Ritchie faces up to the fact that the incidence of corporation tax is a little more complex than \”companies pay it so there!\”.
Which is, it has to be said, an advance on his earlier thoughts on the subject.
The argument is whether the tax is paid by corporations themselves, their owners, their employees or someone else – for example their customers. This is an issue to which I will be returning quite soon – because it has some significance for the recent reviews on some aspects of corporation tax recently announced by HM Treasury. Suffice to say I take the view that all these outcomes are possible – which puts me in marked contrast to those from the political right who argue that corporations can never pay tax and as such should not be taxed (although they’re rarely quite so bold as to specify it quite like that – but there’s no doubt that’s what they seek).
No, the one set we know to not pay the tax are the companies themselves. For they simply cannot pay a tax: there\’s no \”there\” there to pay one. Both St Cable of Vince and Larry Elliott are with me on this one.
It must be some combination of shareholders, employees or customers.
As such it was good to see that the NYT blog was conditional in its conclusions. It said that if a corporation tax was charged in a closed economy then the charge would end up being paid by the owners of capital – whether by reducing the retained earnings of the company or by reducing distributed earnings.
This is true. In a closed economy the burden of a business profit tax will be carried by the providers of capital: shareholders in the case of a corporation, just as it would be partners in a partnership.
On the other hand in an open economy – one without capital controls and where trade is wholly or largely unregulated- then it is possible that the charge can be transferred onto labour.
Not quite. It\’s not quite just the legal restrictions upon the movement of capital and or trade. It\’s the actual openness…modified by all sorts of things other than legal openness. In a 100% open economy, one where national boundaries made no difference at all to how and where capital was invested and where adjustment was near instant to changing incentives then 100% of the burden would be (not \”can be\”) transferred to labour.
But we know there are many things which make, even in the absence of any legal restrictions, capital not entirely and wholly openly liquid. From Adam Smith\’s observation that merchants prefer the domestic to the foreign trade to language and cultural difficulties and so on.
Which is why all of the estimates of how much of the burden falls upon labour even in the most open economies are less than 100%. It\’s not just the law that matters.
We can also turn that around and point out that even where the law does insist upon a closed economy such taxation will not be 100% be borne by capital simply because there will always be those willing to break the law: as there were indeed back in the days of capital controls. Please note that this not is condoning the breaking of the law (despite my personal conviction that it is immoral of the government to tell people that they cannot take their own money elsewhere), rather, just pointing out that we do, when designing any system of anything, have to consider the effect of the scofflaws. As examples, the illegality of drugs certainly and prostitution possibly create vastly worse results precisely because of those scofflaws and the black markets that grow up around them than an acceptance of such damage and a controlled legalisation would do.
So, as I say, we need to consider, even if we do not approve of, the costs of law breaking.
But these are rather quibbles when we get to Ritchie\’s new idea:
The reality is that we do, of course, live in open economies. But the fact is that tax has, by and large, sought to create the environment of a closed economy whilst allowing free trade so that the benefits of tax being charged on capital can be secured at the same time that trade can take place. This was the underlying direction of travel of a great deal of tax policy for the last thirty years, and rightly so.
This is now in danger. The important combination of residence based taxation, controlled foreign company rules, the taxation of dividend income from overseas subsidiaries and the application of strict transfer pricing rules was not chance: it deliberately created a closed economy for tax. Dismantle any one of those elements and an open economy for tax is created. This appears to be the objective of the ConDem coalition government – and it is profoundly dangerous. It might remove forever the chance to tax capital.
Err, no. Do you see what he\’s done there? Yes, exactly, he\’s begged the question, a marvellous case of petitio principii. He\’s gone from \”taxing corporations in order to tax capital\” to \”tax capital\”.
The argument we\’re trying to explore is not whether we should tax capital it\’s whether taxing corporations is a useful method of taxing capital.
That may be what the Tories and the Orange Book Liberals want – because it ensures that a whole raft of funding for government is eliminated for good – but the result is either a massive increase in the taxation burden of ordinary people or a loss of well being on their part.
Which of course is nonsense: for we\’ve all already agreed that the open economy bit means that the burden of corporation tax is largely borne by ordinary people (some 70% of it is according to the CBO, more than 100% according to Mike Deveraux, someone who Ritchie will never agree with)….even under this \”closed tax system\” that Ritchie insists that we currently have.
My assumption is that he\’s preparing a report for someone or other and is desperately trying to find some logical justification for insisting that corporation tax really is paid by rich bastards so that\’s OK then, despite all the economists who talk about the economics of taxation disagreeing with him.