Wednesday 3 July 2013

Homey-In-Chief makes more good points but fails to join the dots...

From City AM:

In some cases, a pound generated by capital or labour ends up being taxed so many times that it is almost entirely confiscated by the state; in other, much rarer cases, the tax levied is far lighter. This makes no sense, and we need a tax revolution which sees the current system swept away and replaced by a simple, clear tax code where all income is taxed just once at a single, flat rate, with as little opportunity for avoidance as humanly possible.(1)

Most critics of tax avoidance actually quite like high taxes, and want to wring out as much money from the economy as possible. I disagree: I want to slash tax avoidance, but at the same time I want the overall tax burden to be reduced as much as possible...(2)

Another flagrant instance of such double standards can be seen with the patent box, which enables companies to pay a lower rate of corporation tax of just 10 per cent on profits from patented inventions and certain other innovations. To widespread cheers, George Osborne is promoting his scheme – a blatant tax avoidance device – as a key tool to attract investment and business to the UK.

Yet when Luxembourg or other low-tax jurisdictions tout for business in similar ways, it’s deemed a scandal. Why is it OK for Big Pharma to pay much less tax, but not for water companies to do so, or Google or Starbucks? Why are some companies being treated better than others? Why the inconsistency? (3)

Our kafkaesque tax system is bonkers and broken. We need to tear it up and start again.(4)


1) Yup, agreed.

That tax would be Land Value Tax - truly earned income is not taxed at all, and residual income which would otherwise go into land rents is taxed once and once only at the same flat rate (anything up to 100%). Such a tax cannot be passed on, neither to consumers nor to producers/employees and neither does it affect anybody's gross income or total output - the flow is in the other direction: you start with turnover, deduct wages and other input costs (or you start with wages and deduct living costs) and the rest goes to land rents. Land rents are not really a cost, they are a residual profit share once everything else has been paid for.

2) Yup, agreed. What kind of tax does not wring a penny from the productive economy and cannot be avoided..? See (1).

3) Yup, agreed. The Patent Box is going to be great fun for us tax advisors and might, at the margin boost UK tax receipts or the UK economy, but the really evil thing is that patent income is basically government-protected monopoly income. If governments did not protect patent holders against infringement, it would be much lower.

Now, there are good arguments for giving such protection to innovators but clearly, the holder of the patent can choose where it should be registered and where the residual income is taxed. Patents are very internationally mobile, but the end-users aren't.

For example, you can register the patent for a whizz bang mobile telephone in the Bahamas if you wish and pay not tax whatsoever. But millions of people are not going to fly over to the Bahamas when they want to buy a new mobile phone (assuming they can smuggle it back through customs in their own country). So the only way to tax such income is at source, i.e. by slapping a tax on the sale of patented products to end users, wherever they may be.

But there is another kind of government-protected monopoly income which is not mobile in the slightest, the source of that income cannot be moved by as much as an inch... see (1).

4) Yup, agreed... see (1).

14 comments:

mombers said...

"For example, you can register the patent for a whizz bang mobile telephone in the Bahamas if you wish and pay not tax whatsoever"
The thing is that the company selling the phone can shift the profit into the Bahamas through transfer pricing or simply royalties. Tax authorities have spent vast amounts of time trying to discourage it or publicly shaming those who do it, but it's perfectly legal and trying to prevent it just imposes dead-weight costs on the economy

Mark Wadsworth said...

M, yes, that's how they do it.

So the country in which the profits are actually made (where the designers are, where the phones are manufactured or where the phones are sold or used) still has plenty of opportunity to collect its share of tax.

Even ignoring the obvious one, that could be a withholding tax on royalties, a tax on salaries of designers, a flat tax per phone manufactured, imported or sold etc,

Kj said...

Hmm, good point about patents themselves being very mobile. However accepting that something is subject to a patent, is a state matter, which should make it taxable. Maybe revisit our old friend VAT, and have an ad valorem tax of x% on any product / component that is subject to a patent?

Mark Wadsworth said...

Kj, some sort of turnover tax is the logical conclusion, assuming a government wants to collect some money in return for protecting patent and copyright income.

DBC Reed said...

Sorry to interject, but I haven't noticed any reference to Saturday's Daily Telegraph 29.vi.13 which led with 'End of the Thatcher Property Revolution' on the front page. Based on ONS figures, this depicts a Doomsday scenario for Homeownerism with 58% of 25-34 year olds owning homes in 2001; 40% in 2011.More people (9million!)renting than any time since 1961.The figures are going our way but more quickly than might have been anticipated. The quote from Nick Faith of the more-independent-than- most Policy Exchange ,calling this shift " a long term challenge for all political parties ,especially the Conservatives" is ,if anything, an understatement.

Kj said...

DBC: well, the upside is a majority of renters is fertile ground for LVT I guess.

Anonymous said...

DBC, I did notice that, but it's nothing we didn't know already.

Plus I didn't like the headline, which should have read "Final Victory for Thatcher Property Revolution!" rather than "End of...". This concentration of land ownership was what they planned all along!

I also refer you to Kj's comment, it's all fertile ground, I just need to get those ten million people under 40 who neither own land nor bother to vote, to vote for YPP :-)

DBC Reed said...

@MW
Quite- but I don't think you're going to get people to vote for the Young People's Party if they're thirty-something renters with children! Something like Generation Rent might be better ,dropping the "The" in true 1960's fashion.(The Who started off as Who I remember.)You do need a name that is self-explanatory because that is the only electoral propaganda you can afford. People need to see it on the ballot paper (probably for the first time ) and think Give them a go. N.B anybody called Thatcher, no matter whom they represented, always got more votes in her day; people with names beginning the lower letters of alphabet always do better than the maths would suggest because they appear at the top of the list. These things matter! Do take these things more seriously - there is something of YPP a bit stunt-like.

Mark Wadsworth said...

DBC, until somebody thinks up a generic word for "people who'd be better off under LVT and who are socially liberal re e.g. drugs and who might like half of student loans to be waived" then I'll stick with "young", thank you very much.

We've done this to death - YPP is an obvious name because it must be clear from the off what our policies are on 90% of things.

As to positioning on ballot papers, I trust that you are aware that on most ballot papers candidates are ordered alphabetically by surname?

And if they are ordered by party name, then sod it, I'm quite happy to be last, to pick up the votes of people who turn up to vote but then despair at the candidates on offer and then simply tick the last one because they can't be bothered reading the list again.

I take this all very seriously indeed, even "politics as satire".

Bayard said...

DBC, AFAIAC, thirty-somethings ARE young people. The only thing the YPP lacks is a strapline "the party that fights for young people" or something to dispel the notion that it is a party OF young people only.

Mark Wadsworth said...

B, you're going to have to set yourself up with a new Blogger ID or something because all your comments go to spam whence I have to retrieve them all every evening.

And yes, a good strapline is always handy. The best I could come up with is "Don't waste your protest vote".

Apparently, the Post Office won't deliver leaflets which just say "Fuck the lot of the whinging bastards".

Unknown said...

This is my new identity.

Bayard.

Mark Wadsworth said...

MC, interesting.

Which is first name and which is surname? Is is "Mr M. Charles" or "Mr Charles, M."?

Unknown said...

Mr M. Charles. Sadly, my comments are still disappearing. Perhaps Google has my IP address down as belonging to a spamster.