Prem Sikka, he\’s a lad, ain\’t he?

In general, an individual cannot receive tax relief on interest payments whether the debt is for buying a house, car, fridge, cooker or anything else. In contrast, the tax concessions to corporations have been maintained regardless of whether the debt is for buying productive assets, or speculating in markets, paying exorbitant dividends, setting up operations in tax havens, or even champagne parties for friends.

You would sort of hope that a Professor of Accounting would know that interest for business expenses is allowable….whether it\’s a corporation, partnership, sole trader or entirely an individual. Buy to Let landlords offset mortgage interest against rents for example.

He also rather misses the major point:

Elimination of the tax relief on corporate interest payment would not prevent companies from using debt finance. Instead, it would add an element of neutrality into their choice of capital structure since payments of dividends to providers of equity do not qualify for tax relief. The ending of the taxpayer subsidy would also force companies to maintain more moderate levels of leverage. The measure would increase tax revenues that can be used to fund pensions, healthcare, education, public transport, reduce public borrowings and even tax cuts for normal people, and provide a much needed stimulus to the economy.

You get to tax these flows once.

Dividends are taxed at the level of the recipient (different in the US, I know). So is interest. So, if you\’re going to tax interest at the level of the company you have to make it tax free at the level of the recipient.

So there ain\’t any more tax revenue to be had….and you\’ve created a rentier class who, at least in appearance, are living tax free off their interest.

I can really see the lefties buying into that, can\’t you?

5 thoughts on “Prem Sikka, he\’s a lad, ain\’t he?”

  1. No, you don’t have to make it tax free at the recipient. You just tax it twice. Yes, it leads to massive distortions (just as US companies buy back shares rather than issue dividends because of double-taxed dividends). But since when do the Left care about massive distortions? That’s their MO.

  2. Tim

    You may not have noticed that Prem was actually discussing a proposal from George Osborne – a lefty to you but not to most

    And he is seriously discussing withdrawing tax relief on interest

    He has not linked that to making the receipt tax free – as yet

    He probably will – but that’s his commitment to flat tax coming out

    And it will backfire on him, horribly

    Trouble is, your argument as usual was based on a false premise – which undermines all you do

    Richard

  3. “And he is seriously discussing withdrawing tax relief on interest”

    I like the way you call it “relief”. Like it’s a gift from the state. It isn’t. It’s an allowable cost of business, like running a van. Of course, you’re one of those dingbats that think taxes should be levied on turnover, not profit.

    The analogy with vans is apt because in the past politicians started to stir the shit on company vans, indirectly creating the leasing industry. Result: same tax paid as before the shit stirred. Just more paperwork for everyone. So even if a miracle occurred and your kind were in power to enact such a stupid proposal, you’d discover that all kinds of alternative corporate structuring would emerge. Not least relocation offshore and tax paid only on UK operations (which will suddenly be devoid of debt, the debt having been moved up to the offshore parent).

  4. Someone must have read an entirely different article here. There is serious attempt to shift the debate which is currently all about how to hurt the working and middle classes whilst those who caused the financial crisis get away. The whole discussion here is bizarre. The article does not anything about taxing anything twice. As usual, Tim’s imagination is doing overtime, but not to good effect.

    I wonder why George Osborne floated the idea and quickly backed off. The IMF is also pushing this idea – hardly known for left-wing views.

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