Err, no, this is a solution to the problem being described, not a problem in itself

I have promised Madsen that I won't talk about Richard Murphy here too often. And this is one of those "not too" moments for he's provided us with a target rich environment. Murphy is arguing that corporations are piling up cash, cash which they don't know what to do with. Therefore mutter mutter higher taxes!

One problem with this is that Murphy's response to everything is as with the Underpants Gnomes, "this, therefore, mutter mutter, higher taxes!". But in this instance we've a graver logical error to explain:

The first is that the tax system encourages it. In the US in particular, but in other states too, the tax system encourages profits to be recorded and retained in tax havens.

Yes, this is absolutely true. The US has one of the highest corporate tax rates in the world and US corporations do indeed park large portions of their foreign profits offshore in order not to pay it. This also means that they cannot distribute this cash to their shareholders via either dividends or share buybacks. It is indeed an explanation for why there are such large cash balances in corporates (some $1.7 trillion of the 2.8 trillion being complained about in fact).

Third, they do nothing because they have no clue what to do with their cash.

This is ascribed to their not knowing how to innovate: and I'm willing to go along with that. Innovation generally comes from new market entrants, not from established players.

So, that’s why cash is accumulating. What to do about it? The obvious answer is that we need a progressive income tax. As profits increase so should the corporate tax rate. The IMF has warned of growing inequality around the world. This cash fuels it. There is a need to tax it to reduce that inequality. The problem is, of course, that at present the cash is hidden away from tax. The answer is the one that I, the Tax Justice Network and others have promoted, which is unitary taxation. This taxes global corporations as if they are single entities, so wherever their cash is located it will be within the scope of a tax charge. Second, we may need to consider specific taxes on excess cash holdings. One of the reasons for tax is to correct market failings. It is a market failing that a corporation can accumulate too much cash because of monopoly power. An excess tax charge would correct this. The time for it has obviously arrived. Third, tax haven abuse needs to be tackled, of course, but so does the shift in corporate tax systems towards territorial taxation need to be addressed. The UK is positively encouraging this trend towards offshoring cash unproductively under George Osborne. That is absurd.

Therefore, mutter mutter, higher taxes!

Except there's that glaring error there about territorial taxation systems. As above, the majority of this corporate cash is sitting on the offshore balance sheets of US companies. And they won't bring it onshore and won't distribute it to shareholders because they would then have to pay that 35% on it. But in a territorial tax system foreign profits don't pay tax at all when they are repatriated. That's actually rather the point of a territorial system. Apple's profits in Europe simply don't get taxed by the US tax man.

So, therefore Apple can pass those profits through to investors. Who might spend it (Keynesian stimulus!) or pay taxes on their income or possibly even invest it in new firms capable of innovation.

That is, a move to territorial tax systems solves, entirely, the very problem that Murphy is complaining about. It shifts those cash reserves from the corporations who don't know what to do with it to the investors who quite probably do have an idea of what to do with it.

And yet, note, he's claiming that the solution to his problem is exactly the thing that should not be done.

Now, I've had fun over the years with various of Murphy's ideas but we must remember that he's not entirely a figure of fun. He really is trying, with his friends at the Tax Justice Network and the like, to determine how the entire international tax system should be changed. And yet he's using this sort of logic I've described above to do so.

Remember, a territorial tax system stops companies piling up profits offshore, for a territorial tax system means that they can distribute those offshore profits to investors. Therefore Murphy is claiming that we must not have a territorial tax system in order to stop companies piling up profits offshore.

Eh?

Reform of the international tax system is one thing but might we ask for at least a modicum of logic in the proposals being put forward?

The effects of abolishing corporation tax

As you all know I'm a great believer in pushing that corporation tax rate right down to zero. In simply abolishing the tax in all its forms. One of the arguments against this is that, well, whadda about the revenue to pay for schoolsnospitalsncouncilouses? And the thing is, I'm not entirely sure that there's actually all that much revenue in corporation tax. Here's a prediction about dividends for this coming year:

Stock market investors are in line for windfalls after research showed that Britain’s biggest companies are expected to pay out a combined £72.4bn in ordinary dividends this year. Businesses listed in London’s benchmark FTSE 100 and mid-cap FTSE 250 will lift their dividends for the current financial year by 4.5pc, according to financial data firm Markit. The total payout is expected to rise to £89.3bn once special dividends, including Vodafone’s $23.9bn (£14.6bn) shareholder reward, are taken into account.

Note that this is only listed companies, this does not include any private companies paying dividends: something which a lot of them do of course. That £80 billion odd has already paid corporation tax at what, 25% say? Do note that most of the dodges about corporation tax fail when it comes to money available to pay dividends: all that offshore stuff just doesn't work. So, given that the £80 billion is a net figure, add in a bit for private companies and we could guess that perhaps £30 billion, £35 billion has been paid in corporation tax upon these dividends. The recipients of those dividends then get a tax credit on what has been paid already (higher rate taxpayers have to cough up more).

Over here we've got the total recepits for corporation tax:

Comparing the last two years available, total CT liabilities were broadly equal, rising by one percent to £43.8 billion in 2011-12, from £43.2 billion in 2010-11.

And some £9 billion of that was the offshore oil and gas sector. Which isn't, really, corporation tax that's a tax on the Ricardian Rent of the oil being found under British waters. Something that should most certainly continue.

£44 billion minus £9 billion in Ricardian taxation gives us pretty close to that £30 - £35 billion which is simply the advance taxation paid upon those dividends. And it really makes no difference at all whether we tax that at the level of the dividend recipient or the company.

All of which means that if we were to abolish corporation tax and then tax dividends simply as the income they are then there wouldn't actually be much difference in revenues to pay for the schoolsnospitalsncouncilouses.

Agreed, this is very much back of the fag paper stuff and I'm sure that other people have more accurate information on this. But wouldn't it be wonderful to be able to simply abolish a tax without any great effect upon the public revnues? Oh, and with the effect of no company ever again being able to do any tax dodging at all as there would be no tax for them to dodge? Plus all those accountants and lawyers have to go off and do something productive.

I like it as a plan. So where and why am I wrong here?

All I want for Christmas is the abolition of corporation tax

I think it's about time we abolished corporation tax don't you? As this paper shows, the effects will be pretty good. The rise in other taxation as a result of increased growth won't quite cover the revenue loss but it'll be a near thing:

We simulate corporate tax reform in a single good, five-region (U.S., Europe, Japan, China, India) model, featuring skilled and unskilled labor, detailed region-specific demographics and fiscal policies. Eliminating the model’s U.S. corporate income tax produces rapid and dramatic increases in the model’s level of U.S. investment, output, and real wages, making the tax cut self-financing to a significant extent. Somewhat smaller gains arise from revenue-neutral base broadening, specifically cutting the corporate tax rate to 9 percent and eliminating tax loop-holes.

There's a major difference between the US version and the UK. Here, those in receipt of dividends gain a tax credit for the corporation tax already paid. If we abolish the corporation tax of course we would abolish that credit and dividends would be taxed as normal income. So it's entirely possible in the UK system that the revenue effect would be positive.

As to why we want to abolish it it is disguised taxation. 90% of the country believes that it is actually the companies that pay it. The other 10% of us are aware that it is the shareholders and the workers (in the form of reduced wages) that do. So better to lay the taxes openly on those who really bear the burden than disguising the cost of government from people.

And finally, one reason that we collect this tax at the corporate level is because it is convenient to do so. But as you may have noticed with the furore over Google, Amazon and so on, it is no longer convenient. So, let's stop doing this inconvenient thing and tax directly.

Yet more nonsense about corporation tax

Yesterday I was muttering about how the lies being told about corporation tax were bending the minds of even respectable establishment figures. Today I find that we've a similar problem whereby we've some deeply uninformed commentary on the tax paid or not paid by Thames Water.

Thames Water sparked fury yesterday when it announced it will not pay corporation tax for up to a decade. Britain’s biggest water supplier has already been berated for racking up more than £1billion in unpaid taxes. But as it reported soaring profits after the summer heatwave, finance director Stuart Siddall said: ‘It will be seven to ten years until we pay tax.’

Hmm. Why is this then?

Thames Water can delay tax payments under government rules as it invests large amounts on new pipes and sewers. Its planned £4.2billion ‘super-sewer’ under London means it will not be due to pay tax for years.

Ah: the complaint is therefore about an obvious and essential part of any tax system that is trying to tax profits. Which is, of course, that you only try to tax profits. Which produces a problem when someone invests in something.

That problem being that you've got to have some method of making an allowance for what has been invested. Say, just for the sake of argument, that £1 billion is invested in something. And there's £100 million in "profit" coming from that investment. can we then decalre that that £100 million is the profit that we should be taxing? Well, no, we can't, because someone has had to put that £1 billion in at the start. That's a cost: there's no real, economic, profit until that £1 billion has been paid back first. Only then, after the costs of doing whatever it is have been paid is there in fact a profit that can and or should be taxed.

There are various possible methods of doing this, making this allowance, and the law as decided by Parliament does so through the use of capital allowances. Leave aside the details of how it works but this is what is being done. Ensuring that it's only actual profit that is taxed, not the repayment of the initial investment.

And do note again that there has to be some method like this in the tax code: without it there would be very much less investment. And what worries is the following:

Labour’s Margaret Hodge, chairman of the Commons Public Accounts Committee, called it ‘deeply unfair’, saying Thames Water – which is owned by an Australian consortium – had an ‘obligation to pay their fair share in tax’. Tax accountant Richard Murphy, who helped expose tax avoidance by Starbucks, said: ‘The reality is that much of this will never be paid. ‘They are never going to stop spending money on infrastructure, which means they will probably never pay tax. Companies like this have to say when and if they will ever pay tax.’

At least one of these two knows all of this but is still wibbling nonsensically about it. And at least one of these two has also been calling for more infrastructure investment as a method of getting the economy growing. So to complain about the tax structure that encourages infrastructure investment does seem a little odd.

But to my larger complaint. We're being told an ever more fantastical series of tales about tax absolutely none of which have any grounding in reality. There is no possibility of having a tax system on profits that does not make an allowance for investments made. So why is there this spreading of fear, uncertainty and doubt about the tax system which makes this essential allowance?

Should it be a crime for a business to make a loss?

This is an interesting little example of the pernicious effects of the lies that are told in certain forms of campaigning. We've a proposal that there should be something called a corporate ASBO. Sure, it's a personal suggestion but it is also from the head of the Howard League for Penal Reform.

So, I would like government to think about introducing a corporate anti-social behaviour order. ASBOs are in the process of being replaced by various other civil orders by the government but for the sake of simplicity, I shall call my proposal the corporate ASBO. The important point is that individuals and big corporations should be equal before the law. The last Labour government introduced the Serious Crime Prevention Order but this focuses on the more serious end of corporate crime, applying to individuals who have already been convicted of crimes such as money laundering or credit card fraud.

The corporate ASBO could be handed to registered companies engaged in anti-social behaviour. An appropriate threshold, in line with orders pertaining to individuals, would be required to ensure the ASBO is not used in a vexatious manner. The ASBO would be targeted at corporate actions that are deliberately socially harmful, cause distress or nuisance or annoyance.

It would not target legitimate business, even business that some might see as unpalatable (for example pay-day loans or betting shops). The purpose of the ASBO would be preventative – identifying low-level behaviour and seeking to prevent it increasing in frequency or seriousness.

I have no opinion on this and my intention here is not to develop one. Rather, I want to look at what has prompted this proposal:

Contrast a child playing his music too loudly and too often that annoys the neighbours to Starbucks which announced today that it has no tax obligation this year. The effect on the public services and on the social fabric of so many of the biggest companies managing by sleight of hand to avoid paying billions of tax is incalculable.

She's been suckered by the lies being told by the tax campaigners. She's outraged that Starbucks doesn't owe any corporation tax this year. The campaigners have alleged that this is all because of dodgy dealings over royalties, brand names, margins on purchasing coffee from Switzerland and the like. Whereas in fact the reason that Starbucks doesn't owe any corporation tax is that it hasn't made a profit. Even if all of those allegedly nefarious (and all entirely legal too) activities are added back into their accounts Starbucks still hasn't made a profit in the UK. There's no tax due because there's no profit to tax.

And very much the same is true of all of the other stories we hear about as well. There never was a £6 billion tax bill at Vodafone: that was entirely made up by Private Eye. There never was a deal over it either: the company simply paid the normal corporation tax due on remittance of overseas profits into the UK parent company. Barclay's did not dodge a tax bill on selling off a subsidiary, Gordon Brown specifically changed the law so that no tax would be due on the selling off of a subsidiary. Boots has not dodged tax by loading up with debt: the tax paid has simply moved from being corporation tax nominally paid by Boots to income or corporation tax being paid by the recipients of the interest.

Each and every one of the stories being peddled falls apart on any sort of detailed examination. But enough of these lies are being told that we've thoroughly respectable members of the establishment like Frances Crook insistent that new offences must be invented, new punishments devised, in order to punish those being lied about. Just goes to show that if you lie loudly enough and often enough then you'll be able to convince people of what just isn't so.

I can't help feeling though that there's got to be a better way to run a country than this.

It can't be a tax cut for fund managers because tax incidence

Hurrah for someone in government having a bright idea at last but the reporting of this is appalling:

A tax cut for City fund managers will leave the typical worker £11,000 better off on retirement, the Treasury has said. The Treasury has promised to abolish “Schedule 19” stamp duty reserve tax, which applies to some investments sold by funds. The tax cut, worth £145 million a year to the fund management industry, is politically controversial and Labour has promised to reverse it.

That's simply ludicrous. If it's a tax cut on fund managers then fund managers will benefit. If it's actually future pensioners who will benefit then it's a tax cut on future pensioners, not fund managers.

Which brings us back to the whole subject of tax incidence again. Who nominally hands over the cheque to the Treasury can be very different from who bears the economic burden of the tax. As we can see here. Nominally the tax is on fund managers buying and selling shares. But actually, the tax falls on the pension pots of savers. It must do: otherwise how can reducing the tax increase pension pots?

Fortunately this has all been well studied. The IFS looked at exactly this question a decade ago and their report is here. The conclusion is that stamp duty is, in the end, paid by pensioners in lower pension pots and also all workers in the economy as it makes capital for companies more expensive.

So, Hurrah! Investment capital becomes cheaper thus boosting the amount of it that will happen and savers gain better returns on their pensions. Hurrah! indeed.

Ed Miliband, the Labour leader, in September suggested that Labour would reinstate the tax, describing the Coalition move as a “tax cut on hedge funds”.

Yes, yes, I know this is a democracy and all that, the very ability to get elected meaning that you are indeed qualified to be elected. But please, can't we hope for a few more people who actually understand the real world? For example, Schedule 19 doesn't apply to hedge funds in the first place, only to unit trusts and open ended investment companies.

There are good taxes and bad taxes

Or perhaps I should say that there are taxes which do less damage and taxes which do more. My interest being piqued by two stories in the papers. The first is businesspeople complaining loudly about business rates:

For most business people across the country, there will be just one thing on their minds when the Chancellor delivers his Autumn Statement next month – will he act in the economic interest of the nation and announce a freeze on business rates? Business rates are an inflexible and irrational tax that thousands of companies have to pay before they turn over a single pound. We hear from our members constantly that they want to grow but are held back because the business rates imposed on new premises are too punishing for them to bear. The last thing the Government should be doing is weighing down on business growth at a time when we need the economy to move from being just about good, to being truly great. If businesses have more cash freed up from paying less in business rates, they can take on more staff, invest, export and put money back into their local communities.

The second is a different group of people complaining about stamp duty on property transactions:

The Government is coming under increasing pressure to reform stamp duty on house purchases as experts predict rising property prices will push up the total bill to more than £9bn annually. The Council for Mortgage Lenders (CML) said stamp duty paid by home-buyers already looks set to exceed £6bn this year and is predicted to grow by a further 50pc to £9bn in the next five years.

Now, given that we know that there are some things that must be done, even things that must be done that can only be done by government, we are going to need to raise some taxes somewhere, from some part of the economy. But cleartly, what we'd really like to do is raise that money where it does the least amount of damage. The OECD has a handy guide to this for us here. The measurement is of deadweight loss. How much economic activity doesn't take place because of the imposition of different types of taxes?

Repeated taxes on property, that is business rates, have the lowest deadweight costs of any form of tax. The only one that could be better is a proper land value tax.

At the other end of the scale, one that has such detrimental effects that they've not even bothered to put it into the table for they cannot believe that anyone would be stupid enough to use them, are transactions taxes. Like, for example, stamp duty on house and shares, or perhaps the financial transactions tax. Diamond and Mirlees gained their Nobels in part for pointing out how appllingly damaging this form of taxation is.

It's fairly easy for us, therefore, to judge between these different taxes. Business rates are an efficient tax, stamp duty an inefficient one. We should therefore support the rates and attempt to do away with the duty.

It is possible for those subject to business rates to claim that, for example, they put retailers at a disadvantage to internet sellers. But this is fine: we want people to economise on their use of inputs in the production of whatever. If internet retailing uses fewer inputs than traditional then we'd like to see the move from one to the other. This frees up property and capital to be used to do something else: meaning we all become richer as we have both retailing and whatever else from the same initial set of assets and capital.

The value to us of Sainsbury's is not the amount of tax that they pay

This is a slightly strange thing for a businessman to be saying:

Justin King, chief executive of J Sainsbury, has challenged business leaders to “stand up” and reveal their tax practices, arguing that “tax is a moral issue” for British companies.

The supermarket boss argued that “consumers have every right to ask” how much a company is putting back into the country where they operate and make their profits. Speaking on a panel about Business Trust at the CBI annual conference he said that he “strongly disagreed” with those - including the CBI - who have said that company tax bills should be based on the letter of the law, not social responsibility.

He told the CBI conference: “How we do business, how we put back into the community of which we are a part, put back into the society from which we draw our revenues is a moral issue and it’s one that our consumers have every right to ask us.”

How Sainsbury's put back into the society they draw their revenues from is by drawing those revenues. Their job is to be a grocer for goodness sake: to provide us with somewhere we can attain nirvana with 15 brands of baked beans and 17 of toilet paper. That's the point of them, the only point of them. If we didn't think we gained more value from their existence and services than we would from their absence then we wouldn't shop there. Thus, given that we do shop there we must value their existence and the services they provide.

And that really is the end of it I'm afraid. How many people they employ to provide these services, what profits they make, what bite the government takes out of their revenues or profits are all entirely irrelevant things. The contribution Sainsbury's makes to our society is that we have somehwere to get beans and bogroll from.

Nowt else.

We spot the Laffer Curve in the wild again

A little point about the Laffer Curve that isn't usually properly appreciated. There is no Laffer Curve.

Rather, there are a series of Laffer Curves. Different taxes, in different societies at different times will always have their own shapes and peaks. We normally think about the curve with respect to income taxation and economic growth. Sometimes the gross weight of all taxation and growth. But there's a Laffer Curve in consumption taxation too:

After a hefty cigarette tax increase took effect July 1, tobacco tax revenues dropped $29 million or 21 percent short of projections, accounting for almost half of the shortfall in other taxes.

It is indeed possible to ramp up taxes sufficiently to reduce tax revenues. Therefore there really is a Laffer Curve. Even if for only this one tax in this one circumstance.

Which means that when we trun to our more nomral idea, that link between income taxation and revenue scollected, we do indeed know that there is an extant curve: we've just got to work out that peak.

Or, if we're rather more clever than that, work out what is that growth maximising rate for that is what is going to make a better world for our children.

At heart here though my point is simple. There are those who deny the very existence of even Laffer effects: we now know that they exist and can prove so with this simple example. Thus we can dismiss entirely the views of those who deny this simple and basic truth.

Blatherings and facts about the tax gap

HMRC's just released their estimates of the tax gap. What should be paid under the law of the land against what is actually paid. And as a result we've got Richard Murphy shouting that HMRC's estimations are all wet for he's the guy with the real facts.

Now I am actually under a promise to Madsen not to mention Murphy too much here but he's given us a perfect example of why the numbers differ: because the definitions do. Here's Murphy on corporation tax revenues:

Instead let me just highlight some of the absurd anomalies in this year’s report that I have noted so far. Let’s take corporate tax avoidance for a start. According to HMRC in 2011-12, they year to which this report relates UK tax avoidance in that year was just £4 billion and was split down as follows: (chart excluded-Ed)Now this report in the Mail on Sunday in April 2012 – covering the same year as a result – gave an estimate (and in my opinion a fair one) of the tax avoidance of just a few giant tech companies: (chart excluded) That’s, as they note, £685 million lost to five companies. Microsoft and Yahoo are not in there. And there are, we know, plenty more playing such tricks. But apparently the total lost is just £1.5 billion. Actually, that’s because none of these losses to tech companies is in HMRC’s figures. They may have been in David Cameron’s sight lines when attacking tax avoidance but HMRC refuses top recognise they do anything wrong. And that’s ludicrous.

Now what he's talking about is of course the way in which various tech companies sell into the UK from Ireland or Luxembourg, paying their corporation tax there. Murphy is claiming that the tax on this money that is paid (or not paid) in Ireland is thus tax avoidance from the UK tax system. What he's missing is that it isn't. Here's HMRC on the subject:

In broad terms, companies are required to pay corporation tax in the country where they carry on the economic activity that generates their profits, not where their customers are located.

Hmm, so where the customers are is not the determinant of where the tax liability is. Not even in theory: in fact theory, that spirit of the law, operates exactly the other way around. That people are selling to UK based firms or consumers does not, in any manner, create a tax liability in the UK. It is entirely other and very different criteria that decide that question. And as HMRC goes on to state:

Non-resident trading companies which do not have a branch in the UK, but have UK customers, will therefore pay tax on the profits arising from those customers in the country where the company is resident, according to the tax law in that country. The profits will not be taxed in the UK. This is not tax avoidance: it is simply the way that corporation tax works.

So, the reason that HMRC does not include such numbers in its estimates of tax avoidance is that under the basic system of corporation tax, under both the spirit and letter of the law of this and most other nations, there's not any tax avoidance going on. This is the way that Parliament, the OECD and before them, the League of Nations (where the basic structure of international tax treaties come from) set the whole system up.

Murphy's numbers try to include such sums which is most odd for someone prclaimed as one of the nation's leading tax experts.

What is actually happening here is that Murphy thinks that settled law should not be as it is. Which is fine, of course, there's plenty of areas of life where I think settled law should not be as it is. I wouldn't be allied with a radical think tank if I didn't. But there is something important to therefore note about these tax gap estimates.

Murphy's numbers and thus, for they all run with them, those of the TUC, PCS, Unite, Polly, nef, Margaret, Lady Hodge and the rest of the rag tag groups that is the British left, estimate what the tax gap would be if the law were changed to conform to their prejudices and misconceptions about what settled tax law should be.

HMRC's numbers are based on what settled tax law actually is.

All of which does lead to a small amusement: those campaigning for tax law to be changed to reflect their prejudices are of course campaigning to increase the tax gap. For if the law were changed in the manner they desire then that tax gap would be closer to their figures: figures note which are larger than those under current tax law.

And it's very odd indeed to see lefties arguing that there should be even more uncollected tax around the place.