Corporation tax: not fit for purpose

Interesting number here:

British businesses spend around £20billion per annum not on paying taxes, but merely on complying with taxation law.

The yield from corporation tax is around £45 billion (2008/9 figures from IFS) meaning that the cost of collection is nearly 50% of the revenue raised.

But wait! we can go further as well (even if this is on slightly dodgier ground). There is always a deadweight cost associated with taxation. At the margin, at around current tax levels, this is roughly 30% of the sum raised. Another £14 billion then.

So, it costs us £34 billion to raise tax of £45 billion. This simply isn\’t an efficient system.

Better by far to abolish corporation tax altogether and simply tax the income/returns when they arrive with people.

After all, companies don\’t pay tax, only people do: and we also know that 70% or so of the corporation tax burden is carried by the workers in the form of lower wages.

Vastly, humoungously, cheaper simply to tax capital and income when it arrives in pocketbooks and abolish the whole structure of corporation tax altogether.

Hey, if you really want you can get more tax revenue for the same hissing from the geese at the same time.

9 comments on “Corporation tax: not fit for purpose

  1. Err, no. The money companies spend on complying with tax law covers corporation tax + VAT + PAYE (plus some property taxes, stamp duties, business rates, etc – but let’s not worry about those for now).

    Which works out as gbp45bn + gbp80bn + gbp120bn = 245bn. A 10% cost-of-compliance, even if the IEA’s completely unsourced data is accurate, is somewhat different from 50%, no?

    I mean, did you not apply the fag-packet test here? The concept that companies’ compliance with tax law costs half the money raised from them in tax is *obviously insane*, unless you’re a partisan hack or have your brain switched off…

    Tim adds: Using a fag-packet test it’s actually relatively uncontroversial that US corporate spending plus the distortions caused by tax planning amount to around about the revenue from the corporate income tax.

    And we can certainly point to taxes where the incidence is greater than 100%: Stamp Duty on shares is one, Mike Deveraux insists that the long term incidence of coproration tax is over 100% (and Joe Stiglitz published a paper showing that this can be true in theory).

  2. it’s worse than that, surely, as you still haven’t added the cost of having lots of civil servants administer and audit and approve the corporate tax returns.

    that’s the number that should come off the 45. The 20 should be added to it to give something like an “actual tax” rate – the tax you pay plus the cost of complying, so 65 billion on these numbers, implying a rate of – don’t know – but it’s almost 50% more than the headline rate, and that would change some league tables and views on efficiency, presumably.

  3. Tim – do you accept that the gbp45 billion figure in the post is wrong, and that this should be gbp245 billion? If not why not? On the fag packet side, the only way you can reach the enormous numbers you cite is by making assumptions about deadweight losses – the collection costs don’t ever end up doing that.

    Ambrose – as well as the error above, HMRC’s *total* admin spend is GBP4 billion a year. So even if we accept the IEA data, then we can say that the *total* financial cost, including both industry and government expenditure, of collecting gbp245 billion in corporation tax, VAT and PAYE, is GBP24 billion, or 10%.

    You can come up with more by assuming deadweight losses, but meh, deadweight losses (rather like public sector pension ‘liabilities’) are a concept primarily used so that right-wing think-tank hacks can take small real numbers that make sense (e.g. PFI debt, cost of tax collection), mix them up with vast invented numbers that don’t (e.g. present value of things that are never going to be paid out, somebody’s guess of what people would do if they didn’t have to pay tax), and confuse the public into believing the vast sum for Terrible Government Things they generate isn’t pulled out of their arse.

    Tim adds: John, if you think that deadweight costs are made up then you really need to crack open that econ 101 book again and look up opportunity costs. By definition, that taxes are enforced not entirely voluntary there are deadweight costs.

    The standard assumption (no, not a “right wing” one) is 20% of revenue collected, a more accurate one is 33% of revenue given the marginal rates in the US as of now.

    I took the IFS number to be for corporation tax only: I might be wrong in that but I’ll still stand by the idea that the distortions and costs of collecting corporation tax are larger than the revenue collected. Especially since it really is the workers paying the majority of it.

  4. No bother. BTW, if anyone wants to check the figures, they’ll discover that HMRC’s recorded costs are about GBP16bn a year – this is because for some reason GBP12bn in child benefit is classed as a “cost to HMRC”.

  5. Well, Mr Murphy, if you are convinced that public sector pensions will never be paid out, please don’t tell those who work on blithely unaware of that piece of treachery. And deadweight costs exist and are very, very, real, but only if, unlike you one suspects, one pays real taxes.

  6. “Murphy”? Do fuck off.

    And I paid about GBP30,000 in UK tax in 2008-09 (less in 2009-10 because I was only working full-time up to Jan 2010), so you can fuck off again.

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