Corporation Tax Incidence.

I know, I know, again.

We\’ve got Richard Murphy in one corner arguing that this is all bunkum. Companies should pay more tax because, well, companies should pay more tax apparently.

Today\’s contestant in the other corner is the Institute for Fiscal Studies. Non-partisan, highly informed, generally considered to be some of the best neutral analysers of the UK\’s tax system.

On the subject of corporation tax and its incidence:

The first chapter of the consultation document repeats the government’s objectives for corporate tax reform, which are to promote “competitiveness and fairness” (paragraph 1.4). Before turning to the more substantial parts of the consultation, it is useful to consider the meaning of these terms.

“Fairness” has been defined as “ensuring that individual businesses pay their fair share of tax in relation to their commercial profits and compete on a level playing field”.5 Unfortunately the government does not say what it means by “their fair share” of tax. Nor is it clear whether competing “on a level playing field” refers to competition between UK firms operating in different industries, or between UK and foreign firms operating in the same industry.

In fact, notions of “equity” or “fairness” have little meaning in the context of business taxation. Corporation tax may be borne partly by customers in the form of higher product prices; partly by workers in the form of lower wages; and is borne by shareholders in the form of lower post-tax profits only to the extent that it is not shifted onto customers or workers in one of these ways. This is likely to vary substantially across different sectors of the economy, depending on the extent of international trade and the mobility of employees and capital used by the business. There is no simple link between the share of profits paid in corporation tax and the impact of the tax on the owners of the business. The government’s distributional objectives can be achieved more easily using other elements of the overall tax and benefit system.

So they\’ve certainly bought into this idea of tax incidence. I still wonder why Murphy keeps rejecting it? Is it simply that such a glimpse of reality doesn\’t fit his narrative?

6 thoughts on “Corporation Tax Incidence.”

  1. I went and looked at Murphy’s refutation of tax incidence. Not with high hopes but I did think that it worth a look as it is not every day that someone offers to refute a fundemental economic principle.

    Holy shit! It is borderline deranged.

    This response to someone who patiently explains why he is wrong is priceless:

    “Ray

    What you say is terribly plausible.

    And of course, quite wrong.

    Let’s just imagine there is no BP, Vodafone or UBS shall we?

    Do you think they’ll go away if we all imagine that?

    Do you really think they’re a collective o the minds of the members?

    Do you really think they have no greater impact than their members acting in unison could?

    If so, why have them?

    The answer is simple: because they are agenst with economic impact in their own right. One of those impacts is the right to impose cost on society. The payment of tax is the duty payable in exchange.

    Your argument only exists in an economics text book. I live in the real world. It’s very different out here. You should try it.”

    Utter gibberish.

  2. The IFS neutral?

    Please pull the other one.

    They buy the same assumptions as standard economists do.

    One of those assumptions is that they are objective.

    But that’s a tautological impossibility.

    And the IFS is in practice anything but neutral on this issue.

    As is standard practice for tax institutes they accept any idea that reduces the burden of tax on capital and increases it on those least able to pay. See http://www.taxresearch.org.uk/Blog/2008/06/05/raising-vat-is-not-the-answer-to-the-corporation-tax-problem/

    Richard Murphy

  3. “They buy the same assumptions as standard economists do.”

    Is “standard” meant to be a synonym for “competent”?

  4. “Is ‘standard’ meant to be a synonym for ‘competent’?”

    I certainly hope not. As a third-year student at the LSE and Heterodox Economist, I can assure you that almost all “standard” economists couldn’t find their arses with both hands.

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