Larry Elliot on tax incidence

In the end that means you and me, since business passes on its share of the tax bill through lower wages, higher prices or reduced dividends.

That\’s Richard Murphy\’s argument that businesses carry the economic burden of corporate taxes buggered once again then, isn\’t it?

We then need to move on to decide which of those three groups does indeed carry that economic burden and empirical studies suggest that it\’s about 70% which is bourne by the workers in the form of lower wages.

Corporation tax is thus not fit for purpose. It\’s sold as a tax on the companies (obviously not true) and if not that, as a tax on capital. Which it also isn\’t. So if we really want to tax returns to capital we need to abolish corporation tax and replace it with something else. As a first approximation I suggest simply treating income from capital as income. No CGT regime for example.

Maybe that\’s the right answer and maybe it isn\’t. But corporation tax definitely is not the answer.

One argument I can see against such a regime is that those who live in a tax haven, such as Monaco, will not pay any tax on their capital income. But since, in time, the absence of corporation tax will lift that 70% of the burden that currently falls on the workers, I say "so what?".

That some do not pay tax might be galling but a rise in the worker\’s incomes is what we all want, isn\’t it?

8 thoughts on “Larry Elliot on tax incidence”

  1. Tim, I’ve got a question about this.
    If you have a multinational company and we in the UK reduce corporation tax will the benefit not flow to overseas employees/customers? If so, is this not an arguement for keeping corporation tax?

    Tim adds: There are of course flows across borders in any open system, yes.

    However, if we tax corporate profits made here in the UK then it is UK workers that carry the bulk of the burden. Do not tax UK made corporate profits and there is no tax for the workers to bear the brunt of.
    Seems pretty simple to me. Whatever the effect on foreigners, the British worker will be better off.

  2. Right wingers always have this knee jerk thing about corporation tax, which completely misses the point.


    1. It’s not as bad as VAT, which raises twice as much as corporation tax (in the UK), and which increases prices to consumers, reduces income of businesses, depresses output and adds to distortion between VAT-able and non-VAT-able parts of economy.

    2. It’s not as bad as Employer’s NI (which raises about as much as corporation tax), which adds to cost of doing business, depresses wages and reduces employment levels.

    3. If you exempt ‘companies’, then partnerships will just all incorporate, so for a given level of total revenues, the rate of income tax charged on employment income will go up even further so any modest gain in corporation tax is wiped out immediately.

    4. Corporation tax is not charged on reinvested profits, by definition. It is only charged on ‘surplus’ profits that end up as cash in the bank or as dividends. So corporation tax is just an administratively simple version of a tax on ‘income from capital invested in UK regardless of domicile of owner’ (instead of capital gains tax or higher rate tax on dividends, that are truly grim taxes and subject to all manner of avoidance).

    5. For sure, at the very margin, corporation tax might just persuade some businesses to move offshore, but that is largely down to wage or other cost differentials (e.g. corporation tax in China and India was 35% last time I looked). Companies like Tesco can’t just shift all their supermarkets offshore, and even if you buy foreign manufactures in the UK, the bulk of the selling price accrues to the UK part of the supply chain.


  3. but MW, in my day when tax interested me at all, the marginal rate of tax on personal income (60%) was higher than the corporate tax rate (35%), so why did they not incorporate?


  4. Diogenes, I have no idea what the other rules were in those days. Either way, it would be a deferral not an absolute relief, as the tax on the dividends would have wiped out the initial saving (?).

    We had an episode a few years ago when UK limited companies paid no tax on the first £10,000 profits and of course we tax advisers told all our client to incorporate – the gimmick being there was no tax when you took that money out as dividends either (or a full credit for tax that hadn’t been paid, depending on your point of view).

  5. Why not let the market decide on whether corporate tax is important? I propose a voluntary “TaxTicked” label that tax-compliant marketers can use on their products, websites, etc. My research says that the man in the street knows darn well that they’re paying an unfair share for public services. And they’d welcome a way to reward companies that don’t stoop to tax avoidance.

  6. Your argument seems to focus on the report that tax incidence falls 70% on labour, and that a reduction would benefit the ‘working class’. You however fail to take into account the distribution of labour wage rates across the company. I.e. that the ‘fat cats’ can/do receive a larger proportional share of the wage rate increases. Meaning that any reduction in the corporation tax potentially creates an even larger vertical equity problem.

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