Idiocy, idiocy

The way we tax companies needs to be turned on its head. Abolish taxes based on a company’s profits and replace them with taxes levied on their turnover.

Apple makes a 45% gross margin, Facebook a 50% net margin near enough. Walmart, Target, Sears, make 2%, 1% or so and sometimes negative margins.

Yep, taxing turnover’s the right way to go.

Idiot.

Ed Conway is economics editor of Sky News

Jeebus.

66 thoughts on “Idiocy, idiocy”

  1. I’m curious as to how he became economics editor of anything. According to Wikipedia, he read English at Oxford; he later did a masters in Public Administration at Harvard. Perhaps the latter covered the basics; but (only) a little knowledge is a dangerous thing.

  2. Isn’t tat VAT?

    Kinda, but more like the old sales tax and raised at every link in the chain.

    It’s an utterly idiotic idea – if a turnover tax were a good idea, countries other than totalitarian hellholes like Cuba would already be doing it.

  3. Presumably if a company has no turnover at all, only expenses, it’ll be entitled to a tax rebate, year after year. Hmm … T P Fuller Ltd, Procrastination Consultants.

  4. Doesn’t that just close down vast swathes of the economy? Anyone with a profit margin of less than the tax rate, or indeed a profit margin somewhat above the tax rate (to allow for some retained profit) is going to have to shut down pretty sharpish? Anyone making a loss is screwed?

  5. “Doesn’t that just close down vast swathes of the economy?”

    Yes. Anyone not currently making a decent margin would be completely nailed.

  6. So Much For Subtlety

    abacab – “Yes. Anyone not currently making a decent margin would be completely nailed.”

    I actually proposed this here a few years back. And our Kind Host did not like it then.

    But suppose someone who is not making a decent margin closes down? The rest of the industry will soon be making a decent margin and they won’t. We like carbon trading because it removes the least efficient users of carbon. Isn’t this removing the least efficient users of capital?

    As much as I dislike Apple and Facebook, they are the New Economy. Walmart is a tougher case, but Target and Sears are the old dead economy. Let Schumpeter’s Creative Destruction loose. Close them down if their marginals are so small. They are going to close anyway. Let Apple and, God Help Us, Facebook grow.

    After all, in the end profits are quasi-fictional. They are what a company wants them to be. There are all sorts of ways of hiding or disguising them. Above all the very idea of profit lends itself to abuse – if you spend the share-holders’ money on nice art for the boardrooms and Executive meetings in Rome, that doesn’t count as profit. But if you have to pay on your turn over the share-holders will be asking pretty sharp why they need such an expensive building in the centre of London.

  7. Imagine a chain of companies manufacturing a product in stages.

    Company A buys £10m of raw materials, processes it, and sells it to company B for £11m.

    Company B buys £11m of basic materials, processes it, and sells it to company C for £12m.

    Company C buys £12m of basic materials, processes it, and sells it to consumers for £13m.

    Total turnover to be taxed from all three is 11+12+13 = £36m.

    Now suppose the companies merge. There is now a single mega-corporation that buys £10m of raw materials and sells it to consumers for £13m. Total turnover is £13m.

    Exactly the same business. Exactly the same profit margin. Totally different turnover.

    Net result? It would destroy all the small companies doing one bit of the supply chain well, and massively favour giant mega-corporations able to do everything for themselves.

  8. “But suppose someone who is not making a decent margin closes down? The rest of the industry will soon be making a decent margin and they won’t. We like carbon trading because it removes the least efficient users of carbon. Isn’t this removing the least efficient users of capital?”

    Regardless of the theoretical benefits, I think the real world practical outcome should be considered more – inefficient users of capital close. Other close the low margin parts of their businesses and introduce more efficient ways of working (which will usually involve less labour and more machines) in the rest. Result mass unemployment, reduced demand, lower profits, lower margins, more businesses not able to pay the turnover tax. In other words a death spiral of the entire economy.

    Now if you were the type of psychopath didn’t mind destroying the lives of millions and creating misery for the entire nation for years, maybe decades, then yes, a more capital use efficient economy might (might) emerge from the wreckage,that eventually might be ‘better’ than what preceded it. But is it worth it?

    There’s also the fact that in order for the remaining firms to prosper and make increased margins, price would have to rise. Supermarkets would have to charge more for the same things for example. So we would all be worse off, as the basics of life get more expensive. The thing is, we want ALL businesses to be low margin ones, that gives us (the consumer) the best amount of stuff for our buck. We want companies to be able to make just a few pence per item on billions of items, we pay less that way.

    I can’t actually see a tax more likely to destroy the entire economy inside a few years than a turnover tax.

  9. @Samuelbuca – it already happens in a way… the “apple tax”… same hardware but dumbed down UI… we just need a few more to start doing this…

  10. As others say, it’ll simply shift the supply / demand curve as prices are adjust to compensate (low margin “sectors” are not going to simply stop, supply and demand got them to “low margin” in the first place).

    But NiV’s point is a more serious one – unless rebates are to be received for offsetting supplies. But then we already call that VAT.

  11. @Jim

    Th effects you describe are similar to a recession. If you see a recession as a propensity not to spend (for whatever reason) a tax that abstracts money from the economy at the point is spend would mimic the effect exactly.

  12. Jim,

    “So we would all be worse off”

    If it was tax neutral with regard to the new turnover tax rate (yes I know, ha ha), some prices would go up and some would come down as the various sector supply / demand curves all found new equilibriums?

    Competing with overseas is also more complicated. UK companies selling abroad – would need to be exempt? Otherwise can’t compete selling abroad with overseas companies. And would need to be charged to overseas companies selling into the UK market, or UK firms are at a disadvantage in the home market? Looks more a more like VAT?

    Yes, sure, it’s a crap idea anyway given we are already have VAT?

  13. Is it really ‘less efficient’ to have lower profit margins? Surely competition cuts the chance to make excess profits?

  14. It’s funny how Times journalists condemn the likes of RT and Sputnik for hosting flat-earthers and other cranks. Then they go and publish garbage like this. The mainstream media is an utter joke from top to bottom.

  15. You can tax profits because you can be sure the company has the net cash to pay the bill. If you ask companies to pay tax on revenues, many won’t have the cash. They’d either have to borrow it, or go bankrupt.

  16. Solid Steve 2: Squirrels of The Patriots

    Let Apple and, God Help Us, Facebook grow.

    Pfft. Liberal.

    I’m very interested in seeing Facebook and Twitter harmed. Not because they’re making too much profit, but because we’re in a state of political, cultural and demographic total war. And Big Tech, particularly the social media companies, are on the side of our enemies.

    Tax them till the pips burst, regulate them till their blue hairs fall out, harry them with ten thousand feral attack lawyers, burn them to the ground, salt the earth, drive them before you, and hear the lamentations of their soyboys.

  17. VAT would be one way to mitigate the stupidity, but it’s not the same thing. VAT is a tax on the difference between turnover and expenses, not a tax on turnover.

    But the campaign for MOAR TAX isn’t talking about any differences! They’re citing just the turnover itself as their justification. If this is the right measure to decide how much tax a company should be paying, then that implies that you ought to be taxing turnover. Which would have the effect of paying big companies to buy up all their small suppliers, to reduce the number of inter-company interfaces where taxes can be charged.

    Of course, the campaign for MOAR TAX would just see that as tax evasion, and demand that mergers be banned forthwith, and corporations be banned from owning more than a certain fraction of their supply chain, and so on. Stationary bandits are only interested in one thing – grabbing control over more and more of the wealth other people have earned, and blocking all the escape routes from their bottomless rapaciousness. Any unfortunate consequences of them squeezing the wealth out of the economy until the pips squeak can be blamed on ‘the rich’.

  18. “We like carbon trading . . .”
    Rilly? IMHO it’s just a latter-day variation on catholic indulgences, where you get to do what you like as long as you can afford to pay.

  19. So Much For Subtlety

    Jim – “Other close the low margin parts of their businesses and introduce more efficient ways of working (which will usually involve less labour and more machines) in the rest. Result mass unemployment, reduced demand, lower profits, lower margins, more businesses not able to pay the turnover tax. In other words a death spiral of the entire economy.”

    Let us posit the invention of a miracle device. Let’s call it an internal combustion engine. It might force all sorts of people to introduce more efficient ways of working. Involving fewer workers and more machines. Who would claim that the inevitable result would be mass unemployment, reduced demand etc etc? In fact such a device might kick off a sixty year cycle of economic growth that totally reshaped the world’s economy.

    “Now if you were the type of psychopath didn’t mind destroying the lives of millions and creating misery for the entire nation for years, maybe decades, then yes, a more capital use efficient economy might (might) emerge from the wreckage,that eventually might be ‘better’ than what preceded it. But is it worth it?”

    Damn that Henry Ford! Time to ban all innovation?

    “There’s also the fact that in order for the remaining firms to prosper and make increased margins, price would have to rise.”

    Unless it is tax neutral. The same people paying the same taxes as before won’t lead to price rises.

  20. Why does an economics editor still think you can tax a company?

    Why does he think it’s a great idea to tax wealth creation?

  21. “Let us posit the invention of a miracle device. Let’s call it an internal combustion engine. It might force all sorts of people to introduce more efficient ways of working. Involving fewer workers and more machines. Who would claim that the inevitable result would be mass unemployment, reduced demand etc etc? In fact such a device might kick off a sixty year cycle of economic growth that totally reshaped the world’s economy.”

    Which was introduced into the economy over several generations, a life time even. They were still using horses to plough fields up to WW2, many people still used bicycles until the 70s, steam trains continued to the 60s. So the improvements were gradual, and the disruption lessened by the slow pace of introduction. Changing the taxation system in one go is not the same at all. You get all the negative effects now, and none of the benefits until the future. Not a way to run a society IMO.

  22. TN

    “You can tax profits because you can be sure the company has the net cash to pay the bill. If you ask companies to pay tax on revenues, many won’t have the cash. They’d either have to borrow it, or go bankrupt.”

    You’re right, but an Interesting thing is – it’s easier for a company to manage falling turnover if the cost base is mostly variable (gotta be ruthless and quickly, and often with people, sure). And this, like a profit tax, would be variable (albeit on turnover – much like other variable costs of sales).

    Much harder is a business with a higher percentage of fixed cost, eg a big retail rental lease say on a shop. Falling turnover would hit that business far more quickly.

  23. UK Plc unilaterally imposing such idiocy would be economic suicide. Seriously. There’d be nothing more than megacorporations with their entire suppy chain alpha-to-omega in house left in the UK, and everything else would bog off abroad where such idiocy does not abound.

  24. I can’t read past the first paragraph because paywall, but I did spot Facebook in his line of fire?

    If it really is the “high margin” companies that he’s pissed off about, then yes obviously, he really has lost it.

    Because Tim’s point. If you tax the turnover, they’ll pay less tax pro rata, not more (because if tax neutral, their turnover % rate will be less than their current equiv Corp tax rate as a % of turnover).

    Unless he’s completely barking and imagines that a turnover tax rate suitable for the likes of Facebook (consolidated PBT 50%!) works for a whole economy?

    Hmmm – that Times paywall is clearly stonkingly good value…

  25. Whenever one of these idiots has an idea about turning something on its head, or ‘challenging the established thinking’, do they ever stop to think why, out of the hundreds of possibilities for the configuration of the thing they are attacking, we settled on the one we did?

    Or are they so egocentric that they genuinely believe that they have spotted something millions of people over how dress of years haven’t?

  26. If you tax turnover, then you are taxing a business for simply existing. All business, even failing ones, have some turnover.

    And since a business can be a large multinational company, a successful family firm or a sole trader making cakes to order, you would be putting a tax on any activity in the country that involves the buying and selling of goods or services. I suppose that would include prostitution.

    Sounds like a protection racket run by criminal gang.

  27. Hold up. I thought we agreed that we want to tax companies where they generate profits, which in the case of Apple, Facebook, Google, etc, is in the US. Not where they make sales in the rest of the world.

  28. Just treat it the same as any other tax or expense of the business. Get the buyers to pay it.

    People often forget a business does not have money of its own.

  29. Bloke no Longer in Austria

    As any fule kno…
    If one is a one-man or family company, then it is not in one’s interest to make a huge profit. Just about everything goes down as expenses and capex. Why make a profit when I had to give a chunk of it to that one-eyed goon Brown or oily Osborne ?
    But like a good boy I paid PAYE and NI and even didn’t claim back all the VAT that I could.
    If there was a turnover tax, I would have emigrated to BongoBongoLand because it wouldn’t have been my while working here.

    And another thing. I was at one comoany a few years back and was chatting to the accountant brought in to do the books. Innocently i asked him whether it was possible to make losses greater than the company’s turnover. “You’re working in such a company and they had better do something about it…” Thez didn’t last long.

  30. New companies are often loss making in their first years.

    Paying tax on turnover would really help that. An extra expense eating all the investment.

    Oh, no, wait. They’d put up prices so their customers could pay the tax. That would build market share I am sure.

  31. “Oh, no, wait. They’d put up prices so their customers could pay the tax.”

    Or their customers would buy cheaper imports. Our experts batting for Britain yet again!

  32. — “Expect he’ll be in favour of taxing Sky on turnover, then.”

    The BBC would also be caught. And the tax-avoidance vehicles used by its “stars” (sic.)

    Every non-profit organisation must inevitably be liable to taxation of its turnover.

    The country would be so rich with all this tax income most of us could retire and live comfortably on the coast.

    Thanks, Ed. You’ve a fucking genius. You should definitely patent this idea.

  33. Bloke in North Dorset

    NiV,

    For the left, and a large number of so called opinion formers* and policy makers, that consolidation would be a feature not a bug. They still view the economy as working best when large companies employed 1000’s of unionised workers all doing the same job.

    They can’t get their heads round the idea that the modern economy is all about relatively small, in employment terms, companies specialising and supply goods and services to other relatively small companies. Even the end company that produces the finished good, such as car makers, car markers don’t employ that many people compared to the past.

    *I presume the Thunderer still thinks of itself as an opinion former

  34. Bloke in North Dorset

    “Every non-profit organisation must inevitably be liable to taxation of its turnover.”

    If it drives those smug bastards who make a nice living running “not for profit” business to the wall then it ain’t all bad.

  35. Just to flesh some numbers – a 5% turnover tax would cost Rolls Royce £685m (turnover 13.7bn), compared with underlying profits of 813m in 2016. So a tax rate of 84%. Whereas Google UK had revenues of £4.92bn, and would pay 246m. Sainsburys had revenues of over £25bn, and would be due to pay more than £1.25bn, on profits of £587m. Amazon’s UK sales are a bit over £6bn, so its tax bill would be £300m. A rate of 1% would raise £50m in tax from Google, so hardly a kings ransom, but still demand £250m from Sainsburys, a 50% tax rate on their profits…….

  36. JIm.

    Are you trying to neutralise (tax take), or not?

    If an average “PBT % of turnover” for the economy as a whole is say 10% (it’s not, but for this purpose), and Corp tax rate is 20%, then that’s a turnover tax rate of no more than 2%.

    5% is way too high (or it is not tax neutral?).

    Unles the idiots want to assess it by sector!

  37. “then that’s a turnover tax rate of no more than 2%.”

    ie no more than a couple of pence on prices (less what they save on Corp tax).

  38. “replace them with taxes levied on their turnover”

    So, basically he’s in favor of destroying every retail company of any size in existence.

  39. @PF

    Have you just made up a number (10% profit for the economy as a whole) and then used that as a justification for a turnover tax rate of 2% which is reasonable as it is no more than “a couple of pence on prices”?

    Don’t suppose it’s occurred to you that;

    Using made up numbers isn’t a convincing argument

    If it were that simple to add a couple of pence to prices everyone would be doing it and

    It is only “a couple of pence” if something costs £1.

    Honestly it’s like justifying killing every man under 5′ 7″ because the average man is 5′ 8″ so it won’t result in any deaths.

  40. Meanwhile BBC “whine in the morning” is that every child that needs one doesn’t have a team of specialists sat in an ambulance outside their house 24/7/52 just on the off chance they are needed. “It’s obvious” says concerned Rachel Burden “The more the NHS spends the more it actually saves.” Nods all round in the studio.

    It’s like those people whining that the head of the airline hasn’t met with them at the airport and taken them for a coffee to explain exactly why their plane is delayed.

  41. A major problem here is that a tax on turnover would basically require something near to *company by company* level regulation.

    The profit made on turnover for a giant like Walmart is going to be different from the profit made on turnover for a major steel manufacturer which will be different for Netflix which will be different for Google which will be different for a medium sized grocery chain which will be different from a mom-and-pop convenience store.

    And as for ‘removing the least efficient firms’, firms that are making low profits *are already as efficient as they can be* – absent some new technique being developed – its just that all their competitors are also incredibly efficient and ruthless, cuththroat competition drives price (and profitability) down.

    ‘High profits’ is relative and, again, differs from sector to sector and even by size of company within a sector.

    To go to a tax on revenue would, effectively, be turning the nation into a fascist state as there would have to actually be government agencies dedicated to individual economic sectors, trying to figure out the ‘best’ tax rates within their little demesnes.

  42. &AndrewC

    ” “It’s obvious” says concerned Rachel Burden “The more the NHS spends the more it actually saves.””

    That level of idiocy cannot be anything other than the result of botched surgery.

    Was her argument that, in order to meet a savings target of 10% or 3Bn, the gvt needs to fund them by a further 30bn?

  43. @John Square

    Something along those lines. She can’t seem to grasp that just because in one particular situation it would have saved money to have had a pre-emptive contingency plan in place if they had known in advance the plan would be needed, it doesn’t mean that those contingency plans should be in place for every single possible situation.

  44. So Much For Subtlety

    Agammamon – “A major problem here is that a tax on turnover would basically require something near to *company by company* level regulation.”

    Why? A flat 1% of turn over seems fairly uniform to me.

    “The profit made on turnover for a giant like Walmart”

    But profit is not turnover. So it is irrelevant. What we do now is tax what Wlamart pleases to call its profit. Which, as you say, varies from company to company. And yet we do it without too much trouble or the arrival of Stormtroopers.

    “And as for ‘removing the least efficient firms’, firms that are making low profits *are already as efficient as they can be*”

    You mistake my meaning when I say efficient. Yes, Walmart is highly efficient at getting goods to stores at low prices. But if people are not making profits, they are not using their capital efficiently. It makes more sense to take money from dying industries and invest them in growing ones. It is better for all concerned if we do not invest in companies making 1% margins and we do invest it in companies making 50% margins. Now if the tax system encourages the former, it ought to be changed to encourage the latter.

    “‘High profits’ is relative and, again, differs from sector to sector and even by size of company within a sector.”

    And yet we manage to tax it without Fascism hitting these shores.

    “To go to a tax on revenue would, effectively, be turning the nation into a fascist state as there would have to actually be government agencies dedicated to individual economic sectors, trying to figure out the ‘best’ tax rates within their little demesnes.”

    It sounds pretty much like the present income tax system. What is your logic for this interesting claim?

  45. “Yes, Walmart is highly efficient at getting goods to stores at low prices. But if people are not making profits, they are not using their capital efficiently. It makes more sense to take money from dying industries and invest them in growing ones.”

    You’re confusing capital investment with material costs.

    A big supermarket chain will own a number of warehouses, shops and lorries and a little bit of stock on hand (capital investment), and it will then buy lots of manufactured goods (material costs) which it will sell at a slightly higher price to cover utilities, maintenance, employee costs, (costs of doing business) and to provide return on the capital (profit). But they don’t have to provide a big return on all the money that went into buying the stock, only on the capital.

    If a supermarket is not re-supplied, it will run out in a few days (witness the bank holiday rush). So they only hold a tiny fraction (a few percent) of their annual throughput as stock in hand. Their profits as a proportion of turnover are irrelevant. What matters is their profits as a proportion of capital invested. And if that wasn’t as good as for any other industry, nobody would invest in them.

  46. Income tax is not a turnover tax. You get deductions from it. Allowances. You are taxed on your income less your deductions.

    A turnover tax inevitably hits high turnover low margin businesses more than low turnover high margin. It’s an absurd and illogical basis on which to tax. Three businesses as manufacturer, distributer and retailer could have a combined turnover 3 times that of a company that did all three. On a company model that at the moment is based on all ‘profits’ being distributed as salary to the business owners so there are no company profits. Suddenly one chain is having to find tax from nothing and the other three times that.

    If people cannot see the utter absurdity of such a situation they just don’t understand it.

  47. Bloke in Tejas in Normandy

    “Income tax is not a turnover tax. You get deductions from it. Allowances. You are taxed on your income less your deductions.”

    It’s pretty much a turnover tax. I can’t deduct my cost of living; I can only deduct a small fraction, pre-designated by the state.

  48. No. Because turnover for a business and income for a person are two entirely different concepts. You’ve even said it yourself. The deductions allowed from turnover are deductions related to the turnover. The deductions from salary are limited and for the most part completely unrelated to the income. You cannot possibly look at £100k on turnover and £100k in salary and think there can be any link in the way those two should be taxed.

  49. Jim – amazon’s UK turnover is around 600 million.
    You are thinking of the UK turnover of a company based in Luxemburg. Any turnover tax there would be paid to the government there, not UK.
    Its quite possible if you have purchased from amazon itself on the UK site that you have never purchased from the UK company.

    Same with purchases from other overseas companies. The overseas governments would benefit, not UK.

  50. Andrew C

    Have you just made up a number (10% profit for the economy as a whole) and then used that as a justification for a turnover tax rate of 2% which is reasonable as it is no more than “a couple of pence on prices”?

    No, not a justification – I don’t agree with it, and I have said that (!) – simply doing some illustrative sums…

    Don’t suppose it’s occurred to you that; Using made up numbers isn’t a convincing argument

    Repeat – I’m not putting forward an argument..;) I don’t actually care if the average is 5% (1 pence in the pound) or 15% (3 pence in the pound), it was simply an illustration.

    If it were that simple to add a couple of pence to prices everyone would be doing it and

    Actually, prices (in supermarkets for example, and elsewhere) do frequently whiz up and down by more than that (by product) and for all sorts of reasons.

    It is only “a couple of pence” if something costs £1.

    Yes, obviously, it’s a common enough usage style – meaning “pence in the pound”?

    Honestly it’s like justifying killing every man under 5′ 7″ because the average man is 5′ 8″ so it won’t result in any deaths.

    Behave yourself..:)

  51. “It’s pretty much a turnover tax. I can’t deduct my cost of living; I can only deduct a small fraction, pre-designated by the state.”

    But your cost of living was not an expense incurred in making your income.

    In many countries you can indeed deduct the cost of getting to work, and also any other expenses relating to self-employment income (main or side-income). Just cos the UK doesn’t do this any more doesn’t change the fact that income tax is closer to corp tax than to a “turnover tax”.

  52. Also, you could, conceivably, raise corp tax at income tax rates. It would suck, but it could be done.

    On the other hand, unless you’re Cuba and hence a totalitarian hellhole, you couldn’t possibly raise a turnover tax at income tax rates.

  53. Easy enough for a company to simply shift abroad. I daresay there are plenty of EU countries that would love to have UK companies based there, paying corporation tax there…. paying head office wages there… paying for multiple sites even.

  54. I was surprised to learn from French colleagues that the cost of their season tickets (already about 30% of the UK cost per km) is tax deductible as are lots of other expenses ‘necessary to perform their job’. Of course, they pay a substantially higher rate than in the UK on their income after expenses.

  55. Sales taxes are usually retail and raised on the buyer, and collected and paid over by the seller, for rather obvious reasons. VAT is similar, but seeks to raise it through the supply chain on the value added. But it is poorly executed, and the exceptions make it a minefield. It is easy to come up with fucking stupid ideas, with no regard for the consequences. Our MPs do it all the time.

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