Yes, it\’s Ritchie again

To summarise my counter arguments they are:

1) Of course multinationals pay most tax, but there are numerous reasons for this. These include:

a) The UK has the largest financial market in Europe clustering financial, oil, mining and other companies in a way that no other centre in Europe does. It probably has more multinational companies per head of population than anywhere else in the wold. Of course they make a disproportionate contribution.

b) The proportion of profits within the UK economy has risen over recent years. I show this here. Almost all of this will relate t multinational corporations – so unsurprisingly they are paying more tax. But this may not be a cause for celebration – remember this means that labour is getting a smaller share and that means the wealth disparities in the UK have risen. I don’t consider that good news.

The two points militate against each other.

OK, so we\’ve got lots of multinationals based (domiciled that is) here and quoted on our Stock Exchange and so on. They make pots of money overseas and the UK Treasury gets some of that pots of money in tax.

OK.

However, the rise in profits as a share of the economy is measured as a rise in the share of profits in GDP. That\’s, as we all know, Gross Domestic Product. Note that profits made by multinationals overseas are not domestic and thus (unless GDP accounting is even more screwed up than I thought it was) included in GDP. They are in GNI…..*

That oppression is not necessarily good for the UK economy. UK companies employ more people in all likelihood – and that generates more tax and more added value.

Tee hee.

Employing more labour is a cost. Thus if you employ more labour to get to a particular production level or output, you have added less value, not more.

Employing one bloke on £20,000 to produce £100,000 of output or emplying three blokes each on £20,000 to provide £100,000 of output. Which adds more value (all other things being equal, of course)?

2) Let’s be clear about the second point – that large companies pay lower rates of tax than smaller ones. I have argued this previously and it has been denied – but Oxford has now confirmed my findings. But I have made this an issue for good reasons. They are:

a) This reverses the policy direction of successive UK governments. We have decided to have a progressive taxation system – and that continues to be what parliament endorses, and yet that is not what we have got. That creates what I have called an ‘expectation gap’ which rightly gives rise to protest. That this exists is confirmed by the newsworthiness of the story Peston picks upon. The gap is real, and I’ll assess its size in another blog, later.

b) If the intention of parliament is not being fulfilled and the messaging that it is intended to deliver to the UK population and business community that there is a deliberate bias in our tax system to help small business overcome the disadvantages it faces when competing with large business is not being delivered in practice then very clearly our corporate tax system is not working as expected, and that is enough reason to demand change in it.

And this bit. I have a vague feeling in my water that we can explain this. For the Oxford report which Ritchie is talking about refers to trading profits. I assume that this is before financing costs. At least I\’ve been told it is before financing costs.

And what is it that we know about large v small companies? That the latter have a great deal more trouble accessing debt finance than the former. And yes, interest paid is deductible from trading profits before we get to taxable profits.

So we would expect large companies, given their access to debt finance, to have more debt than small companies. And we would thus expect interest costs to reduce their trading profits by more than they do for small companies. That is, that the gap between trading and taxable profits will be larger for large companies and thus so will the tax rates differ if we compare tax with trading, rather than post financing, profits.

There must absolutely be some of this going on: whether it\’s enough to explain the gap I don\’t know.

* As ever, please do correct if I\’m wrong here.

6 thoughts on “Yes, it\’s Ritchie again”

  1. “So we would expect large companies, given their access to debt finance, to have more debt than small companies.”

    It would be at a lower cost though. In general it just sounds like the economies of scale apply to tax planning just as they apply to other things.

    Why does Dickie believe we have a ‘progressive’ tax system? It is what it is through decades of Government policy making. There hasn’t been some magic about turn in recent years by corporations. They aren’t breaking the law. The rules drawn up by Parliament and the Treasury are being adhered to. If Parliament had any other intentions the rules would be different.

  2. If Parliament had any other intentions the rules would be different.

    I never thought of this until you put it like that, but it is interesting that lefties, whose trust in the power of government is frequently so unbounded, should be so suspicious of the way that governments-as-they-actually-exist have instituted and implemented their rules. As if every government until now has been corrupt, but come the Revolution, comrades, all government will only ever be incorruptible.

  3. While I would not attack the issue in the way Ritchie has, he has a point that the tax and regulatory regime in the UK favours large corporations, as they are better able to cope with the costs and game the system to their advantage. I doubt that he would advocate abolishing corporation tax and much business regulation to counter this, however.

  4. “game the system to their advantage”? The rules are absurdly complex, which means you spend hours/days planning the best way to move profits from one country or other back to the UK so you can pay dividends to your shareholders, after all the other countries have taken their cut. Is that how the system is meant to work?

  5. Just as a general point Tim, you seem to be overestimating Ritchie again by implying that he knows what value is and where it comes from. He really doesn’t understand that labour is a cost. It’s the standard anglo-socialist problem.

    Both capitalists and old-fashioned communists agree that production is the key measure of an economy (“tractor statistics”). Anglos don’t, they believe that measures like employment are the key measure of an economy. They don’t give a damn whether a single tractor makes it out of the factory or not, so long as people are employed there. To Ritchie, labour isn’t a cost. It’s the purpose of the economy.

Leave a Reply

Your email address will not be published. Required fields are marked *