Timmy elsewhere

At the ASI.

Time for Plan Worstall. Abolish corporation tax

16 thoughts on “Timmy elsewhere”

  1. We need corporation tax because people live in other countries where they cannot be (directly) taxed.

    Seriously, if you abolished corporation tax and taxed purely on a personal income basis you would have a massive exodus of company owners to low- and no-tax jurisdictions. Corporation tax is not simply because it’s convenient to go after companies, it’s because it is actually the best (yet0 way of extracting some tax on profits going to overseas residents. Now that said overseas residents have come up with some fine wheezes to avoid said tax. Chief among these are having an offshore company “sell” some “service” to the profit-reaping onshore company for vastly more than the service is worth.

    The only way out of the resultant loss of revenue would be to have a withholding tax on dividends, which creates exactly the same problem we are trying to avoid. And that still doesn’t work when the profits are being offshored by transfer-pricing scams, because it looks like, on paper, the PO Box in the Caymans is making all the profits.

    You seem to see a revamping of the global tax system as a threat to the movement of capital, I see exactly the opposite. In fact, if we let things carry on as they are, states will start to clamp down on free movement of capital. And that would be really shit.

    Also we can argue lots about where the burden of this taxation falls (combination of shareholders and workers). This is however just moralising and if we are going to moralise I see no reason whatsoever why the full tax burden should fall on labour and none on capital. And, no, you don’t have to be a socialist to hold that viewpoint.

    It’s entirely right to ensure some of said burden falls on the capital owners – the costs of the government, civil society and so on that (in part and with all usual caveats) enables the capital owner to make any damn money in the first place. And it would also not be socially desirable to have all the owners of all EU-based capital resident in the Caymans controlling via holding companies in the Bahamas or Monaco.

  2. JamesV, you say that the business should pay corp tax because it enjoys the benefits. But then you go and confuse yourself by mentoning the capital owner as the beneficiary who is in effect the business owner.

    A business can’t benefit, but the owners (shareholders) can. So they might as well be the ones paying the tax. Not all shareholders will go elsewhere. Some can’t like pension funds.

  3. SBML: yes, yes, it’s the workers/consumers/owners who will pay any corporate tax, agreed. But as long as we tax income, and there is a consensus that capital income is to be taxed as well, corporation tax is the way to do that with relative neutrality as to how to pay out that income to capital owners, without all the fuss of capital gains taxation.
    As it happens, I think land taxes are a much better way of taxing the received benefits of doing business somewhere, but as long as we do tax income, CT, largely taxes revenues where they occur. There is no good argument for taxing the income a UK citizen gets from a business ownership in Hong Kong, the benefits are received in HK. And you also seem to admit that some are more mobile than others, and that capital taxation on the personal level only, would affect owners differently depending on mobility. Is that really a good thing?

  4. @SBML, I’m pretty sure I was specific about the benefit accruing to the owners, I’m entirely on-message regarding “businesses” being legal constructs, networks of contracts, whatever, not living, breathing entities that can “benefit” in a personal sense.

    That not all owners will move is neither here nor there. Plenty will do what they currently do – avoid the tax on the payments into their offshore holdings and evade it when repatriating to spend on their alpine villa.

    You then have a whole group of people reaping great benefits from having an orderly society (tax-funded) but contributing nothing to it (in terms of tax at least) while the workers find 50% or more of their hard-earned taken off them at the point of earning. If it’s enough to turn hardcore liberals like me into class warriors then there is something seriously fucking wrong.

  5. Tim Worstall has led the way in pushing the true economic nature of the firm, the company, into the thoughts of policy makers and even tax campaigners. A company is, in economic terms, a very useful vehicle for bringing together all of the vested interests in the trading process: capital, labour, suppliers, customers and even the State. All of these, including the State, have a legitimate interest in the share of spoils. In particular, his insistence on reminding us all of tax incidence means that high corporate taxation is off the agenda probably for a generation.

    His call for a tax on dividends instead of CT does indeed make perfect sense. It really wouldn’t matter in that case where an MNE tried to ‘hide’ its profits. At the the point the topco chose to distribute, that would be the point of charge. And indeed the incidence would then all be on capital.

    However, I believe he has made the case for very low CT rates rather than no CT at all. This is not just based upon the view that ‘I wouldn’t start from here, but we are here’. CT does provide an ease of charge and collection, a convenience as Tim says, that itself brings its benefits. As the company is a legal entity, it does present a legitimate chargeable entity.

  6. His call for a tax on dividends instead of CT does indeed make perfect sense. It really wouldn’t matter in that case where an MNE tried to ‘hide’ its profits. At the the point the topco chose to distribute, that would be the point of charge. And indeed the incidence would then all be on capital.

    No it wouldn’t. It’s still a fact that a return on capital would attract a tax, whether the same tax is applied as a CT or a dividend/CGT-tax. As you well know, retained profits used for actual investment is deductable and not subject to CT, so even with CT, the fact remains that only money intended for distribution are taxed in the long run. It would be disappointing if TW’s work in pointing out tax incidence turns out to be pointless, if the followers somehow still believe that incidence relies on who is the legal payer.

  7. The whole point of the current debate around corporate taxation is “where are you taxing the profits”, or rather “how do you tax the profits made in this country when they are simply transferred somewhere else”. And whether you tax the corporation on its profits or its shareholders on their dividends you have the problem of profit offshoring. And I really think that in the absence of some new international order on that, you will see walls to capital and investment put up to ensure that some share of those profits gets taxed where it is generated.

    I also think, and sure you might disagree with me, that a world in which ultimately most capital (at least in terms of company ownership) is in the hands of a few living in tax havens, living in splendid isolation from the costs of the societies they are making money from.

    To put it slightly differently, where capital is invested _from_ has an effect on its value to the owner of said capital, not just where it is invested _to_.

    At the very least if you allow the situation to continue, you have lost a powerful group in whose interests it is to advocate for lower taxation and more efficient use of the tax collected.

  8. JamesV: I don’t know if it was adressed to me, but I somewhat agree. The point about tax incidence is rather academic, and may not convince everyone, but the prospect of having ownership of capital, and even worse, concentrated groups of ownership of capital, with an advantage over less mobile owners (pension funds, small time investors), is not a good situation, and yes, it’s unpalatable to say the least. But I’d say the prospect of an effective global tax “alliance” or streamlining is more unpalatable, for reasons of freedom and sovereignity. Ofcourse the ultimate conclusion is to move towards land taxes, and reduce the rates for CT/income tax, and hence reduce the gains for evasion/avoidance, and accept that taxes on mobile factors in economic activity will always be subject to competition and, well, mobility, by it’s very nature, and have policy reflect this.

  9. Meanwhile Richard Murphy appears to be morphing, rather like Paul Krugman, into Good Richard and Bonkers Ritchie. (My many thanks to Tim Worstall for pointing out how people seem to morph in this way)
    The OECD report, based as it is on the paradigm of Worldwide CT, does highlight the problems of a methodology – system isn’t really the correct word- that was designed for another, pre-IT, age.
    I wholly agree with the OECD view that taxation of profits has become detached from profit-making activity. This is the key issue.
    However, it seems that Good Richard shares this concern. So, the OECD says “No or low taxation is not per se a cause of concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it.”
    Richard AGREES: “Again, this reflects much that I have argued. It is not low tax rates per se that makes a tax haven harmful, it is the secrecy that permits profit shifting into the tax haven without being detected that is harmful”
    So he actually accepts that low taxation isn’t harmful and that tax havens are acting legitimately when offering la ow tax rate. By extention he also accepts the idea of tax competition.
    It is therefore terribly unfortunate that Bonkers Ritchie destroys his good work by declaring, as he has today, that the UK’s reducing tax rates makes Messrs Cameron and Osborne effectively international tax avoiders. Richard Murphy should consider taking Bonkers Ritchie to an isolated Norfolk farmhouse and…
    Similarly Good Richard and Bonkers Ritchie seem to have fallen out over transfer pricing and the arm’s length principle. Good Richard appears to have been reading my comments on his blog very carefully; I truly welcome that Richard. Thus, when the OECD says “In the area of transfer pricing, the rules should be improved in order to put more emphasis on value creation in highly integrated groups” and “The rules to be developed will include a requirement that MNE’s provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template”
    Richard acclaims this, saying “Without using the term this appears to be an explicit endorsement of the demand for country-by-country reporting issued by the G8, and naturally I welcome that”.
    Leaving aside that it is unusual for an endorsement to be explict without being, well, explicit, it might well be a call for cbc reporting. However, these statements, coupled with the concern that tax charge is decoupled from profit-making activity, show that the OECD is conerned that PROFIT should be recognsied where it is made. Again, Good Richard appears to agree. In his recent debate with a group of parliamentarians he said ” …we must have country-by-country reporting – which is the one thing that the G8 really promised and which I first proposed a decade ago. This is a tool for investors and tax authorities alike that by publishing a separate profit and loss account for each place in which a multinational corporation trades…”
    So profit is the key. As intra-group transactions are what blurs the clarity of this, it follows as night follows day that the OECD is calling for transfer pricing rules to be robust enough for profit to be recognised where economic value is added. I emphasise again, Good Richard appears to agree. So now I ask, without applying the arm’s length principle, how are we going to get there? How can that separate P&L account be drawn up without the arm’s length principle? Good Richard has offered no alternative.
    Bonkers Ritchie has thethered his horse to a piece of raving insanity called Unitary Taxation. This ignores the arm’s length principle, ignores profit-making and value-adding, expressly refuses to accept a role for IP, the very thing that drives much if not most present-day economic commercial behaviour. INSANE!!!
    So, whilst not any sort of cure-all, the arm’s-length principle allows us to allocate profit between jurisdiction, a necessity for cbc. Good Richard understands this; Bonkers Ritchie is off howling at the moon.

  10. Sonic Johan

    Your first point is very well made, profits reinvested can indeed be relievable IF the CT regime provides relief for capital reinvesmtent (that isn’t an automatic feature of all regimes around the world and, even where these reliefs exist, they tend to relate only to certain reinvestment.)

    However, you second point: “It would be disappointing if TW’s work in pointing out tax incidence turns out to be pointless, if the followers somehow still believe that incidence relies on who is the legal payer” is plain wrong.

    I didn’t say that. By “legitimate chargeable entity” I simply meant that companies were convenient, reliable and so sensible taxpayers from whom to seek to obtain tax revenue. I get – and I would imagine every one of Tim’s ‘followers’ gets – that incidence is an economic concept, different from the legal payer. You have made very thought-provoking contributions – certainly I have had to stop and think quite hard. Don’t, however, stoop to condescension; it really doesn’t suit you.

  11. Ironman: fair enough, and likewise. I’ll also admit that the academic research for the incidence of CT vs. dividend taxation is mixed, some do actually indicate that dividend taxation do slant more towards owners of capital, and increase “progressivity”. But from a common sense perspective, I have a hard time accepting that the bulk of damage income taxes do will be improved by moving from the corporate to the personal level, and that any such benefits may very well be the result of tax planning and a reduced tax take, which is just as prominent in personal capital taxation as corporate taxation. That’s not to say that this is a bad thing overall, less taxes are indeed better, but there are equity (level playing-field type, not redistributive) issues we shouldn’t be comfortable with.

  12. It has just occurred to me that Ireland has pretty well done what TW has suggested – v. low corporate taxes, and I think some companies have managed to negotiate special rates. And it’s not so small that it can live on the company registration fees and a few tax lawyers.

    What has the result been? Good, bad, indifferent? Genuine question – I’m not insinuating that Ireland’s current mess is because of that policy, though I’d be interested if anyone thinks it contributed.

  13. Ireland’s mess certainly has nothing to do with low CT rates. Indeed Richard Murphy condemns it for stealing other countries’ tax bases, so it must be beneficial to Ireland.

  14. Ironman, indeed, my understanding is that the current mess is a result of a good old property boom + euro plus deciding not to be beastly to the Germans (bankers).

    But has it (low CT) had any effect? Does it just mean higher personal income tax? (From Wikipedia, they seem to have a minute nil rate band, but that be crisis related – or me misunderstanding.)

    Or has it done some real good?

Leave a Reply

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