A Challenge from Richard Murphy!

Clearly I\’m getting under the man\’s skin. Good.

I note that Tim Worstall is persisting in his claims that my methodology used in the TUC report,  The Missing Billions, is flawed.

It is flawed.

Worstall’s argument appears entirely dependent upon rhetoric. If ever there was a man to split hairs it is him. I am reasonably confident if there was no person left on earth to argue with Worstall would take issue with a lamp post, and it has to be said that argument with Worstall is totally pointless because it continues ad nauseum without any benefit arising. As a result, candidly, I will not bother. Far too many people of sound mind had been convinced by my argument to need to engage with him in that way.

Ooooh, get her….

I do instead issue a straightforward challenge.

Fine, bring it on…..

I say that was because of a significant and deliberate increase in the abuse of the world’s tax systems by these companies through the undertaking of tax avoidance. Worstall disagrees.

Err, no, I\’m afraid that this is incorrect. Worstall does not disagree with this point at all.

My challenge to Worstall is simple. Produce the data that can show any other explanation for this trend, but I warn you in advance: do not use KPMG’s survey of corporate tax rates because that is a simple statistical analysis which takes no account of the population size of the countries in question, or of the size of their GDP and therefore of their relative economic significance. As I noted above, when these factors are taken into account this cannot explain this trend, as I proved in earlier research.

Tim Worstall can nitpick, but I have produced answers and he has not. That is the difference between us and right now I can find no alternative explanation of the evidence I created and which others can now reproduce.

That’s why I stick by my work, its methodology and its findings and the obvious inferences that can be drawn from it.

The numbers tell this story loud and clear. That’s enough to justify action.

It\’s true that Richard has produced answers and that I have not. It\’s also true that I nitpick. But that is because I am pointing to a logical error in the methods by which Richard reaches his number.

Allow me to start all over again.

We traditionally make the distinction between tax avoidance, which is the process of legally optimising the use of the various allowances and possible business structures to minimise a tax bill, and tax evasion which is everything from the illegal use of such to reduce taxes all the way to the simple ignoring of tax altogether, as in the black economy.

Richard adds a third distinction here. "Tax planning". He uses it to mean the use of the various allowances and possible business structures in the way that those writing the law intended. For example, if there is a 125% R&D allowance against corporation tax (which there is, or at least used to be) then if you claim that against your R&D costs then this is tax planning. In Richard\’s terminology, tax avoidance is where you use that same allowance but not in the manner in which it was originally intended. Say, over allocating overheads (just as an example) to R&D so as to maximise use of that break.

OK so far?

Now, what Richard tries to do in his report for the TUC is to estimate how much there is of what he calls tax avoidance. Note, his meaning of tax avoidance, not tax evasion or even tax planning.

That\’s where he gets his number of £12 billion or so from.

However, when you read through his methods, we find that what he has actually calculated is not, using again his terminology, tax avoidance, but tax planning and tax avoidance lumped together.

If the estimated loss is extrapolated across all of these 700 companies then the total corporation tax expectation gap might be some £11.8 billion. This is an increase from £9.2 billion, which was the estimate made the last time a similar exercise to that undertaken here was completed, relating to the period to 2004 30. As a proportion this may be the highest gap of all. Much may be due to legitimate tax planning, but by no means all is. Some, undoubtedly, is due to tax avoidance.

Thus his estimate of £12 billion for tax avoidance fails, for he has, by his own admission, lumped in the entirely, even from his point of view, legal, legitimate and morally acceptable practice of tax planning with tax avoidance.

That is my argument with his numbers. That he\’s used a logically flawed method to get to his final number.

Just to clarify again. I do not doubt that there is tax evasion (Heck, I\’ve worked in Russia. I know there is tax evasion). I do not doubt there is tax avoidance, as Richard defines it. The use of legal structures and allowances to reduce tax bills in manners not intended by those who drafted the original laws. I do not doubt that there is tax planning either.

I do not doubt in the slightest that companies do their best to use both tax planning and tax avoidance to reduce their bills and I\’m perfectly happy to agree with an allegation that the amount of this going on has been increasing in recent years.

My argument is, and has been since the beginning, that Richard has used a logically flawed method to attempt an answer to the empirical question of "How much?" Because he lumps together both tax planning and tax avoidance we cannot use his final number as a measure of tax avoidance.

That\’s it.

I have already dismissed his arguments on tax incidence.

Well, yes, but not all that successfully it has to be said. First there is the argument from credentialism:

Worstall is not an accountant: his studies in the subject ended at undergraduate level.

But why my chops in accountancy would make any difference to the truth or not of the economic incidence of a tax I\’m not sure. That\’s an economic question, not an accounting one.

In fact, no senior member of the tax profession I have ever spoken to believes in the incidence argument – and I include those who have discussed it with tax economists of world stature who swear it is right. The reason is easy to explain. Economists live in a world of make believe: they are called the assumptions on which they base their theories. One of those almost universal assumptions is transparency. It does not exist. So people do not behave as economists assume; corporations do behave as if they bear the tax burden, and redistribute it as a result because they think that benefits them, and as such do at the very least change the distribution of tax liabilities within and between states, including the part they pay.

Economist assume transparency? Do they? First I\’ve heard of it I have to admit.

But basically Ritchie\’s argument here is that economists are nuts and that it doesn\’t matter what they think. Accountants are the one true fount of knowledge and that\’s an end to it.

Quite why accountants would be correct on a point of economics and economists wrong he doesn\’t trouble to tell us.

But in Ritchie\’s mind, all of this is nonsense, this paper is rubbish, foolishness, delusion, idiocy, even Britannica is just wrong. For the Accounting Gods have spoken and there\’s an end to it.

And by a quite delicious irony here is Richard praising Vince Cable\’s latest essay into journalism.

You can see why this man is thought to have the best economic brain in British politics.

Isn\’t that nice? Strangely, Richard left out of his quotes from the article the following:

Companies are, of course, not individuals but legal entities. Any corporate tax is ultimately passed on somewhere else – in reduced dividends or wages or in higher prices.

That\’s, err, the tax incidence thing again, the thing that Ritchie dismmisses out of hand.

15 comments on “A Challenge from Richard Murphy!

  1. what is the tax incidence argument that all these luminaries he has spoken to do not believe in? Is it just that when a corporation is taxed, it is either taken out of wages or profits, or added to the price? Is he arguing that taxes only come out of profits?

  2. Tax incidence is a very interesting topic. I must admit that very few tax professionals (for I am one and mingle with them) give this very much thought whatsoever.

    The myths that VAT is a ‘tax on consumption’ or that ‘tax breaks for pensions encourage savings’ for example, are widely accepted as true.

    Where you are both way off piste is just looking at corporation tax. UK receipts £40 billion odd, of which £10 billion from North Sea companies (who pay at a higher rate). Even if we restrict ourselves to the taxes paid in £-s-d by UK businesses (ignoring incidence) we find that PAYE/Employer’s NIC is about £140 billion and VAT is about £80 billion, Business Rates is £20 billion.

    So corporation tax (the second least bad tax, per Uncle Milt) is a drop in the ocean anyway.

  3. “It’s true that Richard has produced answers and that I have not. It’s also true that I nitpick. But that is because I am pointing to a logical error in the methods by which Richard reaches his number.”

    It may also have something to do with the fact that only one of you is trying to create a cottage industry out of this stuff.

    Murphy wants to make a living out of peddling crap to the TUC and Guardianistas, so he is going to have to be the one forwarding theories. I suspect most of us just read them for a laugh in between doing a real job. Which, in my case , involves dealing on a day to day basis with international tax structuring experts in the accounting profession and I can confirm the following.

    – Many wouldn’t know the theory of tax incidence if it bit them on the arse. They are accountants , not economists.

    -I haven’t yet met one who is familiar with the theory who doesn’t think it is obviously true.

    – In the profession, Richard Murphy is read with more amusement than anger.

  4. Jonon.

    Perhaps a little more anger and less amusement is called for since it is Murphy and his academic sidekick Prem Sikka who are making the running.

    It is they who are more likely influence, disastrously, government policy in this area than you and your more sensible colleagues who remain silent.

  5. What is this “accountancy” in which this wally claims expertise? As I understand it, it involves memorising a bunch of arbitrary conventions, mastering arithmetic, and learning to avoid taxes. I’m damned if I can see what economic insight can reasonably be assumed to grow on that midden.

  6. Perhaps you could get under his skin in a professional way. It seems Govt dont have any economists (only accountants).

    Interim Economist, Stata, SPSS, Excel, Security Clearance Exciting opportunity to join a high profile public sector client, based in London. The Interim Economist will be responsible for contributions to economic analysis of labour market data using Stata, SPSS and Excel to identify labour shortage in skilled occupations and to draft report and present results of the analysis to the committee and to discuss results for specific occupations at meetings with employers, trade unions and sector representatives.

    If you want the link, let me know.

    Tim adds: Ah, well, but you see I’m not an economist either…..only an interested amateur

  7. Kay,

    Most definitely the employee. I work as a freelancer, and pay 63.9% in Tax, NI and ENI.

    That leaves me with a paultry 36.1% of earnings, or 1/3rd of what I earn, so yes, I increase my rates to cover this sorry state of affairs..

    Appreciate your exceptionally well informed amateur status.

  8. Ian PJ,

    “Most definitely the employee”

    ah but you don’t: you raise your rates to compensate, so it is actually your customers that pay.

    Not that this disproves the point…

  9. As I’ve pointed out several time at my blog, Richard Murphy has serious, and often extraordinary, difficulties understanding basic accounting and tax issues relating to U.S. companies.

    Quite frankly, I wouldn’t let figure out the tip for a good meal.

  10. @ Ian PJ, you are way off piste with 63.9%. You can’t just add 40% plus 11% plus 12.8%.

    I take it that you trade through a limited company and are caught by IR35 or your claim does not make sense anyway

    Assuming your company is not VAT registered and it invoices £100 gross, the most it can pay you is in fact £52.30, a marginal tax rate of 47.7%, not 63.9%.

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  14. I have had a run in with Mr Murphy over Low Value Consignment Relief – he has banned me from his blog for daring to suggest that taxation is institutionalised theft. I am, apparently, a “polite libertarian” – the latter word is clearly a term of opprobrium. The man does not permit debate. The only people permitted to contribute are those who share his views. I pointed out the dangers of group think (which were identified some 2000 years ago when someone wrote “cum omnes unum cogitant nemo cogitant”. I am delighted to see I am in good company.

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