset by lower taxes, employment would soar, cost of imported goods plummet. Brexit would be a huge success and we wouldn’t be subject to the vengeful whim of the cheese eating surrender monkeys.
Yeah, I know it’ll never happen. But it is a nice thought.
Lee,
Lee, companies do not pay taxes (for all they are indeed liable to them). Workers (through reduced wages), consumers (through increased prices) or owners (through reduced income) do – so if corporation tax is reduced in a country then the winners will be the three groups of individuals above. So your apparent (I am trying not to second guess your conclusion here, but don’t know the details of it) assumption that taxation not paid will simply shift back as profits to be taxed in the owners’ home country is only accurate if the incidence of taxation does not fall on workers or consumers that much, which seems very unlikely. If you are going to do engineering on tax policy, then you need to know the flows, and I have yet to see any estimates that the tax incidence on owners is higher than the other two groups combined (I have always assumed, since encountering this through a happily socialist economics teacher, so there is an obvious bias there, that the owners’ incidence was likely to be smallest in the long term, and highest in the short term, since profits can be squeezed to cope with changes, but this is then worked through the system).
You are right that some money not taken as tax in country A and repatriated to country B (including in increased wages to be fair) will increase the tax yield in country B. But I don’t see this as a problem: if tax yield on company C in country A is reduced by 300 currency D’s, and we assume equal tax incidence, and that all the workers and owners are taxed in country B, then country B will be increase tax yield by the relevant tax rate applied to 200 currency D’s (so perhaps 50 currency D’s), whilst country A will have reduced its tax yield by 300 currency D’s resulting in a net loss of tax yield. Even if all 300 currency D’s go straight to the owner’s in profit, country B will only benefit from a proportion of this unless it has 100% personal taxation (at the nominal 25% I assumed above, they would only get 75 D’s). Whilst this is clearly a simplified model, it makes it clear that even if you are correct to assume the money released by a reduction in corporate taxation will go straight to wages and profits (and to the consumer), it will only amount to a major chunk of the tax reduction if personal tax rates are high – and owners will move to avoid that as well…
Ironically, in theory your ideas work, but once you apply actual numbers they don’t seem to do so. Reduced tax does indeed reduce the share of wealth taken by the government – and therefore increases money for consumption and investment (the outcome of savings if not done in a sock under the matress). You are far too pesimistic on this front.
Oh and all this talk of managing the tax take, my view on this is simply this: reducing the amount of tax money the government raises is generally an unadulterated good thing. After all, giving them more money only encourages them.
Quite so.
My point was that companies “pay” rather more than just corporation tax. As an example, Rio Tinto supplies a comprehensive analysis of what tax gets paid where.
http://www.riotinto.com/documents/RT_taxes_paid_in_2016.pdf
In summary $billion:
Total corporation tax paid to China, Australia, South Africa etc =1749
Employer and employee payroll taxes =1816
Government royalties =1442
Other (analysed further in the report) =799
So the corporation tax was about 33%.
Of course, Rio deals in minerals where it is relatively easy to see what is being done where – soil dug in this country and sent to that country for processing etc. Therefore the corporation tax codes can apply quite easily.
When you get into the world of services, especially online services, the world gets very complex very fast. If someone in Brazil sends an order to an advertising company in Spain to publish an advert on a blog hosted in Ireland, to be invoiced to a company in Canada, the definition of where the transaction is taxable starts to get nebulous. Yes, there are conventions but it all becomes unenforceable and untrackable. Digital flows are a very flawed basis for collecting tax in my view and, unfortunately, they form the basis for corporate taxation of those big faceless corporations. Much simpler to base tax around people, property, things and where spend happens.
Graeme : so you were only talking about capital taxes? So the owner took no salary and paid out no dividends, bought no goods nor services, no fuel and had no employees and used no premises and lived nowhere while he was creating those profits? In the UK, income tax, NIC, VAT, fuel duty, council tax and business rates amount to 77% of the tax take
Up to a point, Lord Copper.
1. I quite accept that companies pay all sorts of taxes apart from corporation tax, and that owners pay tax on dividends (except in that paradise that is Hong Kong.) I took TW’s post to be primarily about corporate income taxes, and taxes on owner’s profits.
2. Yes, a controlling shareholder of a UK company, who was my example, has to live and so will incur taxes on salary, dividends and spending while tax resident in the UK.
3. However, the typical (successful) controlling shareholder of a company of any size does not need to spend anything like all the profits his company makes. He will have a big house and a car or two and live pretty well, but most of the profits will probably be ploughed back into the business and not taken as dividends. So in a thirty year career, starting with nothing, the businessman might make profits of say £20 million (growing from modest amounts to say £3 million a year at the end) Of that £20 million, he might take a third, say £7 million, in salary and dividends, suffering the full weight of UK tax on income and spending. Say £4 million in taxes.
4. But after thirty years his company may have £13 million in undistributed profits and the business itself may be worth, say, £25 million. It’s that £38 million that he can not pay tax on by swanning off (half) abroad for a few years. I was wrong to say “all” in the sentence “A UK tax resident controlling shareholder of a UK company can, without enormous difficulty, extract all his profits without paying any UK tax.” On these numbers, it works out at about 85% not “all.” Sorry about the wild exaggeration.
5. Note in the above example we are talking about £20 million of post corporate income tax profits. He can’t avoid those corporate income taxes. But if TW’s plan to abolish corporate income tax were to succeed, then obviously the profits would be higher – say £25 million. And the value of his company at the end would be higher too, say. £33 million. So he’d be avoiding taxes on a lot more. Also note that in the real world, the incentive effect of reducing or abolishing corporate income taxes (assuming that they are real reductions and are not instantly replicated at the shareholder level) is damped by the possibility that the reduction may be reversed. So it’s not “I’ll be able to create a £25 million company in 30 years time” becomes “I’ll be able to create a £33 million company in 30 years time” and so Yippee let’s get started. Because the £33 million assumes the low tax regime will last. Probably a good assumption for Hong Kong, Singapore and even by now Ireland. But in the UK, you’d need the Labour Party to buy into the idea too.
6. The tax take from capital gains tax is as you say quite small. This is because tax on gains of any serious size is not that hard to avoid (much to the benefit of the country.) It’s Joe Midde-Income who pays a bit of tax on his share profits when they exceed his allowance. Not Montgomery Burns.
7. I agree corporation tax is fantastically complicated (though not quite as complicated as income tax.) The vast bulk of corporation tax is paid by the largest 500 companies. So a good libertarian think tank idea would be to introduce a threshold of say £25 million profits before a company has to pay anything. That would be a great simplification and the cost to corporation tax revenue would be pretty small.
8. The problem is then that individuals (both unincorporated businesses and ordinary folk) would then use companies to postpone, and with luck ultimately avoid – see above) income tax. So although corporation tax revenues wouldn’t suffer much, income tax revenues would. You will recall that Gordon Brown actually did reduce the corporation tax rate to zero for companies with profits of less than £10,000. And – not having read TW’s diatribes about people changing their behaviour to avoid taxes* – was astonished to find a sudden bloom of new companies springing up all of which earned less than £10,000 in profits. A couple of years later he reversed course claiming he was stopping up a “loophole.” A loophole he had deliberately created himself. Gordon is a good reminder that however appalling Mrs May is, things can definitely get worse on the Prime Minister front.
* people also change their behaviour to avoid flying axes, shellfire, venomous snakes and hard work. Nothing special about taxes.
Watchman : Reduced tax does indeed reduce the share of wealth taken by the government – and therefore increases money for consumption and investment (the outcome of savings if not done in a sock under the matress). You are far too pesimistic on this front.
I’m not arguing against reducing taxes. I’m just emphasising that you can’t expect ivory tower theories to work in the real world, precisely in accordance with theory. So places like Ireland, with virtually no existing corporate tax revenue can do a big tax rate cut without much fear of adverse economic or political consequences. Other folk need to tread a bit more warily. I also agree with Fraser :
Oh and all this talk of managing the tax take, my view on this is simply this: reducing the amount of tax money the government raises is generally an unadulterated good thing. After all, giving them more money only encourages them.
But the tax policy I would adopt if elected PM with a majority of 10, and an election coming up in 4 or 5 years would not be the same as the tax policy I would adopt if anointed Absolute Monarch.
To some extent, I agree with Lee when he says that tax policy more like an engineering problem than a physics one. But even that is too simplistic; it’s closer to playing with a random number generator. Watchman correctly points out that the burden of the tax (its “incidence”) falls in some proportion on owners, employees and customers. But the distribution of that burden varies between industries (depending upon competitive factors affecting those three groups) and moreover is fluid: it is constantly shifting as a dynamic economy seeks equilibrium. A company which can lay off most of its tax burden on employees and customers will be fairly insensitive to marginal tax rates; one which is not so fortunate will be extremely sensitive to them. You may think you know (or can predict) which is which, but the reality is that you cannot; no one can. Tinkering with tax rates and structures is always a crapshoot; calling it “engineering” is hubris.
And of course, there are even more complications, an infinity of them. In the US, corporations can deduct interest paid to lenders in calculating their taxable income, but they cannot deduct dividends paid to shareholders. The inevitable result is an incentive to fund corporate operations with debt, rather than equity, as much as possible. This results is a bias toward debt and, often, an unhealthy amount of leverage and a weaker corporate sector. That’s not a direct effect of tax policy but it is a second-order effect which has real-world consequences. And this policy also serves as an indirect subsidy of lending institutions, the demand for whose services is artificially inflated. Even without eliminating this inherent bias, its effect can be minimized with lower overall tax rates (which reduces the implicit “value” of the tax deduction for interest).
Higher tax rates exacerbate and magnify the flaws and distortions inherent in any tax system; lower tax rates minimize and ameliorate them. Thus, the specific nature of a tax cut is generally of less importance than the simple fact of its existence. A low tax environment produces a healthy economy; the fact that it can (and usually does) also result in increased revenues to the government (Laffer was correct) is merely a happy accident. Tax policy isn’t an engineering problem, it’s a hygiene one (in the Herzbergian sense).
Tax policy is psychology not physics.
Alright, Perry, I’ll give the answer- The USA! Do I get a prize for knowing?
Laird,
Tax policy is engineering… but as done by humanities graduates.
Watchman, that is truly scary! With the inevitable result.