Saturday, 6 October 2018

A bad idea is still a bad idea, even if you change the justification.

I thought it was just Faux Libs like Allister Heath who advocated this sort of corporation tax reform.

He - encouragingly - starts off by making good arguments against turnover taxes (like VAT):

Corporate turnover taxes would hit struggling and young firms disproportionately. Loss-making firms would have to hand over money to HMRC, tipping them over the edge. A pro-cyclical turnover tax would trigger an epidemic of bankruptcies.

VAT raises four times as much as onshore corporation tax and is much more economically damaging (and regressive), so why aren't they talking about that first and foremost?

Then comes the inevitable shite:

There is a better [way of reforming corporation tax].

We should just tax cash distributions to investors and creditors when they leave the company – dividends, share buybacks and interest – as we tax distributions to employees. A similar system works in Estonia. True, some firms would be able to delay their taxes, and transfer pricing issues would remain. But it would be a huge improvement.

No it wouldn't. Massive loophole alert.

* A share buy-back is when a company redeems its own shares at a premium (i.e. its a return of capital and a dividend rolled into one), so they say they'd tax that. But a dividend can be dressed up as a return of capital (subtly different to a buy-back), which might or might not be caught by a tax on share buybacks. What happens if it is another company buying the shares? What if A plc buys B plc shares and B plc buys A plc shares? You'd need rules for that as well.

* What about dividends from a UK subsidiary to its overseas parent company or overseas shareholders? Under most double tax treaties these are exempt from withholding tax (or subject to reduced rates), so all those would have to be renegotiated, and we know how good the UK government is at that. What about a dividend paid to a UK parent company which under UK tax rules is and always has always been exempt on the recipient (in my working lifetime, at least)?

* What about all the dividends paid to tax-exempt recipients, pension funds, ISAs and so on? They're still moaning about Gordon Brown's mythical "pensions raid" so no Chancellor in their right mind would contemplate it.

* Some companies are in no hurry to pay dividends. Microsoft famously did not pay a dividend until 2003. Apple is so desperate to avoid corporation tax that it just piles up (untaxed) profits in subsidiaries in tax havens, which in turn invest in corporate and government bonds. So Apple is becoming like Siemens, a bank with its own eletronics division. This would just make such tax avoidance/deferral even easier and more respectable.

* Interest payments can be dressed up in the same way. Instead of paying £5 interest on a £100 bond, the company just repays £5 of the £100 principal, and so on.

Summary: receipts from the proposed tax on distributions would be a tiny fraction of current corporation tax receipts. Which is of course what the Faux Libs want.

The rationale for this is that corporation tax is a tax on capital, which is a lousy rationale as that is exactly what corporation tax isn't. I accept this would be more obvious if 100% first year capital allowances were extended to big companies, a good idea in itself, but hey.

Corporation tax is a tax on non-reinvested profits i.e. accumulated cash not used in the business. Whether the cash is sloshing around in a company's bank account or a shareholder's doesn't make any difference to the outside world, so it is cleaner and simpler to charge corporation tax at source and subject dividends to a lower rate of income tax than other income (to give credit for the corporation tax already paid).

We actually had this ideal compromise briefly in the last couple of years of the Labour government prior to 2010 (effective overall tax rates on dividend income were 20% for basic rate taxpayers and 40% for higher rate taxpayers, exactly the same rates as for earned income, if you ignore the NIC), but Osborne is now heading backwards in time to double-taxation of dividends.
For some reason, my internet friend Martin Farley recommends that the Green Party adopt this tomfoolery, with a couple of tweaks:

Corporation tax would be abolished and, instead, distributed profits from companies will be taxed at the point of distribution, including: dividends, share buybacks, additions to cash holdings, payments to parent or subsidiary companies (both onshore and offshore), and all other distributed income. This will be done at the basic rate (32%) for non-UK income tax payers and inter/intra-company distributions.

We believe that this will raise a further £12bn in revenues due to the more effective taxation of income from corporate profits and at a rate higher than current Corporation Tax. ( We believe this is a very conservative estimate, but will accept a challenge if anyone can produce a more reliable figure).

OK, he's addressed the overseas and inter-company issues, not knowing how difficult these will be to enforce. In which case, a subsidiary will just 'lend' its profits to its parent company. He says the tax will apply to "additions to cash holdings", which is going full circle and is exactly what corporation tax already is (assuming 100% capital allowances and debtors/creditors being paid on time).

Neither side has addressed the issue of 'transfer pricing', which is the biggie here, the UK government could, if it were so minded, shut this down under existing legislation, but for policy reasons does not do so (unclear to me why).

The rationale, interestingly enough is exactly the opposite of the Faux Lib rationale:

This is not designed as a tax increase, but rather a tax simplification that will equalise its burden and significantly reduce avoidance (and thus increase revenues).

In time, this will be the sole tax levied on income, thus reducing the administration of tax by all concerned and ending the perception of unfairness by those who experience double or triple taxation on income, while others avoid it altogether.

Summary: the Faux Libs are pushing for this to make tax avoidance/deferral much easier and reduce revenues (even though they don't say that); Martin Farley is encouraging the Greens to adopt this as policy because it will reduce avoidance/deferral and increase revenues.

All very Alice in Wonderland.


James Higham said...

Why aren't they talking about that first and foremost?

Because VAT raises four times as much as onshore corporation tax and is much more economically damaging (and regressive).

Mark Wadsworth said...

JH, haha clever.

L fairfax said...

Why invest in a company that does not pay dividends? Surely shareholders want some money back?

Lola said...

"Corporation tax is a tax on non-reinvested profits i.e. a tax on income distributions?

The thing that they are all missing here is that companies don't actually pay this tax. They collect it. Only people pay tax. In this case shareholders, that is the owners. (And in theory CT has a depressive effect on profits which means that, all things being equal, lower pay for employees.). The dividend paid to owners is (a large) part of the return for risk that they take for investing in the business. Note, it used to be that equities had a higher yield than bonds, as they were more risky. It's only post WW2, starting roughly from when Ross-Goobey spotted the looming Great Inflation, that the yield levels were reversed.

In this debate also I think that there is a lot of envy. That is anyone that owns shares does not deserve the income; they are 'doing nothing' for it. Those that think this forget / ignore that the vast bulk of equities are own by funds of one kind or another and these funds underpin pension benefits.

Personally I'd just scrap CT (and VAT, obviously) an go full LVT. But hey, I'm just like that.

Dinero said...

> L Fairfax .

" Why invest in a company that does not pay dividends? Surely shareholders want some money back? "

The company and its product has value in itself. As long as the shareholder trusts the directors to maintain it there is value for the share holder to own it.

Physiocrat said...

VAT raises bugger-all. Scrapping it over a couple of years would mean that, at most, one-third of the headline yield would need to be replaced. It may be that scrapping VAT would result in no loss at all to the exchequer

Here's why. These are back-of-envelope calculations and it needs some serious number crunching, but the country cannot afford such a harmful tax.

Bayard said...

From the article "There is no reason behind the widespread adoption of this tax; it is just a meme, like wearing one's baseball cap back-to-front." Au contraire, the attraction of this tax is that it is a tax that the government does not have to collect. The citizens collect it and send it to the government.

Physiocrat said...


VAT costs the government big bucks.

1) VAT forms part of the cost of living index on which benefits, pensions and public sector salaries are calculated. Taxpayers' money is being paid to people to pay tax with. It is a well-known phenomenon, known as churning.

2) VAT depresses GDP by at least 0.25% for every % of VAT. That is a loss of at least 5% to the economy, which gives rise to added welfare costs and reduced tax revenue.

3) VAT abstracts revenue from other taxable revenue streams including incomes, profits and rents; this is over and above the loss due to depressed GDP.

4) Adminstration and policing costs to the government are at least 1% of the yield.

The country cannot afford VAT.

John McCone said...

Running around the world trying to tax imaginary people is a mug's game.

If we do insist on taxing companies there should just be a law mandating that something like 1% or 2% of a company's equity be issued to the government every year.

Firstly, it would discourage nested corporate structures where A owns B which owns C as they would be hugely tax inefficient since each would lose 2% to the government each year.

Secondly, if paying in shares rather than tax, enables companies to manage their cash reserves and gives them more flexibility in planning, which should help them to avoid bankruptcy and layoffs.

Thirdly, it would resolve the whole issue of CEOs having a duty to avoid tax and maximize shareholder profit. If the government is the shareholder and simply receives the same dividends as any other shareholder, then maximizing dividend payout (which CEOs have a duty to do) will also maximize public revenue.