Saturday, 30 January 2016

Ex-Chancellor wants to block a tax loophole by creating another one.

From the BBC:

Former Conservative Chancellor Lord Lawson told the Telegraph: "It is profoundly unsatisfactory that corporation tax has to be collected from large multinational corporations by a series of ad hoc compromise deals, as we have once again seen with the Google affair.

"It is also grossly unfair on smaller businesses, who are unable to shift profits between tax jurisdictions and have to pay the full amount due under UK law."

Google's tax agreement came after years of criticism of it and other multinational firms over their tax arrangements in the UK and across Europe. The payment by Google, praised by Chancellor George Osborne as a "victory" for the government, covered money owed since 2005 and followed a six-year inquiry by HMRC.

Lord Lawson said the arrangement showed corporation tax should be replaced with "a much lesser tax, bolstered by a tax on corporate sales".


Google are already actually minimising two separate taxes - VAT (a tax on sales) and corporation tax (a tax on net profits) - by booking the sales and the profits in low- or no-tax countries.

If the UK replaced corporation tax with a tax on corporate sales, they would discover that most of Google's sale to UK customers are from Ireland and have been for years, and that Google would pay even less tax than now.

So either Lawson is far stupider than I gave him credit for; he is working for Google et al; or he is just one of these Homeys/Faux Libs who would like to reduce corporation tax and increase VAT (the worst tax of all) accordingly because that benefits banks and landowners at the expense of the productive economy.


Stephen Stretton said...

Out of interest, how do you avoid a destination based tax? So for example if we had a destination based carbon tax, which consisted of a domestic tax on fossil fuel extraction and import, plus a levy on high-embodied carbon imports (e.g. aluminium) how would you avoid it?

Presumably VAT is a special case because of Europe. But just to take a simple example, imagine UK was out of the EU, but still had VAT. If VAT was a pure destination based tax, then it wouldn't matter if the sales were 'out of' Ireland or 'out of' the UK, since what matters is the residency of the end consumer. So I don't see how Google could get out of it that easily. But maybe I'm missing something.

In general, from an economic perspective (independent of the administration), what are the advantages and disadvantages of income taxes compared to consumption taxes in your view?

Mark Wadsworth said...


1. Taxes on physical goods are much easier to enforce, especially when large volumes cross borders.

2. Google just invoice UK customers from Ireland. The VAT system isn't really geared up to collecting tax from Internet-Based transactions which is why the EU changes the rules every few years but never gets it right (it is probably impossible to get it right, seeing how flawed VAT is in the first place).

3. We have discussed this.

There is not such thing as a consumption tax. Consumers only bear taxes where demand is less price sensitive than supply (booze, fags, petrol etc). VAT on everything else is a tax on output, full stop.

You pointed out a while ago, quite correctly that if ALL business turnover of ALL businesses were taxed at the same flat rate and ALL taxes on profits were wages were scrapped, THEN this would actually come out pretty similar to a flat tax at the same rate on ALL profits and ALL wages of ALL businesses and VAT were scrapped.

So in that sense, we could be indifferent. But we are where we are. All businesses are liable to corporation tax, but only productive businesses are also liable to VAT. That means the true rate of tax on productive businesses is unacceptably high (40% plus) and is a massive distortion toward rent seeking activities which are largely VAT exempt,

So our main focus must be reducing and getting rid of VAT.

Bayard said...

"That means the true rate of tax on productive businesses is unacceptably high (40% plus) and is a massive distortion toward rent seeking activities which are largely VAT exempt,

So our main focus must be reducing and getting rid of VAT."

Or making non-productive businesses liable to it. That's something to hit the likes of Lord Lawson with: Ok, let's get rid of corporation tax and, instead levy VAT on interest charges, rent and food.

I was thinking about alternatives to CT and wondered what the effect of treating Business Rates like income tax would be, so that the % of the imputed rental value of the land you paid increased as the value of the rent increased, in bands. So, if companies like Google really don't have a permanent base in the UK, they wouldn't pay very much tax, but if their lack of a permanent base was just so much legalistic weaselry, then they would be caught anyway. It wouldn't keep the Envious happy, but you can't please everyone.

Such a move would also have the effect of encouraging businesses to relocate outside London and the South East.

Mark Wadsworth said...

B, I don't like idea of extending VAT. Far better to scrap it.

I don't like progressive tax rates either. Flat rate tax is far better and with LVT the optimum rate is close to 100% anyway. With income tax and corporation tax, the optimum rate is probably zero per cent.

And AFAIAA, Google rent most of their UK premises, so could't really care about LVT or Business Rates, the landlord pays it i.e. if BR goes up, their rent goes down.

Google did relocate some stuff to Manchester, but it was the total occupancy bill (rent + BR) which persuaded them, not the split between rent and BR.

Bayard said...

"B, I don't like idea of extending VAT. Far better to scrap it."

Agreed, but given that, out of the three options for Lord L's motivation for saying what he did, the last is by far the most likely, the suggestion to extend VAT to practically everything would expose him for the Faux Lib banksters' shill that he is.

Dinero said...

> Mark

Does the fact that businesses can claim back their VAT expenses, and Consumers cannot, affect the incidence of the Tax.

Mark Wadsworth said...

Din, no not really. There is a chain of producers who between them bear the VAT.

mombers said...

I think the only reason that VAT rates can be so high is that they are nickel and dimed the whole way through the supply chain. E.g. you pay the retailer 20% VAT but they reclaim what they have paid the supplier, so maybe max 10% of the sale price. Where pure retail sales taxes are in place, rates above 10% are widely evaded...

Mark Wadsworth said...

M, exactly.

The end retailer is tricked into thinking that the consumer pays the tax, and the others in the supply chain only pay a small net amount of VAT on their own gross profit margin.

Dinero said...

What is the official stated purpose of VAT.