The Tax Gap

Yes, it\’s Richard Murphy again! Whoo hoo, aren\’t we lucky little boys and girls?

Here.

He approvingly quotes an American report about corporate taxation.

While the statutory U.S. corporate tax rate is relatively high, effective corporate tax rates – the share of their profits that corporations actually pay in taxes – are much lower, due to the plethora of corporate tax breaks in the tax code.

Indeed, this is true. That legislatures fix headline tax rates is true, just as they fix various allowances ("tax breaks" here, but these can be things as simple as depreciation and capital allowances etc etc).

So, we would expect, in any corporate taxation system which goes beyond a simple flat profits tax for tax rates paid to be different (and assuming that there are any such tax breaks at all, even the corporate equivalent of the personal allowance or breaks on pension contributions enjoyed by individuals) than the headline rates.

Good, fine, I\’m happy with that and presumably so is Richard Murphy, for he does quote it approvingly.

Except, except, this is the same Richard Murphy who complied a report called "The Tax Gap" the methodology of which was also used to create "The Missing Billions" report for the TUC.

In which we have this explanation of that tax gap: 

e. The Expectation Gap

The difference between the headline or declared tax rate for companies, and the rate of tax they actually pay. This Gap is a measure of the difference between the contribution society expects business to make by way of tax paid, and what is actually paid.

That is, our tax gap specifically and deliberately ignores the effect of those allowances which the legislature has specifically put into law. And no, this isn\’t just a minor part of the report. 

However, no study can tackle all issues. The methodology proposed here deals with just one of the Gaps, but an important one nonetheless.

This is the measure of the Expectation Gap, which is: The difference between the headline or declared tax rate for companies, and the rate of tax they actually pay. This Gap is a measure of the difference between the contribution society expects business to make by way of tax paid, and what is actually paid.

A slightly odd measure of the amount of tax that should be paid as against what is paid then, don\’t you think?

To bend over backwards to be entirely fair Murphy does mention this little problem in section 7. And then adds: 

For all these reasons, accounting profit can be the wrong basis for assessing the Tax Gap. That being said though, and given that companies are not required to publish their tax returns, there is only one adjustment that can be appropriately made to accounting profit when estimating the Tax Expectation Gap and that is to add back to reported profit the charge for goodwill amortisation included in the accounts since it is known that it is rare for tax relief to be provided on this charge and it is a number that has to be published within the accounts themselves.

To translate: knowing as I do that my method cannot hope to provide an accurate (or even half-way accurate) result I\’ll go ahead and use it anyway just so that I can claim that companies are nasty tax dodging bastards.

And this is the quality of analysis upon which the TUC bases its campaigns on corporate taxation?

5 thoughts on “The Tax Gap”

  1. I thought the TUC taxation policy was to shout “Windfall Tax” at any part of the economy that was making a profit.

  2. “And this is the quality of analysis upon which the TUC bases its campaigns on corporate taxation?”

    It’s also the basis for the “journalism” in the Guardian and goes a long way to explain what’s going to happen in the Tesco libel trial.

  3. “to explain what’s going to happen in the Tesco libel trial.”

    What’s that then, the Gruaniad getting a damn good spitroasting?

  4. Pingback: Tax Research UK / The Tax Gap methodology is valid

  5. The one who knows

    Tim, you come across as a complete and utter moron who know sweet frick all about fiscal matters. Why don’t you just stick to subjects more suited to your ilk, such as cooking recipes.

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