The Guardian gets a little confused

and says measures are needed to remove the tax treatment bias that favours companies funding loans through debt as opposed to equity.

Eh? What? A debt is a loan and equity isn\’t either a loan nor debt. As written that line is completely impossible.

We all know what they mean of course: they\’re talking about the preferential treatment of debt over equity in the taxation system.

Not that there is preferential treatment when you actually look in more detail. Equity returns are taxed at the corporate level. Interest at the level of the recipient. Much of a muchness there really. And you most certainly could alter this system: tax the interest paid out by the company at that company level for example. But if you do that at the same time you\’ve got to make the interest tax free to the recipient. And I can\’t quite see that working politically. It might be the same thing economically but the idea that buying corporate bonds gives you a tax free income just won\’t fly.

Of course, there\’s another, much simpler, method of equalising the tax treatment. Just abolish corporation tax and tax all income from companies, whether interest, capital gains or dividends at the marginal income tax rate of the recipient. This would be true equalisation and it would also be very simple.

And hundreds of thousands of parasites would have to go do some real work for a living. Oh dearie me. Plus we remove some thousands of pages from Tolley\’s. Shame, eh?

6 comments on “The Guardian gets a little confused

  1. Do they really think that making finance expenses non tax deductible is fair? will have no impact on investment?

    Companies with high debt levels could end up paying more tax than they make in profit. Every company would reduce leverage, and investment would fall sharply.

    Funny though that everyone is talking about this issue whilst companies around the globe are sitting on piles of cash. Its like worrying about skin cancer in winter.

  2. That is an interesting solution Tim!

    However, in the UK, you can set up a company for 20 quid with no requirements regarding minimum capital, resident directors or even physical office space. This is almost unique in Europe.

    In the event that you have “personal service companies” without employees, the only tax collected would be VAT above threshold.

    Would dividends be taxed as income to make up for any shortfall in revenue? This could disadvantage many shareholders aiming for high dividend stocks, while boosting start-up and tech companies. Have you modelled the distortions (undistortions) this might create?

  3. Would dividends be taxed as income to make up for any shortfall in revenue?

    From OP:

    tax all income from companies, whether interest, capital gains or dividends at the marginal income tax rate of the recipient.

    So there’s your answer?

  4. “However, in the UK, you can set up a company for 20 quid with no requirements regarding minimum capital, resident directors or even physical office space. This is almost unique in Europe.”

    I can’t see how this is unique to the UK. You certainly don’t need resident directors anywhere else in Europe (at least not residents in the country, maybe in the EU). Office space is most certainly not required anywhere. Minimum capital is only required for limited companies of some kind. 20 quid may not be doable elsewhere though…

    “This could disadvantage many shareholders aiming for high dividend stocks, while boosting start-up and tech companies.”

    I can’t see how Tim’s proposal would change this. Corporate income taxes are paid on profit and dividends are (typically) paid when there is a profit. Start-ups (but not necessarily all tech companies) have limited profits and therefore pay limited corporate income taxes and dividends.

  5. SE,

    You are quite right there.

    I should have written:

    “Would dividends be taxed as income make up for any shortfall in revenue?”

    This would be a nice data analysis project…

  6. Paddy,

    I doubt that dividend taxation alone would work – but the more equitable treatment of both capital gains and interest income also proposed are likely to more than do the job. Most people with those sorts of investments being reasonably well off, and therefore with marginal tax rates well above that of even the top rate of corporation tax.

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