Yet even more windfall tax

As with Hatters, now that our own favourite retired accountant has come out in favour of the windfall tax we can confidently reject it of course.

The arguments for a windfall tax on energy companies are complex. I am in favour of such a tax at this time.

However, there\’s something vastly more interesting in his post (as well as the usual extremely odd argumentation).

We often hear about the incidence argument of corporation tax, which says that all tax burdens are eventually suffered by people. In extremis, I do of course agree (although I also argue that as the tax is used to change the people who pay the burden it remains important that it is charged).

Excellent! At last some reality is penetrating. Over the past few months he\’s moved from entirely denying the tax incidence argument, through claiming it only works in a closed economy (Brrrring! Fail! It works in an open one, not a closed one!) to accepting it.

As I say, good, however, we now need to look at the second part, the bit in parentheses.

Because the studies done on the incidence of the corporate income tax (what we call corporation tax) are all pretty much in agreement.

In theory, it\’s going to be some combination of the workers, in the form of lower wages, the customers, in the form of higher prices and the investors in the form of lower returns. Quite how that split actually works is an empirical question. One you\’ve got to go out and calculate.

Now, the one that I use here is a study done by the Congressional Budget Office over in the US. They\’re as close to bipartisan as we\’re going to get.

Their answer, in the US economy, is that workers bear 70% of the burden.

Isn\’t that lovely? We\’re attempting to make the returns to capital pay the tax. The outcome is that the returns to labour pay the majority of it.

Yes, corporation tax does indeed change the people who pay it: that\’s exactly why we don\’t want to have it. It changes who pays it from those we would like to pay it to those who don\’t.

What would be a better system is simply to abolish corporation tax altogether. Dividends would be taxed, as now, as income at the marginal rate of the recipient. Retained profits, ones which are reinvested, would not be taxed at all. To balance the system we could tax capital gains at the same rate as marginal income.

We\’d save gargantuan amounts in paperwork. We\’d also save huge amounts because attempting to avoid corporation tax skews investment decisions and best of all, the workers would be better off.

Which is what we want of course.

In short, it\’s precisely because corporation tax does change who pays the tax that we want to abolish it.

 

 

27 thoughts on “Yet even more windfall tax”

  1. You are making the typical right wing mistake of looking at the USA. Over there, they do not have the Worst Tax Of All (Value Added Tax ) or the Second Worst Tax Of All (Employer’s NI). OK, to be fair, they have sales taxes and payroll taxes, but these are not as high as in the UK.

    Working backwards from Milton Friedman, LVT is the least bad tax and a flat-rate tax on incomes/profits (which includes corporation tax) is the second least-bad tax.

    So please, direct your attention to the worst taxes (VAT and Employer’s NI) before you worry about corporation tax (that is not levied on reinvested profits, it is only levied on retained profits).

    The lefties (including Richard Murphy) are right here for the wrong reasons – they think that VAT and Employer’s NI are The Worst Taxes because they are regressive (which is quite possibly true, BTW). They are in fact The Worst Taxes because they are the ones that most inhibit economic growth and full employment.

  2. Which also deals with your argument that dividends (which of necessity are paid out of un-reinvested profits) or capital gains should be taxed at all. In the interest of simplicity, these gains should be taxed at company level and that should be the end of it.

    On a practical note, if you exempt ‘corporate’ profits from tax, how will you deal with ‘partnership’ or ‘sole trader’ profits?

  3. They are in fact The Worst Taxes because they are the ones that most inhibit economic growth and full employment.

    In the case of VAT it is also a tax of unimaginable complexity. Gordon Brown must love it.

  4. @ JohnB “and the hardest to dodge”

    Land Value Tax is the hardest to dodge, and neither is it regressive (keeping the lefties happy) nor does it impede the economy (keeping the free market liberals happy). Nuff said.

    @ Serf, thanks.

  5. @ John B, what sort of tax department do you work in? TBH, corporation tax is by far and away the easiest (despite a myriad unnecessary complications). And if income tax and employee’s NI were rolled into a flat tax of 31% (and employer’s NI scrapped), then payroll ladies up and down the land would heave a sigh of relief.

  6. Mark, I think i understand your reasoning but doing away with VAT would surely mean the Chavs would end up paying no tax at all. Is that really what we want?

  7. Zorro, The Chavs pay Land Value Tax indirectly (it’s included, by definition in the rents that they pay); they buy Lottery tickets (a tax on the stupid); they drink and smoke (alcohol and tobacco duties) and they face savage means testing if they have the temerity to try and work for a living (like income tax, but far worse).

    Far better to reduce VAT and reduce means-testing.

  8. The Americans don’t have VAT. They have something more daft: Sales Tax. At least VAT is levied only on the value added by an enterprise.

  9. Kay Tie, Sales Tax = Turnover Tax = Value Added Tax, it’s all the same thing.

    Anybody who wants to argue with me on this might like to run a small business; do an AAT/CTA qualification; work in tax for a few years; and do degrees in accounting and finance and law.

    If I’m wrong, then I’m wrong.

    Tim adds: There’s a very large difference between the two. A VAT can be charged at a much higher rate than a sales tax. Because you get it in bits though the supply chain, there’s less incentive to try and avoid it.

    Other than that, you’re right of course.

  10. No Mark, VAT isn’t a turnover tax. I have positive turnover, and negative VAT payments (i.e. HMRC sends me money every month).

    Furthermore, I refute the idea that qualifications are proof of correctness of an argument: our favourite retired accountant has qualifications too.

  11. Nice one, a tautological definition. You just said that VAT was the same as Sales Tax. I just proved that it isn’t.

    And yes, I do run a VAT-able business. Most of my business is with VAT-registered EU clients. Some is UK. But I’m also making substantial capital investment in kit and therefore have substantial reclaims of input VAT (regardless of whether I was selling to EU or UK businesses or indeed end consumers). The same would not be true were I operating in the US or Canada: Sales Tax applies to all purchases made by a business (except purchases for resale stock).

    The rate of VAT has no impact on my business. The same would not be true for Sales Tax. Thus you cannot equate Sales Tax and VAT. They are different systems that just happen to look similar from the perspective of an end customer.

  12. Kay Tie, OK, VAT is a tax on non-zero-rated-or-otherwise-exempt-from-VAT-VAT-able supplies.

    And what, pray tell, is the big difference between you making supplies to UK VAT registered business (who pay you the VAT to hand over to HMRC but in turn reclaim it as input tax) and you making zero-rated supplies to Johnny Foreigner?

    (clue – there isn’t one – beside my other experience I also do logic and maths)

  13. “Kay Tie, OK, VAT is a tax on non-zero-rated-or-otherwise-exempt-from-VAT-VAT-able supplies.”

    And how is this ” = Sales Tax = Turnover Tax” then? I’ll put you out of your misery and simply state that VAT is a tax on the value added to the goods and services consumed, a “value-added tax”, or VAT for short. It isn’t a Sales Tax. It isn’t a Turnover Tax.

    “(clue – there isn’t one – beside my other experience I also do logic and maths)”

    The kind of logic that glosses over contradictions. You need to have a chat with Bertrand Russell.

  14. it looks as if Murphy has done a complete u-turn on tax incidence. It also appears that he now accepts the Congressional study that he felt free to disregard. He also talks about wanting to abolish corporation tax, an idea he also used to pour scorn on. Perhaps he is about to revise all his muddle-headed opinions and we get version 2 of the Tax Gap study.

  15. Kay Tie, (let’s assume for sake of argument that) you are absolutely 100% right!

    Let’s assume that “VAT is a tax on ‘Value Added'” (aka a tax on entrepreneurial skills, aka labour, aka return on capital, call it what you will) which serves to bump up our nominal corporation tax rate (aka tax on entrepreneurial skills etc) from 28% to a minimum of 45.5% (for VAT-registered businesses, blah blah).

    With the kicker that even loss making businesses have to pay it (effective rate >100%). Hurray for VAT! The Worst Tax Of All!!

    Now explain this – total UK corp tax receipts, approx £40 bn per annum (excl. North Sea corp tax), total VAT receipts approx. £80 bn per annum, i.e. twice as much

    (You might at this stage like to trot out the politicians’ mantra ‘VAT is a tax on consumption not on production’, I’ll deal with that little misconception later, this is just a test to see whether you believe what politicians say or whether you can think for yourself)

  16. calm down guys – just think about the compliance costs –

    congestion charge costs more than kit collects
    IHT costs more than it collects
    corporation tax costs (including all the experts in the IR and accountancy and legal firms) less than it collects
    VAT collects massively more than it cost to collect because Joe Public does it for you. yes, my local gardener did my fence for £500 vat free but that only adds up to the VAT on a few trips to Sainsbury

  17. I’m not saying that VAT is good or bad. In fact, “evil genius” is perhaps the best description. I’m just trying to correct the wilder statements about what VAT is or how to think of it.

    VAT is not a tax on turnover. It is not even a tax on gross margins because there are, in effect, capital allowances. It’s certainly not the same as a sales tax, because a sales tax is a tax on direct sales, with special carve-outs for stock. This explains why VAT can feasibly be at 20% in Europe, whereas in the US a sales tax of 20% would kill the economy: VAT doesn’t sum through the supply chain like sales tax does.

    I have no opinion on whether VAT is “good” or “bad” tax compared to NI, income tax or CT (all of them being bad). It certainly has some bad aspects: raising prices so that some sales don’t occur (depriving the seller of profit, the buyer of utility, and the Government of tax revenue).

    I have enormous respect for your work and opinions, but VAT is your “rage button” like the EU is for Tim and state authoritarianism is for me.

  18. Tax or no tax, they’re at it again – The liberal paternalists are proposing to ban the display of tobacco in shops and are currently soliciting the opinion of their electorate. Banishing cigarettes will cost ordinary taxpayers more money, inconvenience thousands of consumers (who are paying tax through the nose on tobacco already), and threaten the livelihoods of shopkeepers all over the UK.
    I’m sick and tired of more of the same from Nanny – obsessed with dictating how people live their lives but brushing the big issues, like knife crime and recession, under the carpet. They’re planning to hide tobacco, and they are already policing alcohol, red meat, fatty foods, and salt to name a few.
    I’m sick of seeing pubs closing down where I live. I’m sick of being made to feel guilty because I eat and drink as I please.
    I’m sick of Nanny. How about you? Got Freedom?
    Ceej

  19. The problem with removing VAT and focusing on corporation/dividend tax is that our exports are then taxed more. VAT taxes only the consumption in the UK, so imports are taxed at their full value on par with domestic production. Under a VAT-less environment the marginal profits made by importers are taxed only, our companies are taxed for both domestic and export production.

    RE taxing dividends – If dividends are taken then re-invested elsewhere and not spent on goods, under the dividend tax, that re-investment is taxed. If we tax consumption, the dividends would be taxed when eventually spent, but not when re-invested elsewhere. Should we differentiate between retained profits in one company and investing profits into another? I say no. Dividend tax is basically an income tax, so better just make dividends only payable after corporation tax and have no extra tax on dividends.

  20. VAT is my ‘rage button’ not so much because it is a totally evil tax, but because so many people fall for the lies and spin.

    *sigh, try again*

    Big Picture wise, let’s assume a furniture business owns the whole chain – the forest, the sawmill, the oil well (for diesel and plastic bits), the factory, the lorries, the retail shop – all UK-based. It grows the trees, makes the wood, makes the wardrobes, delivers them to the showroom and to the purchaser’s home for a VAT inclusive price of £235. It has (let us assume NO input VAT, because imports aside, UK plc collectively has NO input VAT). Of that £235 selling price it has to hand over £35 VAT.

    The fact that in real life it’s different businesses running different bits of the supply chain, so all but the actual retailer think (as does Kay Tie above) ‘VAT doesn’t affect my business’.

    The fact is, it does, the deleterious effect that VAT has on the wardrobe retailer filters back and hits each business in the supply chain just as badly (or possibly worse) than the cumulative total effect that it would have on a fully integrated company that owns everything from forest to delivery lorry.

    *endof*

  21. The problem with removing VAT and focusing on corporation/dividend tax is that our exports are then taxed more.

    Only a problem if you’re an insane mercantilist. Otherwise, you’d realise that exports are merely the dull stuff we do to pay for imports…

  22. What John B says.

    Dividend tax is basically an income tax, so better just make dividends only payable after corporation tax and have no extra tax on dividends

    Exactly. Flat-rate tax on all income (whether personal or corporate) and no double-taxation of dividends or capital gains is the way forward. And get rid of Stamp Duty while we’re at it.

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