An idiotic claim

Criticism 4.
That a better solution would be to phase out corporate taxation, which is only a cost
that firms pass on to customers and consumers.
Response 4:
Ending corporate taxation would mean either enormous cuts in public spending or large
increases in taxes on individuals.

Given that corporation tax raises between 1 and 3 % of GDP in most industrialised countries its absence would not lead to either enormous cuts nor an enormous rise in taxes on individuals (who, as the tax incidence argument already notes, carry the burden anyway).

For example, Sweden has cut the burden of government by fully 15 percentage points of GDP in recent years. And it\’s not as if they\’re doing badly, is it?

53 comments on “An idiotic claim

  1. Hi Tim,

    I see you are trying to get some logic in an emotional debate.

    The socialists are driven by pure envey and greed and they can’t handle facts.

    Companies are there to employ people who can then pay all the various taxes, as well as to act as big tax collectors – think VAT – and the concept of corporate tax is muddled.

  2. In the UK corporation tax raises around £8bn, which is indeed around 1.5% of total tax receipts. An awful lot of fuss is being made around such small numbers.

  3. Stupid question:

    If corporation tax is 20-whatever percent of UK corporations’ adjusted profits, are those profits in total only £40-odd billion? Seems low.

  4. Corporation tax in the UK 2012/13 was £45bn.

    Income tax £155bn
    National Ins £106bn
    VAT £102bn
    Excise duties £48bn

  5. Total UK tax take was £592bn.

    So Corporation Tax is a shade under 8% of total tax take.

    And 3% of GDP.

  6. Ah but if all corporations obeyed whichever version of “fair taxation” is today’s pluck from the seemingly endless bag of gibberish solutions to imaginary problems, it would probably be 50%, and a rainbow.

    Can someone point me at some reading on the Swedish burden reduction? Hadn’t heard that before and on first glance it seems astonishing that all of the embattled western economies are not racing each other to copy it

  7. Surreptious Evil

    Indeed. Sorry. All figures I quoted are this year’s forecasts from the March 2012 budget.

  8. Sorry, you’re quite right. Don’t know where my figure came from. The breakdown by sector is as follows (for 2011-12):
    £4.5bn – Manufacturing
    £5.2bn – Distribution
    £17.8bn – Other industrial & commercial
    £5.3bn – Financial
    £9.2bn – North Sea Oil
    Giving a total of £42bn.

  9. Data here.

    Total net CT receipts rose very slightly in 2011-12 to £42.2 billion.

    HMRC estimates that a penny on the basic rate of income tax raises £3.8bn. Corporation Tax revenue would not be easy to replace.

  10. “HMRC estimates that a penny on the basic rate of income tax raises £3.8bn. Corporation Tax revenue would not be easy to replace.”

    But it is not being recommended that we replace a removal of corporation tax with an increase in income tax rates.

    What is being suggested is that the removal of corporation tax be introduced in parallel with changes to the taxation of dividends, which currently come with a notional tax credit of 1/9th to provide for the difference between basic income tax rates and corporation tax rates up to the 40% tax band.

    All of that complexity could be done away with by abandoning corporation tax and then determining that dividends are taxed at the recipients marginal rate of income tax (or some variation)

    This should mean that the withdrawal of corporation tax is actually tax neutral, especially since all of the wasted activity around assessment, accounting, collection, investigation, avoidance and evasion would also disappear.

    It might even cause some companies to relocate into the UK from higher tax regimes like France (for example). Wouldn’t that be nice.

  11. I’d be happy to replace Corporation Tax with an equivalent tax on dividends. But I think it would have to be implemented as a withholding tax, or too much of the money would disappear offshore.

  12. For the folks suggesting we should replace corp tax with a tax on dividends, isn’t the problem with that, that it gives more incentive for companies to not pay dividends and re-invest the cash in their activities, when in a freer market that cash would be returned to investors to invest as they see fit.

    Eventual upshot being that we get fewer, larger corporations that we would in a perfect market, which is probably in no-ones interest.

  13. paulB – are you suggesting that all dividend recipients are going to move offshore? Or is this a more nuanced point that you are making?

    counting down for the John B point of total irrelevance…………

  14. Diogenes: a more nuanced point, I hope. In the absence of CT or a withholding tax one would expect a larger proportion of UK shares to be held by overseas investors.

    Tim adds: And the problem with this is? Foreigners investing their cash in British industry is a problem because?

  15. Australia has a quite complex system to achieve this, companies are taxed, then you get franking credits for that tax with your dividend and are then taxed at marginal rate. At some point of income, you loose the franking credits.

    It would of course just be easier and cheaper just to tax the dividend in the first place, but except in rare places, most taxation degenerates into an opaque mess designed to obscure the true taxation level.

    No CT, pay tax at marginal rates on all income and a withholding tax on the dividend, would be a good system. It makes it much more sensible for companies to just pay dividends too, rather than poor money into BS share buy-backs.

  16. @theProle:

    “it gives more incentive for companies to not pay dividends and re-invest the cash in their activities”

    Would it be such a bad thing to change the bias towards reinvesting profits in the business? Isn’t that what we want businesses to do, rather than paying the MD/CEO vast millions?

    Certainly overseas expansion would help to increase inward cash-flows to the UK.

    Companies which accrue large cash holdings that they genuinely cannot reinvest always have the option of undertaking share restructuring to allow the shareholders to choose to receive distributions of income or capital gains on their shares. Admittedly these tend to be rather complex affairs, but still achieve the aim of distributing cash back to shareholders or appreciating share value.

  17. that it gives more incentive for companies to not pay dividends and re-invest the cash in their activities

    Why should the companies care either way if dividends are taxed? If they reinvest it has to increase the value of the business to sell this to shareholders – what are they going to say, “we saved you tax by not giving you money, now watch us burn it”? And if the value has increased, it will be recovered as capital gains (again, on the shareholders) instead.

    At some point of income, you loose the franking credits.

    I must admit I don’t know for sure, but I didn’t think Aust franking credits were means tested David Moore? After all, they’re not a benefit, they’re specifically designed to avoid double taxation. I thought even institutions (like super funds) got them.

  18. Arnald, you are absolutely right about the channel islands. I mean its appalling isn’t it they have less than 2% unemployment, hundreds of millions in reserves, no government debt, growing economies, excellent health and education systems and no government debt.

    You are absolutely spot on about those channel islands. Thier economic policies are absolute crap.

    Moron.

  19. Didn’t Friedman say something along the lines of, abolish CT but tax each shareholder in a corporation on a prorated piece of the company’s profits as if he received it as income, irrelevant of whether it was paid in dividend or reinvested.

    That way companies are incentivised to pay out dividends, and any retained is essentially the shareholder reinvesting his profit.

    Not saying this is necessarily the solution, but it is a different take on things.

  20. ” tax each shareholder in a corporation on a prorated piece of the company’s profits as if he received it as income, irrelevant of whether it was paid in dividend or reinvested.”

    The difficulty that you have with this is that it assumes that all taxpayers are in equivalent positions, whereas this is seldom the case.

    Some will be institutions, like pension funds, others will be seeking to maximize capital gains rather than income, still others will be foreign investors.

    All of which means that you might well add further disincentives to investment rather than increasing it.

    Not saying either you or Friedman are wrong, just that there are genuine arguments against it. Equally, the world is a lot more open than it was in Friedman’s day with a lot more international diversification and movement of capital. Very little of this is related to tax avoidance, but reflects the interconnectedness of the global economy.

  21. @Offshore Observer:

    Coming from another Zero-10 economy (Isle of Man), we should acknowledge that Arnald has a valid point of view even if we don’t agree with it.

    The fact that both the islands have very low levels of unemployment is to my mind their great advantage. I have argued in the past that if it were not for the fact that the economy has low taxation then unemployment would be much, much higher.

    Living on an island in the middle of the sea, we both pay a premium on the goods and services we purchase, however we also both benefit from greater job security (as we can easily get a job elsewhere on the island) and a pay is higher than it would be if unemployment were higher.

    That this has a knock-on effect on NHS and other services is debatable, certainly the NHS services received on the Isle of Man (while not as comprehensive as that of the UK) are for the most part better, cleaner, more efficient and less rude.

    Just because taxes in the UK are far higher than our Zero-10 economies doesn’t make them better, in fact I would argue that the opposite is true and that higher taxes simply promote and exacerbate waste.

  22. Guernsey and Jersey are running budget deficits. Services are being cut. What part of that don’t you understand?

    The reserves in Guernsey are being used to plug the deficit.

    What low taxation? I pay the same tax as I would in the UK, as do most people here. the only difference are CGT and IHT, which hardly affects the normal person anyway. And VAT, yet prices are more expensive for nearly everything.

    0-10 saw a big shift in the burden of taxation, and the it’s getting worse. All taxes have risen except income tax.

    Don’t talk out of your hats.

  23. Oh and education at the state schools isn’t that great, lack of decent staff and resources, only just being addressed after decades of neglect. The Health system is creaking. Most on a low income cannot afford insurance and so never go to the doctor, especially those with kids.

    Jersey’s unemployment and general social cohesion is becoming an accepted problem, it has decrepid social housing, basic education is fairly poor.

    Frontline services are being cut. The deficit eats up reserves. Tax returns are dwindling. Finance is shrinking.

    0-10 is not working. It never did. There were hardly any material new business, oh yes, a rush on brass plates, but no real economic growth.

    get your facts right.

  24. @Arnald:

    Well, I earned the same amount of income in both the UK (when I left in 2009) and the Isle of Man and the difference in taxes meant that my tax due dropped from 30,000 in the UK to about 12,000 in the Isle of Man.

    I know that the top tax rate is the same in the Isle of Man as it is in Guernsey at 20%, so find your assertion that you pay about the same tax to be difficult to understand unless you were due a significant amount of tax credits in the UK.

    Certainly I was never eligible to claim UK tax credits, so I have no idea how that process works.

    Equally, the Isle of Man has had to use up reserves to plug the gap due to changes in the Common Purse Agreement (thanks Ritchie and others), but expect to have balanced the budget over the economic cycle.

    As for the rest, social cohesion on the Isle of Man is much greater than in the UK and our way of life, albeit less exciting is more settled. We don’t have to deal with non-English speaking majorities in our schools and we don’t have to put up with thieving Romanians on our streets as the UK does.

    Life is not perfect, but it is far better than life in the UK.

    Equally, the channel islands has far better weather than the Isle of Man does.

    All things considered Arnald, we could both be a lot worse off.

  25. In removing corporation tax one would, as others above have said, simply tax the dividends at the standard marginal rates.

    Another ‘saving’ would be the scrapping of the then superfluous capital allowances for companies.

    These two alone would make the thing largely revenue-neutral. Then you get the significant admin savings – which is why Richie, as the sub-contracted PCS spokesman, would hate the idea, even if he wasn’t a loon.

    The withholding tax would be part of the strategy to ‘sell’ the thing politically, and the ease the temporary cashflow effects of the transition. In fact, it would simply be a return to the old CT61 ‘Advance Corporation Tax’ regime that accountants of a certain age will remember fondly. Foreign investors would simply deal with the w’holding tax via the usual double taxation relief processes, as UK investors do with divis from forrinland.

    Heck, you could call the withholding tax something like, errrm, ‘Corporation Tax’.

  26. Guernsey tax rates 20% after £9K tax free, plus deductions allowable for pension contributions, mortgage interest, and a married persons allowance of £18K.
    Jersey seems to be a two stage system – you pay the lower of 20% of income less smaller personal allowances, or 27% of income over larger allowances. All of which means that a married man on £25K would pay about £800 in income tax, compared to £3.4K in income tax alone in the UK.

    Arnald, how do you cope?

  27. Arnald

    Sounds like the Channel Islanders are unwitting victims of austerity? Surely they can simply print money and finance the deficit. That’s the solution to similar problems being prescribed to the UK? The one advocated by one erstwhile Downham Market resident, the ‘Lord High Tax Denouncer’ (with Acknowledgement to Surreptitious Evil)

  28. ltw;

    “I must admit I don’t know for sure, but I didn’t think Aust franking credits were means tested David Moore? After all, they’re not a benefit, they’re specifically designed to avoid double taxation. I thought even institutions (like super funds) got them.”

    Ignore me, I’m talking rubbish. I think the removal of franking credits is a Labour proposal, not current law.

  29. Well Arnald if that is the case then the solution is in your hands to correct it, simply move back to the UK.

    However, I suspect that the reality is that the grass is always greener. Certainly the UK salaries have suffered against inflation since 2008 due to a combination of a 23% reduction in the strength of the pound of QE causing devaluation.

    If you had remained in the UK, I suspect that a job which in 2008 might have left you with plenty of money left at the end of the month would not do so today.

    Without a direct comparison of the two positions, including the higher cost of living it is impossible to make a judgement.

    Certainly winging about it won’t make a difference, it just makes you more unhappy.

  30. Wasn’t whingeing, just saying that zero corp tax means higher taxes on individuals and cuts in services. Just like TJN say.

  31. While there may be a deficit in Gsy and Jsy a good part of that is caused by the global financial crisis. Revenues haven’t grown as expected but government expenditure has been kept flat. the deficit is cyclical and structural.

    Household income in the Channel Islands is on average twice that in the UK with a lower tax base. Yes there are fewer public services but that is because people should rely on themselves and not the State to take care of everything.

    As far as public services are being cut, precisely what has been cut in Guernsey? Far as I can see almost all the public services that were provided pre 0/10 are still being provided now.

    I think a move back to the UK might be good for you Arnald.

  32. @Thornavis:

    That’s quite funny as the Isle of Man bus drivers have been on strike recently due to changes in their contracts forced upon them by the government.

    Maybe we should just swap our bus drivers with Jersey.

  33. “just saying that zero corp tax means higher taxes on individuals and cuts in services.”

    Not necessarily. You might find that if you started taxing corporations that many of them might leave, and their owners might up sticks too, if they live in the Channel Islands. The overall effect could be a loss of economic activity (and jobs). Taxation is not zero sum . People (and companies) move to avoid it. After all many of those in the Channel Islands are there for tax reasons in the first place. Do you really think that such people are going to stick around to be plucked by the likes of you Arnald?

  34. Jersey and Guernsey used to get a lot of business from companies shipping CDs and DVDs to and from them, to avoid VAT. I suppose that’s all gone with the LVCR change last year.

  35. The major employers were paying next to no tax as it was pre zero ten. The banks I worked in didn’t care. The only reason zero was brought in was because the IoM, floating because of the VAT scam with the UK, were able to do so.

    Nothing to do with plucking, the regime is only 5 years old and it has been a failure that is resulting in budget cuts that is, or will, affect front line services.

    The jobs are going anyway, not because of Guernsey’s environment, it hardly matters what Guernsey does, the players will do as they wish anyway. OK so a high band of IT may keep the likes of Guy “Family Guy” Hands spitting with horror all over his stupid bib, but families with ties upping sticks? Which bosses?

    The contractions are happening anyway. People that believe places like Guernsey are able to sustain the lifestyles of the nineties are deluded.

    The Guernsey public are paying to keep a handful very happy.

  36. As soon as the LVCR was under threat, all of the companies invited over by the Commerce depts upped and left.

    That’s how farsighted pandering to these people the captured politicians are.

    Like most of you on here. Self congratulatory short termists.

  37. Jim makes a fair point, although it is true that in the Isle of Man we do not tax companies as the UK would do (0% as opposed to the UK’s 24%), we still benefit from the economic activity of having those companies based upon the island, companies which would not put up with the hassle of being here (transit, small community, parochialism, etc.) if it weren’t for the tax rate.

    If we were to raise our tax rate anything close to our neighbours (Ireland @ 12.5% and UK @ 24%) then with their obvious advantages we would see a flood of companies and their wealthy directors and owners leaving.

    I am happy to keep the tax rates low and have the benefit of 2.3% unemployment rate (quite high compared to recent years) and the economic benefits arising from people being employed by companies on the Isle of Man and the economic activity arising from their operations here (cleaning services, accounting, property rental, etc., etc.)

    I expect the same is true of Jersey and Guernsey. By raising the corporation tax rate to even 10%, how many of those companies would re-domicile elsewhere?

  38. Arnald

    Given that small islands with no natural resources are always up against it economically what would you suggest as an alternative to the present set up ? I can see that it might not be sustainable but what would be ? Merging with the UK would hardly be an answer as mainland standards of living would require subsidy which the UK government is hardly likely to welcome, the Scillies survive, just about, like this but they are much smaller.

  39. I’m not disagreeing, if there were any exodus, then at least 10% of the population would leave also, if not more.

    It’s the notion that it is a model that should be copied that annoys me. The expectation is that we have tip top health and education etc, it simply isn’t true. It’s good, but when the economy normalises, the 20% IT will deliver 20% IT levels of provision. Guernsey is a tissue of lies, or rather it has benefitted from a few decades of distorted wealth increase, with only 10 years of ill-thought out infrastructure development, and by the time it realises that no-one really gave a toss in the first place, you’ll have food stamps. And everything will look shabby.

    A lot more could have been done. It’s just no one gave a toss, nor do they now. Most people with the money here sound like you lot.

  40. “the 20% IT will deliver 20% IT levels of provision”

    Fair point, however with that revenue both the Isle of Man, Guernsey and Jersey do what they can. I completely agree that the UK achieves more, but they have a significantly larger population, greater diversity and their own problems.

    The Isle of Man has to send cases of any significant complexity over to the UK, which I’m assuming is the same for Jersey and Guernsey, but given our population of 75,000 permanent residence maintaining a full medical staff to meet the full range of medical services is neither appropriate, nor achievable.

    Equally, if we raised our taxes to the levels of the UK, I strongly doubt that we would gain significant additional revenues to cover the losses of employers leaving the island and the rise in unemployment.

    I do not say this with certainty, for who can, but I believe it to be true, as I believe it would be true for Jersey and Guernsey.

    You seem to be wishing for an equivalence that cannot be achieved without full union with the UK, including all the benefits and dangers that are associated with that.

    Is that what you really want? I know I would fight to my last breath against that in the Isle of Man.

    I’ve seen the decay and degradation that membership of the EU has brought to the UK and thank Christ that we are protected from that.

  41. @Jim:

    I know what you mean, but given both the generosity and complexity of UK tax credits for a family with children (which I believe is the case with Arnald) then it might be true.

    It depends upon the household income, which Arnald hasn’t specified. Given he’s a finance bod at a housing association, I wouldn’t expect it to be outside the range of median incomes, but what would I know.

  42. “the 20% IT will deliver 20% IT levels of provision”

    I am not sure what this means nor indeed what it could mean. IT implemetations do not scale. Small implementationjs are easy peesy lemon squeezy. large ones are problematic. waiting for DBC to prove me wrong with another counter-factual.

  43. Ignore me, I’m talking rubbish. I think the removal of franking credits is a Labour proposal, not current law.

    Wow, they are getting desperate . Still, we only have to put up with them for another 6 months or so…

  44. Arnald

    I don’t think its the tax system which results in you feeing worse off tan in the UK. It’s the cost of housing, which is driven by supply and demand.

    On the same gross earnings as in the UK, as a lower-middle earner, your net after-tax income in Guernsey will be higher than in the UK. In theory you more left to spend.

    But unless you happen to be living rent-free or mortgage-free, the high cost of housing will make you worse off than in the UK, unless of course you were living in London. It’s like comparing living in London on a modest income and living in say Darlington on the same gross income. In Darlington a modest house or flat might cost you £60k to buy. In London or Guernsey the same size modest flat or house might cost you £350k. As rents are based on the capital value, as well as supply and demand, the after-tax and after-housing net income will mean that you are far worse off.

    Places like Guernsey and London are high cost housing places because of apply and demand. In Guernsey, there is virtually full employment and its a small island, so land and housing is scarce and there are too many people chaing too few properties. In London its similar but on a much bigger scale. Yes, you would have the option though of moving further out to access cheaper housing and commuting in, but would have much higher commuting cost, and arguably a lower quality of life if you have to spend two extra hours a day on a train.

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