Sigh

Guardian leader today:

The most worrying thing about tax avoidance is the corporate thinking it illustrates. Listen to Tesco\’s defence of its hunt for tax havens: it is already paying a lot in taxes, and avoiding giving any more is "our duty to shareholders and customers alike". That philosophy is becoming ever more widespread. Tax avoidance was once the sport of giant multinationals; but in the past couple of years, points out Stephen Herring of BDO Stoy Hayward, a whole tranche of mid-sized companies have got in on the act. Servicing them is the fastest-growing practice at his accountancy firm. Moving call centres offshore or selling more goods over the internet are modern business practices that not only reduce overheads but can also often reduce a company\’s taxes. Avoidance or efficiency or planning – whatever euphemism you use, paying the bare minimum in taxes is becoming part of Britain\’s business culture. That leaves more of the nation\’s tax bill to be footed by the rest of us. In the past decade, while corporation tax has been squeezed, income tax and national insurance has grown as a proportion of the country\’s tax take from 42.9% to 47.6%.

The most worrying thing is that The Guardian seemsnot to know the most basic thing about corporation tax. Sure, companies hand over the money but the actual burden isn\’t carried by them. It\’s carried by some combination of workers in the form of lower wages, investors in lower returns and customers in higher prices. That is, we already pay it. And according to the studies into tax incidence, it\’s the workers who get screwed the most.

These people really do have to stop listening to Richard Murphy.

13 comments on “Sigh

  1. Corporation tax certainly reduces the returns to investors. I doubt whether it increases prices significantly, or else low-cost efficient producers would have to charge higher prices than high-cost marginal producers. And this idea that it reduces wages is fairly ludicrous – it’s Employer’s National Insurance that depresses wages the most, let’s get rid of that first.

    Anyway, as usual, everybody yaps on about corporation tax (yield in UK about £50 bn) and politely ignores VAT (yield in UK about £80 bn) because they’re all EU-philes who dare not mention that VAT is truly the most awful tax – a business has to pay it whether it is profitable or not, so unlike corporation tax, it makes a lot of businesses unviable.

  2. “It is quite possible to be a net recipient of VAT, particularly if your business is not profitable.”

    Or if you largely export to VAT-registered customers in the EU, making carousel fraud so attractive.

  3. mark,

    “a business has to pay it whether it is profitable or not, so unlike corporation tax, it makes a lot of businesses unviable.”

    That’s not quite true: for many businesses VAT is a cashflow item: you collect the VAT when you charge your customers and recoup from HMCR that VAT you pay to your suppliers.

    It is quite possible to be a net recipient of VAT, particularly if your business is not profitable.

    Moreover, almost all accounts are shown net of VAT. It just doesn’t figure in the P&L.

    The person who ACTUALLY pays VAT – in that they are not able to reclaim the amount that they pay to their suppliers is – wait for it – the consumer.

  4. Cleanthes, you have been conned. The legal incidence of a tax (“it is borne by consumer”) has nothing to do with the economic incidence.

    What do you think would happen if they replaced VAT with a turnover tax of 14.89% of gross selling prices (of stuff that had previously been VAT-able) and exempted business-to-business supplies therefrom?

    Answer – not much.

    Ergo, VAT is a turnover tax. In economic terms it is shared between producer and consumer. It increases prices paid by consumer, depresses price received by producer and reduces equilibrium output.

    Yea verily, it is the shittest tax!

    Pretty diagrams here:

    http://markwadsworth.blogspot.com/2007/12/business-taxation.html

  5. What do you think would happen if they replaced VAT with a turnover tax of 14.89% of gross selling prices (of stuff that had previously been VAT-able) and exempted business-to-business supplies therefrom?

    Err, tax fraud on a scale that made current carousel fraud levels look like a picnic?

  6. Carousel fraud arises because business reclaim input tax that they are not entitled to and then disappear. If you exempt b-2-b supplies, then there is no input tax to be reclaimed. So there would be less fraud, not more.

    Sure, some businesses don’t pay over their output tax, they wouldn’t bother paying turnover tax either, so that’s no worse.

    Next question

  7. Err, what about “no sir, I’m a wholesaler and only sell B2B supplies, honest, so all my turnover is exempt from the tax”? Which is what everyone selling any goods or services that could conceivably be sold for commercial purposes would claim…

    It’s the main reason sales tax got replaced with VAT in the first place.

  8. *sigh* of course people will try it on. You’d have a sensible rule “Turnover is taxable unless trader can show that the sale was to another registered trader”.

    Sales Tax got replaced with VAT because of the EU, not because it was unenforceable.

  9. “Sales Tax got replaced with VAT because of the EU, not because it was unenforceable.”

    This is sort of right. That was Labour’s policy, but not the Consevatives. They (including in the 1970 manifesto) were committed to introducing it regardless of EU membership – I think from 1968 onwards that was their policy.

  10. Actually that’s not quite right either – should have checked. They waffled a bit about ‘if the civil service’ is happy, but was known to be policy since about 1968.

  11. There used to be a market mechanism for taxes. The Lord with a river or mountain pass which he claimed a toll on had to restrict what he wanted to being just a little lower than the cost of going the long way round.

    The major thing wrong with current tax systems is that the “long way Round” no longer exists, hence the amount of activity is lessened, because the alternative is to do nothing, no long way round and no direct way either.

    Alan Douglas

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