In which we discuss Richard Murphy\’s understanding of tax

Ritchie tells us the following:

Let me suggest something. It’s just an idea. I can’t prove it right or wrong. Nor can it, for that matter be disproved. But the suggestion I want to make is that a country’s corporation tax rate might be inversely correlated to its confidence in the offering it has to make to those companies who want to locate their businesses in its jurisdiction.

Hmm. Interesting idea actually. For what the tax rate is will certainly be one of those things that influences people (an idea Ritchie stoutly denies but….). Along with transport, business climate, planning, etc etc.

So we\’re given this chart to show it:

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Hmm. OK, so we\’ve a low corporate tax rate, we obviously are therefore unsure about how attractive we are as a country to business.

Except, except. That is the headline tax rate. And as so much of Ritchie\’s \”work\” shows, the headline rate ain\’t the real rate, is it? That\’s what all that tax gap stuff is about. The actual, or in the technical term \”effective\” tax rate is something quite different, dependent on all sorts of allowances and so on. So where are we on effective tax rates?

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Oh my. You mean we get more of GDP in corporation tax than do many other countries? And that our effective tax rate is higher than anyone in the Northern Hemisphere?

 

So the idea that we tax companies lightly rather seems to disappear, doesn\’t it? And thus the thought that we are unconfident about our attractiveness and are using low tax rates to compensate: you know, rather like the fat girl being an easy lay to get a date.

 

I agree that that second set of figures is a little out of date (2009). But even so it\’s a very interesting story, isn\’t it? The UK has one of the world\’s highest tax rates on corporate profits. Slightly mucks up part of the Ritchiebollocks story really.

21 thoughts on “In which we discuss Richard Murphy\’s understanding of tax”

  1. So Much For Subtlety

    The UK has one of the world’s highest tax rates on corporate profits. Slightly mucks up part of the Ritchiebollocks story really.

    Yeah but I think Ritchie wins either way because he can then turn around and say that high taxes do not stop companies investing in the UK. So we can jack them up even higher.

    Not a good result. Interesting but counter productive.

    I would be interested in the number of start ups under a high taxing regime. Europe has had very few new big companies in recent times. Unlike the US. Higher taxes can’t help.

  2. “I would be interested in the number of start ups under a high taxing regime. Europe has had very few new big companies in recent times. Unlike the US. Higher taxes can’t help.”

    It would be interesting to see if there was any connection between start ups and tax rates. I can’t imagine many entrepreneurs worry too much about the tax rate they’ll pay on their millions in 10 years time if they are successful whilst starting their business in their parent’s garage.

    Surely the success of US entrepreneurialism is based around other issues like size of population, sophistication of infrastructure, availability of venture capital, generous banks, low levels of regulation etc.

  3. So Much For Subtlety

    Shinsei67 – “It would be interesting to see if there was any connection between start ups and tax rates. I can’t imagine many entrepreneurs worry too much about the tax rate they’ll pay on their millions in 10 years time if they are successful whilst starting their business in their parent’s garage.”

    True but in the weeks when they come out of the garage, they may not have any cash. They may have to pay everyone in Stock Options. As Apple did. Until, that is, the Tax Man declines a stock option and wants the cash. Then they may close.

    “Surely the success of US entrepreneurialism is based around other issues like size of population, sophistication of infrastructure, availability of venture capital, generous banks, low levels of regulation etc.”

    Europe as a whole has a bigger population. Parts of it have a very sophisticated infrastructure. I don’t know about venture capital but the banks could hardly be more generous. Just ask the Greeks. Low levels of regulation are probably closer to home though.

  4. “Europe as a whole has a bigger population.”

    Yes, but not all speaking the same language. I’m guessing it isn’t coincidental that the likes of Facebook started in the USA with a massive student population all internet-connected & speaking the same language, rather than in France or Italy.

    Re tax. I was wrong to say that tax wasn’t a big issue for start-ups and small companies. They all have a massive problem with paying VAT bills. The lack of cashflow and demands of HMRC put many under.

    However they seem to care little about rates of corporation tax. In fact I (funnily enough) had a small business friend this morning ask me what the small company rate was these days as she didn’t know.

  5. I posted this as a comment to Richard’s piece, did not make it through the moderation process as yet:

    “I am not sure about Osborne’s confidence in the UK economy, but if one looks at FDI (flows and stocks) related to the UK economy, foreigners seem to have confidence relative to other FDI destinations.

    Of the countries listed in the chart above:

    – the UK ranks number 4 in $ terms of FDI inflow for 2011
    – the UK ranks number 3 in $ terms of FDI inward FDI stock for 2011

    If one looks at the UK in terms of fellow EU-27 countries:

    – the UK ranks number 2 in $ terms of FDI inflow for 2011
    – the UK ranks number 1 in $ terms of FDI inward FDI stock for 2011

    The UK accounted for 21% of all EU-27 FDI inflows in 2011; the UK accounted for 16% of all EU-27 inward FDI stock in 2011.

    So, if one looks at FDI related to the UK as a measure of confidence, or the willingness for businesses to locate their investment dollars in the UK jurisdiction, the UK is not fairing too poorly given the financial environment.”

  6. “It would be interesting to see if there was any connection between start ups and tax rates. I can’t imagine many entrepreneurs worry too much about the tax rate they’ll pay on their millions in 10 years time if they are successful whilst starting their business in their parent’s garage.”

    I doubt it stops people starting, but I’ll bet it stops them getting really big. If you start a business, its successful and you make a few millions, you have enough money for an easy life thereafter. You then face a choice – do I push on, continue the hard work, build my company into a world beater, make hundreds of millions (or billions even) and see the State take 50% of it, or do I sit back, relax, and potter along at the level I’ve reached.

    I have experienced (at a lower level) exactly that decision. In my business I have several opportunities at the moment that could double or more my income, which would push me way into the highest tax bracket. I don’t actually need the money, I have enough to live exactly as I want right now. So I’m passing by on these business ventures because of the hassle factor vs losing 50% of the extra income to the State. So the State gets 50% of nothing, whereas it could have had 10 or 20% of something.

  7. Jim

    Interesting observation but we were talking about corporation tax rates and not personal income tax rate.

  8. Maybe a country has low taxes because it believes (rightly IMHO wrong in Richie’s opinion) that it is a good idea for taxes to be low.

  9. Jim, you have a point, but Bill Gates would go for it. I don’t think tax is enough to explain why UK businesses stop when they’re comfortable, but US ones want to take over the world.

    PS is the high effective UK rate anything to do with taxes on North Sea oil? (Also Norway?)

    Tim adds: Norway is North Sea. UK is not, or only very marginally. We tax a lot of oil production through royalties. Norway through corporation tax. So, different outcomes by this statistic.

  10. Jim,

    Interesting point. Why do we assume that companies should desire to be ginormous? The market and consumer don’t mind if there are 100 companies in a sector or ten companies in a sector, and neither do those aggregate economic statistics mind either.

    What matters is production, and if people would rather just be comfortably off than be “captains of industry”, that’s cool… and the market working just as us free marketeers say it does.

    And the State? The State gets 50% of some other company’s income rather than 50% of yours.

  11. Ian B:

    “And the State? The State gets 50% of some other company’s income rather than 50% of yours.”

    So successful entrepreneurs cannot make the pie larger…

  12. It is very likely true that a country sets a low corporate tax rate because it lacks confidence in its ability to attract business otherwise. The question seems to be “is this lack of confidence justified”
    If we in Britain are in fact attracting lots of new businesses, including but not limited to start-ups, so much so that we can no longer supply the necessary labour and infrastructure to service them, then we are under confident, and can afford to raise the tax rate.
    I regret to say that is not the world I observe. We have millions unemployed, and millions more in “education” and “training” which appears more designed to keep the unemployment figures low than to increase the skills base. We have people retired at sixty, hale and hearty, many of whom would prefer to work.
    My conclusion is that we are overconfident of our ability to attract business, and therefore need to lower the tax rate.
    This is aside from the fact that corporation tax induces employers and companies to employ intelligent people capable of innovative thinking (such as Ritchie) to avoid them paying too much, and HMRC to employ yet further smart people to make sure that they don’t pay too little. I doubt it is the best use of the countries limited pool of talented people to employ them to argue with each other.

  13. So successful entrepreneurs cannot make the pie larger…

    Not by merely existing. The pie gets larger due to productivity increases (improved technologies, production organisation, etc). You can’t make the pie bigger by altering the sharing of it.

  14. Looking at the graph (which Tim has reproduced) Murphy also says :

    ‘We’re in the wrong company, But maybe he thinks that’s because we can’t compete with the Elite. That’s worrying’

    Looking at the countries in second and more crucially, third place. Is he defining Argentina as an ‘Elite economy’? Based on his increasingly desperate use of statistics, to as the likes of Surreptitious Evil and Bloke in Spain point out, create a false narrative, perhaps the Argentine comparison is more accurate than he cares to acknowledge. Also, his attachment to ‘Keynesian stimulus’ plans which will merely end up in the pockets of his Public Sector Union paymasters as echoes of Japanese policies over the past two decades. In either case, the idea that these economies are ‘The Elite’ just shows that one of the principal economic advisors to the next over meant has less understanding of economics than most GCSE students.

  15. Another thought (sorry, two) – the great man says:
    “I can’t prove it right or wrong. Nor can it[his thesis], for that matter be disproved.”

    1. Is that statement actually right? I mean Murphy (or I) can’t prove or disprove it, but isn’t that the kind of thing clever numerate people could have a stab at? I agree it’s an interesting question.

    2. If it can’t be proved or disproved (to whatever degree of certainty), what’s the point of making it?

  16. While we want to grow our company, growing it to a large size just doesn’t interest us.

    We enjoy the challenge, the involvement, the terror, the travel, and the idea that we can have a job for life.
    Corporation tax as an issue doesn’t mean anything for us, plenty of other issues of far more importance than something that gets billed months after the year end.

  17. Luke>

    1. I think the statement is true. It’s unprovable because it’s simply a trivial logical development of things which are axiomatic to economics.

    2. For Ritchie, trivialities are an advance. He’s talking about the blindingly obvious instead of being obviously wrong.

    Of course London is a more attractive place to do business than Luxembourg in many cases. We could charge an extra percentage point or two of corporation tax over them and retain that advantage, since even our high rates don’t put everyone off. It’s irrelevant when we’re talking about a rate five times theirs.

  18. I’ve just run a couple of scattergrams looking at the relationship between the total tax rate relative to commercial profits and

    1) Logistics performance index: Quality of trade and transport-related infrastructure (1=low to 5=high)
    2) Ease of doing business rank

    Both measures of how good it is to do business in a country.

    Bottom line there is no correlation between the tax rate and the pleasantness of doing business somewhere. (There is a small effect if one includes countries that tax more than 100% of profits – which is negative, but data in these places is terrible). This is also true if one limits it to developed countries. On these measures one finds no relationship between tax and attractiveness.

    You can do the analyses yourselves if you take the data from the World Bank

    http://databank.worldbank.org/ddp/home.do

  19. Just passing through, greetings. I had to do a double-take on the initial quotation because in my mind, it is a low corporate tax rate that shows that a government is confident in its ability to attract business. A low tax rate shows that the government understands business, understands that the relationship can be mutually beneficial, and understands that it will collect more taxes from many thriving businesses taxed at a low rate than from few stressed businesses taxed at a low rate.

    “Because they’re Americans”? Americans are just Brits who are 200 years behind on the long march to the Servile State.

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