We really do need to lower UK corporation tax rates you know: They're the highest in Europe
There's a rather sad misunderstanding about corporation tax in the UK at the moment. Everyone seems to think that we've got a low corporation tax here. When we don't in fact: we've got rather a high one. Oh, sure, we've a low headline rate: but that's very much the smallest part of corporation tax. The much more important part is what are the reliefs, the allowances, what can you claim back, what is actually taxable. Which gives us the effective rate:
It's very difficult indeed to describe the highest EU corporation tax rate as "low". The difference is, while we've a low headline rate, we also allow many fewer exemptions from having to pay that low rate (largely Nigel Lawson's work I believe).
And the importance of this is this:
The Autumn statement shows that economic stagnation is here to stay
One thing became clear today: economic stagnation is here to stay. There is no growth and no prospect of growth without a change of course that focuses on deregulation and targeted tax cuts. There is no trade-off between growth and deficit reduction. You can’t have one without the other.
The key is to go for private sector growth. Government regulation is smothering small and medium-sized businesses, and today’s rate relief announcement is not enough to help them. Employers' National Insurance is a tax on jobs and prevents the creation of over 500,000 jobs by small and medium businesses. It should be scrapped. The best way to stimulate the economy is to give small businesses a break.
The highlight of today’s budget is the rise in the tax-free personal allowance, which the Adam Smith Institute has long called for. It should be raised to the minimum wage level so that the poorest earners pay no tax at all. Scrapping of the fuel duty hike is a good thing, but we should not be too impressed at a Chancellor deciding not to raise taxes – we need cuts to regressive consumption taxes.
The government and media have focused on trivial changes in spending like the £5bn newly allocated to capital projects. Meanwhile, the state is borrowing that amount every two weeks – or another £331 million every day.
Deeper cuts to public spending are clearly needed to cut the deficit, but these are not possible without a fundamental shift away from socialistic monoliths like the NHS. The only way real cuts to expenditure can be made is by shifting to more efficient, market-based models of social insurance for healthcare and welfare. The claim that we can make substantial savings by ‘trimming waste’ is a lie – and we’re fast learning what a dangerous one it has been.
A refutation of the false propositions of the current tax avoidance debate
Multinationals pay taxes that UK companies also pay such as employer NICs or VAT.
Use by multinationals of infrastructure etc. provided by the UK government is perfectly legitimate as they make a major contribution to UK taxation. Moreover, that such an issue arises is simply an argument to eliminate state provision of infrastructure and thus avoid such 'third party payer' problems.
Multinationals have been accused of avoiding paying corporation tax, which is a tax on economic growth and should be abolished.
Corporations do not have a 'moral duty' to pay more tax than they are required to pay under UK law. Even if we were to assume that all UK tax laws are morally acceptable, the corporations concerned are not in breach of such laws. However, such corporations do owe a genuine duty to their shareholders to maximise returns. Remember that many shareholders are pension or insurance funds so you and I both benefit from increased returns and suffer for decreases.
The function of business activity is not to generate tax revenue. Any tax generated is merely a by-product of their success as businesses and is invariably an impediment to greater success. The function of firms is to satisfy the wants of their consumers. Higher taxation means that firms are less able to satisfy the wants of their consumers.
Higher taxation, whether by raising tax rates or by preventing firms in act legitimately to avoid tax, will ultimately result in higher costs passed onto the end consumer. This means either less consumption of the particular good being taxed, less consumption of other goods because they are foregone or less saving. Either way this leads to less economic growth.
Multinationals are paying taxes in other jurisdictions. If they were not, they would be caught by the rules on Controlled Foreign Companies and Transfer Pricing.
That multinationals are basing themselves in other jurisdictions is a clear indication that rates of corporate taxation in the UK are too high relative to other jurisdictions. If rates were lower — combined with other necessary supply-side reforms such as reduction of regulatory burdens — such multinationals would base in the UK and pay UK corporation tax.
To argue that the multinationals concerned should also pay corporation tax in the UK is to argue for the principle of double taxation - something that the large and complex array of international tax treaties specifically sets out to avoid. This would i) put multinationals at an unfair competitive disadvantage in the UK (possibly illegally?) and ii) potentially open UK-based multinationals to similar treatment by overseas jurisdictions.
Sun, wind and tax
In the old fairytale the wind and sun wagered which of them might get the man's cloak off. The wind blew with all his might, but the man fastened his cloak more tightly around him, so it stayed on despite the wind's full fury. Then the sun came out and the man took his cloak off.
In the modern version the Treasury turned on its full force. It employed extra civil servants to collect the extra taxes it thought were due. It imposed new penalties and threatened retrospective laws to make taxpayers conform to its will. But despite its fury, taxpayers clung tight to their accountants and lawyers, and moved assets and income offshore, and the Treasury was unable to part them from the extra resources it sought to remove. Then the Chancellor came out and introduced simpler and lower taxes, and people paid them because it was no longer worth the trouble of avoiding them.
Well, I did say it was a fairytale.
What is wrong with tax avoidance?
I was on Channel Four News commenting on so-called tax avoidance yesterday evening, putting across some points that I think are important to the recent discussion.
I take the view that nothing requires people or firms to voluntarily pay more in taxation than the law requires. Indeed, most try to minimize their taxes by offsetting their allowable expenses. Firms have a duty to their shareholders to operate efficiently, and this includes paying no more tax than the law specifies. This is tax minimization, not tax avoidance.
A firm like Amazon follows the rules of both the EU and the UK, choosing to locate in Luxembourg to take advantage of its benign tax rates. The EU single market not only allows firms to do this, it encourages it by preventing other governments from imposing extra taxes on such firms. Google similarly chooses to locate in the Republic of Ireland. Locating in one EU member state and paying its taxes gives access to markets in all of them. The single market was designed to ensure that.
Firms should not be blamed for minimizing their taxes. The people who should be blamed are the politicians who maintain tax laws so intricate and complicated that firms have to employ expensive teams of lawyers and accountants to navigate them. Taxes should be so low and so simple that people will neither seek nor need complex shelters. That would bring in more revenue, if done right, as well as making tax liability more transparent.
There is no level of tax that is somehow more 'fair' or more 'moral' than that stipulated by the law. It should be the laws interpreted by judges that decide what is right, rather than the opinion of media commentators and politicians. If law-makers do not like the present levels of taxes that are paid, they have the power to change the law, just as any firms that found the new levels too punitive would have the power to move elsewhere.
The whole discussion of so-called tax avoidance tackles the wrong agenda, in that the aim of it is to have government take in more taxation. Instead of trying to increase what government siphons off from the economy, we should be looking at ways of reducing it in order to create the conditions for growth. The whole debate is misconceived, pandering to envy of success, and can only harm the country's economic prospects instead of helping them.
Tax facts
Those who think that all our problems can be solved by taxing the rich more would do well to study this year's tax facts mentioned by City AM editor, Allister Heath, in Tuesday's edition.
1. The top 1% of earners earn 10.8% of all income, but will pay 24.2% of all income tax.
2. The top 10% earn 33.2% of all income but will pay 55.3% of all income tax.
3. The top 31,000 individuals (earning £0.5m+) will pay £14.8bn, which is more than the £13.9bn paid by the bottom 13,600,000 people earning below £20,000 pa.
4. Those earning £0.5m+ per year pay 43-44% in income tax, plus National Insurance plus indirect taxes. The very top 2,000 earners pay on average £2m each in income tax alone.
These facts are sobering, but a real injustice comes from the fact that those earning the minimum wage (for a typical working week) have income tax and National Insurance taken out of that minimum wage. Those on minimum wages would earn a 'living wage' were it not for the money taken from them by government. It seems wrong that people struggling to get by on the minimum wage should lose some of that meagre sum to government.
Yes, MPs really are trying to give us lessons in morality
Executives of Starbucks, Amazon and Google have been hauled in front of the Public Accounts Committee to face questions about their alleged UK tax avoidance practices. Margaret Hodge, Labour MP and the chair of the committee made her feelings clear by telling the executives: “We are not accusing of you being illegal, we are accusing you of being immoral.” Given the MPs recent track record, I am not at all sure how wise it is for any politician to give lectures about morality. Nevertheless, it does make good political theatre if the recipient of a lecture on morality is a multinational corporation, especially an American one.
I can’t comment what would constitute a just, or a morally acceptable, rate of tax. Thomas Sowell, a respected economist and social theorist also had problems with this same issue: "Since this is an era when many people are concerned about 'fairness' and 'social justice,' what is your 'fair share' of what someone else has worked for?" I don’t know if Sowell was ever able to find a definitive answer to his question.
Similarly, I too will have to leave this problem for our politically elected representatives to ponder about.
However, what I have to take issue with is the accusation levied against Amazon at the Committee hearing that the firm was somehow responsible for putting high street booksellers out of business by “playing the system.” Starbucks has similarly been accused for being responsible for the demise of independent coffee shops up and down the country. This is absolute poppycock. These firms’ global success can’t be explained by the amount of corporate tax they do or don’t pay in the UK. These firms are successful because they produce an offer that is perceived valuable by consumers. Starbucks has a unique “experience” that consumers prefer over other coffee shops’ offer, and Amazon’s strategy of providing unparalleled choice at a lower price resonates with those who “love a good deal.” It is the consumer whose preferences, combined with the inability by other firms to provide competing value that determine the winners and losers in a competitive marketplace.
Furthermore, the accusation of immoral behaviour leveled against these companies is not only inflammatory, but it also makes a presumption of intentionality. The directors of these firms, as agents of the shareholders, have a fiduciary duty to maximize shareholder wealth on a sustainable basis. The sustainability of wealth-creation is an important concept in this context. Any profit-seeking firm must balance the often-conflicting interests of the various stakeholder groups that, in addition to the shareholders, include employees, suppliers, customers, and the communities that they operate in. It is this balancing act, often captured under the umbrella term, corporate social responsibility that allows the firm to turn a profit on a sustainable basis, thus creating shared value for all key stakeholder groups.
According to yesterday's London Evening Standard, Margaret Hodge has backed a call for direct action to “punish” these firms after they had failed to convince the Public Accounts Committee about their tax affairs. "I think one should boycott these companies. I do actually think that is the right thing to do," she said after the Committee hearing.
In a free country, Mrs. Hodge has every right to call for a boycott and we all are free, at least for the time being, to choose and decide our patronage. In turn, the firms have to take into account the public sentiment, its impact on revenue generation, and balance these with the interests of other stakeholder groups. However, ultimately the choice has to remain with us, as consumers, to decide whether we value the choice given to us by these firms at a given price, and whether we perceive them as good corporate citizens. It is not for the politicians to make moral judgments on our behalf about companies that have not broken any laws.
Denmark admits its fat tax failure
The world’s first fat tax will soon also be the first to be abolished. Denmark has taxed saturated fats since October 2011, and the experiment has been a failure. Danes are worried that the tax has increased food bills (which was the point of the tax) and that it could be threatening the food industry. One poll found that 70% of Danes felt the tax was ‘bad’ or ‘very bad’ and 80% said it had not changed what they ate.
At the same time, fat prohibitionists tell us that what Denmark really needed was a much higher tax to have the desired effect. Multiple studies find that a tax as high as 10% (much higher than the Danish tax) would reduce population bodyweight by less than 1%. Most of us tend not to change what we eat based on a change in price — foods like butter and bacon are relatively price inelastic. To get people to change their behaviour you have to set punitively high rates.
It is a good idea to question why the health-obsessives are going after saturated fats to begin with. Many believe that a good diet includes saturated fats, as they have been linked to increased testosterone, boost the effects of omega-3 fatty acids, and improved immune system function.
Simple economics tell us that when you tax something, like saturated fats, enough to cause a change in behaviour then their consumption will fall in favour of a substitute. In most cases, that substitute will be carbohydrates. The nutritional science is far from settled on whether carbohydrates are worse for us than other macronutrients (protein and fat). Politicians are unlikely to know better. The tax on fat could be making the 20% of Danes that changed their diets less healthy. That the impact of the tax is largely unknown is a good enough reason not to mess with the food on our plates.
Of course, there is a more fundamental liberal point. Why should we be coerced to be healthy? If someone decides that they prefer Danish bacon once a week to the last (probably quite uncomfortable) five years of their life, that certainly isn’t a ‘wrong’ choice. It is hard to coerce ‘healthy’ behaviour, and government should not try to. Sadly, politicians know that they can appear to attack the scapegoat of the unhealthy citizen, while taking more money from our pockets.
The wrong agenda
There is a damaging focus on taxation instead of growth. Media and politicians, egged on by ideological enemies of business and markets, are talking about ways of making corporations and 'rich' individuals pay more in taxation. Tax avoidance and use of the legitimate means people use to reduce their tax liability are being denounced as wicked, and ways are being sought to curb this activity.
The emphasis is totally wrong. Those who think the economy would be in better shape if more of its resources went to government are simply wrong. Government does not use those resources as wisely as private citizens do. It neither spends nor invests as effectively. It is prone to vast wastage and to the direction of expenditure to serve the ends of politicians rather than those of private citizens.
The agenda is misguided. Instead of concentrating on ways that would give government more of our resources, it should be focused on ways to allow us to generate more resources. Investment and job-creation should be made more attractive by a policy of lower taxation and lighter regulation. If it is easier and more rewarding to engage in economic activity, people will do more of it. The aim should be to have fewer resources directed to government, and more of them to growth.
Why taking the poor out of tax makes economic and moral sense
Today is the start of 'Living Wage Week', the promotional week run by the Living Wage Foundation to plug their campaign to get firms to pay staff no less than £7.20/hour (£8.30/hour in London). I'm broadly supportive of this sort of thing -- consumer pressure is a much better way to get things done than government fiat, and I respect the fact that the Living Wage Foundation has largely avoided lobbying government and calling for a mandatory Living Wage.
Sadly, not everyone has been so self-restrained. It looks as if Labour is going to call for a massive hike in the National Minimum Wage (NMW) to meet the Living Wage rate. To contradict this sort of thinking, we've released a short paper today outlining some of the empirical evidence surrounding rises in the minimum wage, which show a strong correlation between rises in the minimum wage and drops in employment. It stands to reason -- if you impose a price floor on the price of labour, there will be a shortfall of demand for labour. In other words, there will be unemployment. While it's true that this relationship isn't fool-proof -- there are many factors at play in any economic phenomenon, and it would be silly to claim that any one policy will certainly have a particular effect in a complex world -- no responsible legislator should risk raising unemployment.
Nevertheless, the problem of people working on such low pay that they can barely afford to live is a very real one. In the paper, I point out (as Tim Worstall has, many times before) that the pre-tax minimum wage is actually greater than the post-tax Living Wage. In short, the thing that's holding people on the minimum wage below the basic living standard that Living Wage campaigners want is tax. Lift the tax-free personal allowance threshold to the minimum wage rate and you stop them paying tax, effectively giving them a Living Wage without any of the problems associated with raising the minimum wage rate. People earning less than £100,000 would get a bump in their take-home pay, too.
This would cost about £14bn above the government's commitment to raise the threshold to £10,000, but it would probably cost less than that given the reduced welfare bill and increased economic activity associated with tax cuts. The Keynesian left should support this, too -- this targets the wallets of low- and middle-income earners, and so (in the Keynesian worldview) it should have a stimulatory effect in the same way that government spending is supposed to.
It's a simple policy, but one that makes a lot of sense. Stop taxing the people at the bottom of the earnings ladder, and you'll have gone a long way to solving the low pay problem.