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.