Clearly I\’m getting under the man\’s skin. Good.
It is flawed.
Worstall’s argument appears entirely dependent upon rhetoric. If ever there was a man to split hairs it is him. I am reasonably confident if there was no person left on earth to argue with Worstall would take issue with a lamp post, and it has to be said that argument with Worstall is totally pointless because it continues ad nauseum without any benefit arising. As a result, candidly, I will not bother. Far too many people of sound mind had been convinced by my argument to need to engage with him in that way.
Ooooh, get her….
I do instead issue a straightforward challenge.
Fine, bring it on…..
I say that was because of a significant and deliberate increase in the abuse of the world’s tax systems by these companies through the undertaking of tax avoidance. Worstall disagrees.
Err, no, I\’m afraid that this is incorrect. Worstall does not disagree with this point at all.
My challenge to Worstall is simple. Produce the data that can show any other explanation for this trend, but I warn you in advance: do not use KPMG’s survey of corporate tax rates because that is a simple statistical analysis which takes no account of the population size of the countries in question, or of the size of their GDP and therefore of their relative economic significance. As I noted above, when these factors are taken into account this cannot explain this trend, as I proved in earlier research.
Tim Worstall can nitpick, but I have produced answers and he has not. That is the difference between us and right now I can find no alternative explanation of the evidence I created and which others can now reproduce.
That’s why I stick by my work, its methodology and its findings and the obvious inferences that can be drawn from it.
The numbers tell this story loud and clear. That’s enough to justify action.
It\’s true that Richard has produced answers and that I have not. It\’s also true that I nitpick. But that is because I am pointing to a logical error in the methods by which Richard reaches his number.
Allow me to start all over again.
We traditionally make the distinction between tax avoidance, which is the process of legally optimising the use of the various allowances and possible business structures to minimise a tax bill, and tax evasion which is everything from the illegal use of such to reduce taxes all the way to the simple ignoring of tax altogether, as in the black economy.
Richard adds a third distinction here. "Tax planning". He uses it to mean the use of the various allowances and possible business structures in the way that those writing the law intended. For example, if there is a 125% R&D allowance against corporation tax (which there is, or at least used to be) then if you claim that against your R&D costs then this is tax planning. In Richard\’s terminology, tax avoidance is where you use that same allowance but not in the manner in which it was originally intended. Say, over allocating overheads (just as an example) to R&D so as to maximise use of that break.
OK so far?
Now, what Richard tries to do in his report for the TUC is to estimate how much there is of what he calls tax avoidance. Note, his meaning of tax avoidance, not tax evasion or even tax planning.
That\’s where he gets his number of £12 billion or so from.
However, when you read through his methods, we find that what he has actually calculated is not, using again his terminology, tax avoidance, but tax planning and tax avoidance lumped together.
If the estimated loss is extrapolated across all of these 700 companies then the total corporation tax expectation gap might be some £11.8 billion. This is an increase from £9.2 billion, which was the estimate made the last time a similar exercise to that undertaken here was completed, relating to the period to 2004 30. As a proportion this may be the highest gap of all. Much may be due to legitimate tax planning, but by no means all is. Some, undoubtedly, is due to tax avoidance.
Thus his estimate of £12 billion for tax avoidance fails, for he has, by his own admission, lumped in the entirely, even from his point of view, legal, legitimate and morally acceptable practice of tax planning with tax avoidance.
That is my argument with his numbers. That he\’s used a logically flawed method to get to his final number.
Just to clarify again. I do not doubt that there is tax evasion (Heck, I\’ve worked in Russia. I know there is tax evasion). I do not doubt there is tax avoidance, as Richard defines it. The use of legal structures and allowances to reduce tax bills in manners not intended by those who drafted the original laws. I do not doubt that there is tax planning either.
I do not doubt in the slightest that companies do their best to use both tax planning and tax avoidance to reduce their bills and I\’m perfectly happy to agree with an allegation that the amount of this going on has been increasing in recent years.
My argument is, and has been since the beginning, that Richard has used a logically flawed method to attempt an answer to the empirical question of "How much?" Because he lumps together both tax planning and tax avoidance we cannot use his final number as a measure of tax avoidance.
I have already dismissed his arguments on tax incidence.
Well, yes, but not all that successfully it has to be said. First there is the argument from credentialism:
Worstall is not an accountant: his studies in the subject ended at undergraduate level.
But why my chops in accountancy would make any difference to the truth or not of the economic incidence of a tax I\’m not sure. That\’s an economic question, not an accounting one.
In fact, no senior member of the tax profession I have ever spoken to believes in the incidence argument – and I include those who have discussed it with tax economists of world stature who swear it is right. The reason is easy to explain. Economists live in a world of make believe: they are called the assumptions on which they base their theories. One of those almost universal assumptions is transparency. It does not exist. So people do not behave as economists assume; corporations do behave as if they bear the tax burden, and redistribute it as a result because they think that benefits them, and as such do at the very least change the distribution of tax liabilities within and between states, including the part they pay.
Economist assume transparency? Do they? First I\’ve heard of it I have to admit.
But basically Ritchie\’s argument here is that economists are nuts and that it doesn\’t matter what they think. Accountants are the one true fount of knowledge and that\’s an end to it.
Quite why accountants would be correct on a point of economics and economists wrong he doesn\’t trouble to tell us.
And by a quite delicious irony here is Richard praising Vince Cable\’s latest essay into journalism.
You can see why this man is thought to have the best economic brain in British politics.
Isn\’t that nice? Strangely, Richard left out of his quotes from the article the following:
Companies are, of course, not individuals but legal entities. Any corporate tax is ultimately passed on somewhere else – in reduced dividends or wages or in higher prices.
That\’s, err, the tax incidence thing again, the thing that Ritchie dismmisses out of hand.