One-sided Economics by people who don't know as much as they pretend they do

From a reader's letter in yesterday's Times (it's a very old fashioned organisation so they don't put their stuff online):

Mr Cameron... should look at taxing profits which stay in companies and are re-invested in markets and products differently from those that are paid in dividends and buy backs..."

Bob Bishoff, Managing Partner, SCCO International

OK, here's a crash course in calculating corporation tax for people who have better things to do than making their "clients more valuable by providing solutions to the key management issues of Strategy and Structure."

1. You calculate the company's profits under normal accounting rules.

2. In arriving at the company's profits under normal accounting rules you DEDUCT amounts that are spent on market research, R&D, product development, staff training, machinery, advertising etc (unless you are an idiot and don't deduct them).

3. Therefore, by definition, that part of a company's income which is re-invested in the business is excluded from accounting profits because it's not profit - it's an expense.

4. There's then a bit of tomfoolery with add-backs and deductions, timing differences etc blah blah, which even out in the grander scheme of things to arrive at taxable profits (overall, taxable profits are much the same as accounting profits, sometimes higher, sometimes lower).

5. You multiply taxable profits by the corporation tax rate and that's your corporation tax bill.

6. Therefore, only a complete moron would accuse the government of taxing re-invested profits at too high a rate, because the government does not tax re-invested profits at all because amounts re-invested in the business do not count as profits in the first place!!

Twat points to the first person to leave a comment saying that "But a company doesn't get tax relief for money it spends on land and buildings". Firstly, if you are a tenant you get a full deduction for the rents you pay; secondly, if you buy land and buildings, you still get a tax deduction for the interest you pay on the loan; and finally although you can't claim much in the way of capital allowances any more, IBAs having been phased out, there is very little tax on the increase in value of the land and buildings, so fair's fair.