Calculating the marginal corporation tax rate in your head using 'rectangles'

This post is not really about tax, I'm just using it as an example of how to use 'rectangles' to simplify and solve maths problems, so is of general application.
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From the BBC:

Mr Sunak... said a new small profits rate would maintain the 19% rate for firms with profits of £50,000 or less, meaning that about 70% of companies - 1.4 million businesses - would be "completely unaffected" by the tax rise. And there will be a taper above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate - about 10% of firms.

Assuming this works the same as the old way (when the lower and upper limits were £300,000 and £1.5 million), you can work out the marginal tax rate on profits between £50,000 and £250,000 as follows:
£50,000 x 19% = £9,500
£250,000 x 25% = £62,500
£62,500 - £9,500 = £53,000
£250,000 - £50,000 = £200,000
£53,000 ÷ £200,000 = 26.5%

Which is a bit tedious.

This morning I tried using 'rectangles' in my head instead. This turns out to be much easier and quicker - there are more steps but the first six require no calculations at all and only take a couple of seconds:

1. The green rectangle is the tax you pay on exactly £50,000 of taxable profits.
2. The yellow rectangle plus the red rectangle is the total additional tax you pay on exactly £250,000 of taxable profits.
3. But they don't officially make you pay the 'red' tax; they make you pay the 'orange' tax in addition to the 'yellow' tax on profits between £50,000 and £250,000.
4. The red and orange rectangles must have the same area.
5. The red rectangle is 6% high and £50,000 wide.
6. The orange rectangle is X% high and £200,000 wide.
7. The orange rectangle is four times as wide, so it's only one quarter as high.
8. X = 6% red height x 1/4 = 1.5%.
9. Total height of yellow plus orange rectangle = 25% + 1.5% = 26.5%.

This is so painfully obvious to me now, why didn't I think of this decades ago, when the marginal rate changed every few years? The relevance of this may seem pretty arcane, but when you have groups of companies, it comes in handy when deciding how to minimise the total tax payable when there's a decision to be made, like surrendering losses or restricting the capital allowance claim this year in exchange for a larger WDA claim in the next year etc.

Why monopolists prefer VAT to corporation tax

Dinero, in the comments here:

"It occurs to me that VAT has a monopoly profit tax element to it. [In that it taxes the profit margin on a transaction rather than the profit of the balance sheet aggregate turnover]. I was thinking of the word monopoly in that where a vendor sells something unique and in demand, without competition then that vendor can successfully pursue a high profit margin.

Ignore the sentence in square brackets, which betray a deep misunderstanding of basic bookkeeping and economic concepts.

VAT does precisely the opposite! It doesn't tax the profit margin and helps the monopolist.
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Consider our monopolist, who is insulated from market forces (by some combination of economies of scale, barriers to entry, customer loyalty, patents etc). He pays his workers £50 per unit and sells them for £100 incl. VAT. The UK VAT is one-sixth of the selling price, so he pays £16.67 VAT and has a net profit of £33.33 per unit, or 33.33% of the selling price.

Our new entrant or challenger, subject to competition pays his workers £50 per unit and sells them for £70 incl. VAT. He pays £11.67 VAT and has a net profit of £8.33, just under 12% of turnover.
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If the unit selling price is squeezed by a £5 and costs go up by £5, the monopolist's profit per unit is still £20, or 21% of the selling price. The little guy still has to pay £10 VAT and ends up with a net loss of £5 per unit.

So the little guy goes out of business and his ex-workers are all looking for work. The monopolist survives and can push up the selling price to £100 again and push down wages to £50.
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In our first scenario, the two businesses had pre-tax profits of £70 and tax man collected £28.33 in VAT.

What's the position if the tax man scrapped VAT and imposed 40.5% corporation tax instead (£28.33 ÷ £70 gross profits)?

The monopolist pays £20.23 corporation tax on £50 gross profit (more than he paid in VAT) and the little guy pays £8.10 corporation tax on £20 gross profit (less than he paid in VAT). That's a good start.

If selling prices drop by £5 and wage costs go up by £5, the little guy's after tax profits fall to £5.95 per unit, so he still making a living. The monopolist is still doing very well. We end up with more new entrants and challengers; lower unit prices for consumers; more employment; and higher wages.

What's not to like?

Economic Myths: Miller & Modigliani Theorem

The first part of the original M&M Theorem makes perfect sense:

The Modigliani-Miller theorem (M&M) states that the market value of a company is calculated using its earning power and the risk of its underlying assets and is independent of the way it finances investments or distributes dividends.

There are three methods a firm can choose to finance: borrowing, spending profits (versus handing them out to shareholders in the form of dividends), and straight issuance of shares. While complicated, the theorem in its simplest form is based on the idea that with certain assumptions in place, there is no difference between a firm financing itself with debt or equity.

So far so good. If the value of the business is more than the outstanding debts, then the shares have value; if the debts exceed the value, then the shares are nigh worthless. The total value of debts + shares remains roughly the same. The value of the bonds can't exceed value of the business and the value of the shares can't go lower than zero.

If you aren't sure whether to buy shares or bonds in a company, the best strategy is to have a mix. For example Mike Ashley/Sports Direct spent £150 million on acquiring 30% of the shares in Debenhams. Unfortunately for him, the debts ballooned to far more than the value of the business, so the lenders took over the business and his shares were wiped out (a kind of debt for equity swap).

His better strategy would have been to spend less on shares and more on acquiring Debenhams debts pro rata (say 15% of each). If the business had done well, his shares go up in value and if it does badly, his shares are wiped out but he still ends up with 15% of the business in his capacity as lender.
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What's nonsense is the related claim that the tax system encourages businesses to borrow money instead of issuing shares:

Third, the use of debt is less expensive than the use of equity because debt is generally subsidized by the state through the tax system –since debtors can deduct the interest payment associated with the use of debt. Therefore, the use of debt may reduce the firm´s cost of capital.

That's a generalisation across many countries' corporation tax systems, but whether it is true or not depends on the rates of tax applied to corporate profits (at corporate level) and dividend and interest income at shareholder/lender level.

(I started as a tax adviser in 1989 and had to advise clients on 'what is better for tax', the answer depended on the circumstances. I later did an accounting and finance degree, and the lecturer trotted out the M&M tax drivel and would simply not listen to reason and logic.)

IIRC and generalising a bit, Singapore and Hong Kong governments get so much money from land rent, land auctions, stamp duty and capital gains on land that they barely need to bother with taxing incomes. So companies pay 15% corporation tax and individuals pay 15% income tax. If an individual gets a dividend, it is treated as tax paid, so no further income tax due. If an individual receives interest income, it is taxed at 15% so it is as broad as it is long.
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In the UK, we had a brief period in 2012 or thereabouts (before Osborne started messing things up again), when it simply did not make a difference for corporation tax/income tax (ignoring National Insurance, which clearly distorts things, the 45% additional rate and overseas stuff).

The rates were:
Corporation tax - 20%
Basic rate income tax - 20%
Higher rate income tax - 40%
Withholding tax on interest - 20%.

* If a basic rate taxpayer received a dividend, there was simply no more tax to pay (same as Singapore or HK) because the company had already paid 20%. (Ignore the bullshit with the 10% tax credit and the 10% nominal rate, it worked out at nil, unsurprisingly).
* If a basic rate taxpayer took a salary bonus, the employer took 20% income tax via PAYE and the employee had no more income tax to pay.
* If a basic rate taxpayer received an interest payment, the company paid over 20% withholding tax/income tax on a CT61 and the individual had no more tax to pay.

* If a higher rate taxpayer received a dividend, he had to pay 25% income tax on the dividend, so the overall rate was 40%. Remember - company earns £100, pays £20 corporation tax, pays £80 dividend, individual pays £20 income tax and nets £60. (Ignore the bullshit with the nominal 10% tax credit and the 32.5% nominal rate, it worked out at 25%).
* If a higher rate taxpayer took a salary bonus, the employer took 40% income tax via PAYE and the employee had no more tax to pay, net pay £60.
* If a higher rate taxpayer received an interest payment, the company paid over 20% withholding tax/income tax on a CT61 and the individual declared the gross amount and paid a further 20% of the gross amount, net interest £60.

Osborne and Hammond then busily messed up this state of affairs and now you have to do the three calculations each time to see 'what's best for tax'.
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There are lots of other wrinkles...

* Pension funds can receive interest or rent truly tax-free, but receive dividend payments out of after-tax income. It would make more sense to tax all sources at a flat, lower rate, so that they get some refund of the corporation tax on dividends but pay some tax on interest and rental income.

* Some companies have large tax losses (R&D tax credits, Film Tax Credits etc) but have distributable commercial profits, so are advised to pay dividends so that shareholders get the (slightly) lower income tax rate that applies to dividends.

* Some companies don't have distributable commercial profits, so aren't allowed to pay dividends, but can still pay salary bonuses or interest.

In a perfect world, therefore, dividends, interest, rent and wages would be taxed exactly the same way i.e. there would simply be a flat withholding tax at the same rate on each when the company pays them out.

We used to do this for dividends (Advance Corporation Tax);
Banks used to withhold 20% income tax from deposit interest;
Non-banks still have to do it for interest payments (CT61s);
PAYE applies to wages;
CIS deductions apply to sub-contractors in the construction industry;
and tenants with non-resident landlords are supposed to, by default, pay 20% of the rent to HMRC and pay the landlord the balance of 80% (though most wriggle out of this).

You wouldn't even need to bother having special rules for foreigners and there would be no need to distinguish whether it's wages, rent, dividends, interest, sub-contractor payments etc. It could all be included on one return/reporting system and paid to HMRC in one payment. As a final flourish, dividends paid net of tax would be an allowable expense for corporation tax purposes.

Individuals who have to submit income tax returns (i.e. higher rate taxpayers) can then just enter all 'net of tax' payments in one box and pay the same tax rate on the lot, minus the credit for income tax withheld at source.

Here endeth.

Gloriously muddled thinking on corporation tax.

Article in City AM this morning by John Penrose MP who "is Jeremy Hunt's policy guru".

After some fawning drivel about the German Mittelstand and dissing of UK businesses...

The OECD says that corporation tax is the most damaging and distortive, stopping investment flowing to wherever in the economy it is needed most.

This is clearly nonsense. Tariffs and turnover taxes (VAT) are the most distortionary and damaging taxes. Things like currency controls and foreign ownership restrictions (which the UK doesn't have, by and large) are awful non-tax distortions.

The distortionary effects of corporation tax are minimal:

Our businessman has some money to invest in starting or expanding his business. He ignores tax, and identifies Project A with an expected 20% return on investment and Project B with an expected 10% return on investment. He chooses Project A.

His accountant reminds him that he'll have to pay corporation tax on his profits, so actual expected returns are only 16% for Project A and 8% for Project B. The businessman will still choose Project A; corporation tax makes no difference for decision making purposes.

Also, UK plc pays twice as much in cash dividends to shareholders as it pays in corporation tax. If they really needed to retain cash for re-investment, they'd pay lower dividends.

At the moment, we've only got ourselves to blame, because our company tax system rewards firms which borrow much more than ones that invest... So why not reverse the incentives? Stop rewarding borrowers so lavishly and encourage investment instead? It would be fairly simple to do; we could make capital expenditure fully tax deductible as soon as it is spent, and stop company debt interest being tax deductible.

How thick is he? "Borrowing" is money coming in to the business and "investing" is money leaving it. These are completely separate things and have nothing to do with each other.

For example, a company could borrow from a bank and spend it on expanding the business. Does he count this as borrowing or investing? Similarly, it could borrow money without investing it (paying the cash out as dividends or a share buy back); or it could expand the business out of retained profits without borrowing.

The UK corporation tax system is pretty neutral on all this. If a company borrows from a UK bank, it gets a tax deduction for the interest paid and the bank pays an equal and opposite amount of tax on the interest it receives. If one company invests in shares of another, dividends paid on those shares are not an allowable expense of the paying company but are exempt from tax for the investing company. Both of these are completely tax neutral overall.
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UPDATE - to illustrate
Co A lends to Co B, receives £10 interest
Co B saves £2 tax (tax relief on interest paid)
Co A pays £2 corp tax on interest income
Co A ends up with £8 after tax.

Co A invests in Co B, receives £8 dividend
Co B makes £10 profit that 'belongs' to Co A, pays £2 corporation tax
Co B pays £8 dividend out of post-tax profits
Co A receives £8 dividend, on which it does not have to pay tax.
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He also has a very old fashioned view of modern business. Sure, some businesses make massive investments into physical plant and machinery. But by and large, businesses spend a lot more money on other things which help them grow - market research, R&D, staff training, advertising, renting larger premises and taking on more staff etc.

Such expenditure is fully allowable as a tax deduction when incurred; small businesses can claim 100% first year capital allowances but larger businesses are stuck with laughable 8% or 18% reducing balance capital allowances on qualifying items. So for this and many other reasons, 100% first year capital allowances for all businesses large or small are a good idea as it levels the playing field. So he's right for the wrong reasons - there is no particular reason to assume that the overall amount spent on plant and machinery would go up much.

Treating interest payment as a distribution of profits rather than as an expense is also a good idea, but not for the reasons he gives. The flip side would have to be that lenders don't pay tax on the interest they receive, so overall, the effect would be minimal; interest rates would just fall to the net of tax amount.

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.
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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.

Amazon's tax bill (here we go again)

From The Independent:

Philip Hammond has said he will consider tax changes hitting online businesses to ensure there is a more level playing field for high street retailers.

The hint at a so-called Amazon tax for online companies that sell products over the internet comes as high street stores – under pressure from soaring costs like business rates – demand a fairer system.

The only logical way that a special 'Amazon tax' would help high street retailers is if the tax is so high as to discourage people from buying online; or so high as to push Amazon into a permanent loss-making situation.

Mr Hammond added: “The European Union has been talking about a tax on online platform businesses based on the value generated. “That’s certainly something we’d be prepared to consider.”

Amazon already pay two kinds of taxes on 'value generated', being normal VAT at 1/6 of their turnover and corporation tax on their residual profits. Do they play fast and loose and book profits sideways elsewhere? Quite possibly, says The Murphmeister, but that's a different topic. Try enforcing existing laws first before you start inventing new ones on an ad hoc basis.

The Guardian is of course going to town on this:

The company... revealed that pre-tax profits at its UK business tripled from £24m in 2016 to £72m last year. The figures were reported by Amazon UK Services, the company’s warehouse and logistics operation that employs more than two-thirds of its 27,000-plus UK workforce, in its annual financial filing to Companies House. The company almost halved its declared UK corporation tax bill from £7.4m in 2016 to £4.5m last year.

Amazon UK’s warehouse and logistics staff and management enjoyed a bumper $164m (£125m) payout from the company share scheme – a rise of almost a third on 2016’s £95m bonanza – thanks to the company’s surging share price... The payouts will have reduced Amazon’s tax bill because under UK tax law companies are required to deduct the vest value of the shares provided to employees.

Companies aren't *required* to claim this deduction, but they would be stupid not to (I've submitted such claims for my own clients, it's great fun). The value of those shares is liable to PAYE in full as if it were a cash payment.

PAYE rates are much higher than corporation tax rates, so these share-related gains don't *reduce* Amazon's tax bill, they significantly *increase* it, i.e. that £125 million was probably taxed at about 40%, meaning Amazon paid £50 million extra PAYE in addition to the £4.5 million corporation tax. Which is a pretty high overall tax rate when compared to £72 million profits.

For accounting purposes Amazon Services UK reports turnover as a charge to its parent company for the cost of delivering products, which hit £1.98 bn last year. Amazon will not reveal how much it paid in total to HMRC last year, beyond what it paid through Amazon Services UK.

That's turnover net of VAT, so Amazon will have paid about £400 million in VAT as well. Makes a total of £454.5 million tax paid. And we have no reason to assume that they don't pay full Business Rates on their offices and warehouses etc.

All the mugs who believe that 'the consumer bears the VAT' can go back to the remedial class. VAT is a tariff, just like the tariffs that Trump imposed on lots of stuff recently. Did all the businesses affected by them just shrug their shoulders and say 'Not to worry, consumers in the USA will pay the tax'? Of course not.

"The Missing Profits of Nations"

Via a Resolution Foundation email newsletter, this fine study which confirms what we knew all along:

By combining new macroeconomic statistics on the activities of multinational companies with the national accounts of tax havens and the world’s other countries, we estimate that close to 40% of multinational profits are shifted to low-tax countries each year. Profit shifting is highest among U.S. multinationals; the tax revenue losses are largest for the European Union and developing countries...

Our findings have implications for policy. First, they suggest that cutting corporate tax rates, as the United States did at the end of 2017, is less likely to generate quick positive effects on wages than textbook economic models suggest. For wages to rise, productive capital needs to increase, which can happen fast if capital flows from abroad, much less so if paper profits—not productive capital—is what moves across countries.

'Rents' get an honourable mention:

Second, profit shifting raises new challenges for tax policy. It reduces the effective rates paid by multinationals corporations compared to what local firms pays. Whatever one’s view about the efficiency cost of capital taxes, this seems difficult to justify—especially if part of the profits of multinationals derive form rents, which standard models suggest should be taxed.

Having examined the evidence, the authors make a surprising claim:

We show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens. They instead focus their enforcement effort on relocating profits booked in other high-tax places—in effect stealing revenue from each other. This policy failure can explain the persistence of profit shifting to low-tax countries despite the sizable costs involved for high-tax countries.

Their explanation is on page 23:

To ensure profits are taxed where they have been made (i.e., the prevailing internationally agreed rules), tax authorities in high-tax countries routinely audit large companies. They check that intra-group transactions are conducted at arm’s length (i.e., as if the subsidiaries of a given multinational group were independent entities). When they find it is not the case, they can attempt to ask multinationals to correct their transfer prices, which results in a relocation of taxable income across countries.

In the current international tax system, tax authorities have incentives to relocate profits booked in other high-tax countries—not profits shifted to havens. Take the case of France. e1 relocated to France is worth the same to France whether it comes from Germany or from Bermuda. But it is easier for the French tax authority to relocate e1 booked in Germany, for three reasons.

First, it is feasible, because information exists on the profits booked in Germany (from Orbis), while no or little information typically exists on the profits booked in Bermuda. Second, it is more likely to succeed, because firms are unlikely to spend much resources opposing this transfer price correction: for them, whether profits are booked in France or Germany makes little difference to their global tax bill, since the tax rates in France and Germany are similar. Third, if there is a dispute between France and Germany, it is likely to be settled relatively quickly.

Seems plausible to me.

The answer is to simply disallow all expenses paid to businesses abroad unless the company claiming the deduction can:
a) prove that they have no connection with the other company,
b) explain exactly what the payment was for, and
c) show that this is an arm's length, market price.

Institute of Economic Affairs - gloriously wrong on corporation tax.

From page 204 of pdf here.

There's a lot of good stuff, but they relapse into Faux Libertarianism when it comes to the question of what's worse, VAT or corporation tax.

Corporate profits

The OECD found that corporate income taxes (such as the UK corporation tax) have the most negative impact on economic growth, among consumption taxes, property taxes and income taxes (Arnold 2008). Specifically, corporate income taxes have the following problems:

• They weaken the signal to reallocate resources from low-value activities to high-value activities between different companies and also within the same company by reducing after-tax profits.

No they don't "weaken signals" particularly. I know that the OECD said that but it's nonsense. A good pre-tax decision will nearly always be a good post-tax decision. When businesses are decided which projects to undertake, it is educated guesswork, for a given amount of £100,000 to be invested in a new project, if they expect an overall pre-tax profit of £50,000 from Project A and £30,000 from Project B, they will choose Project A. If the business compares post-tax profits, they will still choose Project A with a post-tax profit of £40,000 rather than Project B with a post-tax profit of £24,000.

That is quite different to VAT. Assuming we are looking at the same time frame/effort, compare:
- Project A involves producing/selling 100,000 small, high turnover items which can be made and sold within five weeks. They cost £1 each and can be sold for £1.05 gross = £50,000 profit over a year.
- Project B involves producing/selling 1 very large slow-moving item, which costs £100,000 and, takes a year to make/sell, and which can be sold for £130,000 gross = £30,000 profit.

If you knew nothing about VAT, you would say that Project A is better. But once you take VAT into account, Project A actually makes a loss of £160,000 and Project B makes a profit of £4,000. That strikes me as being hugely distortionary.

VAT similarly distorts activity in favour of VAT-exempt or zero-rated items and against fully VAT-able items. Corporation tax does no such thing.

• They bias ownership structures in favour of debt capital and against equity capital.

This is another of those myths that I have been railing against for decades to little avail. The UK tax system was heading towards a system (it is now heading away again thanks to George Osbrown's constant meddling) where the amount of tax (corporation tax plus income tax) would be exactly the same whether it is funded by share capital or loans. It would be quite easy to enforce the default rule that interest payments are liable to 20% withholding tax and get rid of Osbrown's stupid tweaks, so that by and large, it makes no difference.

• They distort spending patterns in favour of current expenditure, which is fully tax deductible, and against capital expenditure, which is not (capital allowances partially ameliorate this).

Not really. A good pre-tax decision is a good post-tax decision, see above. I've never heard a businessman yet decide to stop using 'capital' (i.e. labour saving devices) because they will not get 100% capital allowances in the first year. And if the IEA really thinks this is a problem, then they could suggest giving businesses 100% first year capital allowances on all the equipment they buy. Most small and medium sized businesses have been able to claim 100% first year capital allowances on all additions for the last few years anyway. I don't really see the harm in extending this to all businesses, it would result in a corporation tax shortfall in the first few years but slightly higher receipts once it has bedded in and an end to all this Faux Lib bickering.

• They discourage investment by reducing retained earnings, which would otherwise be spent on capital investment goods directly by the company or invested with financial intermediaries to the same effect by third parties.

Nope. By definition, corporation tax is not a tax on reinvested profits, which is what we care about, reinvested profits are paid out of earnings before corporation tax. 'Retained earnings' merely means all earnings not paid out as dividends. It's not even technically correct because corporation tax is paid on total earnings, including the part paid out as dividends, which are at directors' discretion. From the company's point of view, the government is just a quasi-shareholder with a right to a dividend of 20% of earnings. The directors can then decide how much pre-tax profit needs to be reinvested; and how much should be retained in cash and how much should be paid out as dividends. If they think the tax bill is too high, they reduce cash dividends accordingly.

Once a business has shown itself to be viable, it will grow organically. The first outlet/machine/project has to be funded by share capital (assuming banks won't lend to start-ups); if there is sufficient demand and it is profitable, it will grow. If the business decides to just roll up profits in cash instead of expanding, then yes it will pay full corporation tax on them.

I spend all day completing tax returns, and it is only tax return in twenty where the capital expenditure in a year is greater than the profits, so if the business can claim 100% capital allowances on all its expenditure, it has a loss for tax purposes. The other nineteen returns show that capital allowance expenditure was a lot less than the profits for the year, ergo full corporation tax relief and/or the expansion is funded out of pre-tax profits, whichever way you want to look at it.

Admittedly, there is a timing issue here but this can all be fed into IRR calculations, or the loss carry back period could be extended from one year to three years again, to give the one business in twenty a better chance of reclaiming all the corporation tax it paid on the earlier years' profits which it has now genuinely reinvested.

One of the few sensible measures in the UK corporation tax system is that there is no tax relief for buying land, and rightly so, as people selling land to each other does not increase our productive capacity one jot, land is not capital. Annoyingly, there is precious little tax relief for the cost of new buildings, even though buildings are capital in the true sense of the word. Again, that can easily be fixed by reintroducing Industrial Buildings Allowances and extending them to all new buildings.

McDonald's taking the piss on corporation tax; HMRC falling for it.

From The Telegraph:

The British arm of McDonald’s paid £123m for “franchise rights” last year, as part of a controversial structure that is under investigation for enabling unfair tax avoidance.

The European Commission launched a probe last year into whether Luxembourg’s tax arrangements for McDonald’s amounted to illegal state aid, as part of a broad crackdown on companies that route money through subsidiaries to cut their global tax bills.

The point being that such royalty payments are an allowable deduction for UK corporation tax purposes and there is only 5% withholding tax on payments of 'royalties' to an entity in Luxembourg under Article XII of the UK-Luxembourg double tax treaty (I thought it was 0% but it says 5%). That money then gets shuffled out of Luxembourg tax-free to heck knows where.

Now, let's have a proper read of that Article:

(1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However such royalties may also be taxed in the Contracting State in which they arise and according to the law of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 5 per cent of the gross amount of the royalties.

(2) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

(3) The provisions of paragraph (1) shall not apply if the recipient of the royalties, being a resident of a Contracting State, has in the other Contracting State in which the royalties arise a permanent establishment with which the right or property giving rise to the royalties is effectively connected. In such a case, the provisions of Article VII shall apply.

How on earth does McDonald's get away with claiming that the royalties don't relate to 'permanent establishments' which they have in the UK? Some McDonald's restaurants are owned and operated by McDonald's corporation itself and some are franchises, but given the level of control which McDonald's has over its franchises, I'd still count them as permanent establishments.

Ergo, on a sane reading of the treaty, those royalty payments are liable to perfectly ordinary UK corporation tax.

(Clearly, McDonald's is paying vast amounts of VAT, so overall it might well be paying 'too much' tax in total, I'm just saying.)

Economic Myths: Corporation tax is a tax on capital.

The Faux Liberatarians say little about the worst taxes of all (VAT and NIC) and usually refuse to countenance the least bad tax (LVT). Which leaves us with Milton Friedman's second least bad tax, a flat tax on income.

The Faux Libs, for reasons unknown to me, are putting the superficial legal form of a tax above substance and by some convoluted process of logic decide that corporate income is somehow special compared to employment or self-employment income, or indeed interest or dividend income.

Enter stage right The Institute of Economic Affairs…

Bringing capital taxation into the 21st century

Woah! Corporation tax is not and never was a tax on capital! Imagine Joe, our self-employed van diver who owns his own van, he drives around picking up and delivering parcels. Are his takings earned income? Yes of course. You could if you wished split it into a small part for return on capital and the rest as true labour income, but why? He claims the depreciation and running costs as an expense and only pays tax on the value of his labour. The small part that relates to depreciation and running costs is in turn earned income of the car factory and the repair workshop etc. You could then split the income of the factory and the workshop into 'return on capital' and 'labour', but ultimately it is all labour (until you get all the way back to raw materials in the ground).

If Joe decides to form Joe Limited and trade through that, does the nature of the income magically change from labour income to capital income? Of course not.

As a matter of fact, corporation tax is a tax on income, full stop. There is no particular reason why this should be taxed at higher rates or lower rates than any other kind of income. It is not a tax on 'capital'. A business with capital worth £1 million that makes £50,000 profit pays the same tax as a business with very little capital and a £50,000 profit. A bit of a clue. I would have thought?

Summary:

* Corporation tax is an inefficient way to raise government revenue. It has a negative impact on growth, investment and entrepreneurship. A 2014 review of the literature found that 57.6 per cent of the amount raised by corporation tax is borne by workers.

Corporation tax, like any tax on income, is an inefficient way to raise tax (but not as bad as VAT/NIC), as is anything but LVT. That's an argument against taxing earned income, not against corporation tax per se. That 57.6% is questionable indeed, but even if true, so what? Do they really believe that if employers get a tax cut, then they would pay their workers higher wages? And if you are a worker, would you rather have PAYE which you bear 100% or corporation tax which you only bear 57.6%?

And in a large, faceless corporation, managers are supposed to try and maximise profits and dividends for their shareholders as a vague collective body, and managers are paid according to results. Does it make any difference to the manager that in economic terms, the government is large but silent shareholder who automatically receives a certain % of profits?

* Since 1981, the average corporate tax rate in key OECD countries has dropped from 47 per cent to 29 per cent. However, corporate tax revenues as a share of all taxation have remained stable during this time. They have increased as a share of GDP, in line with growth in the tax burden.

The first bit is probably true, the last bit isn't - tax as a share of GDP of western economies has been surprisingly stable for decades (35% - 40% of GDP). Laffer effects ensure that it is nigh impossible to get over that 40% threshold.

And the reason why corp tax revenues have remained stable despite the (welcome) fall in rates is partly Laffer effects and more likely because corporate profits have increased as a share of GDP, which in itself is a bad sign because that extra corporate profit is largely monopoly income (patents, land income, monopolies, government contracts etc).

* Economic developments such as globalisation and the growing importance of intangible assets underscore the need for reform of the way in which capital income is taxed.

It's not capital income, see above. Intangible assets are a government protected monopoly right/source of income and so the government is perfectly entitled to collect more tax from those who benefit from the system. Which means that registering IP (which stifles the economy) would no longer be a one-way bet; people would have to choose between giving it a go in the free market at a lower tax rate or relying on government protection but paying the appropriate price.

* The OECD’s BEPS proposals are likely to entail new costs and uncertainty for multinational firms. Furthermore, their volume and complexity means that effective implementation will be difficult, especially for developing countries.

If multinationals played ball, it would not impose 'new costs'. Somehow the global profits of such businesses have to be allocated between the various countries in which they operate and each country taxes its own share at whatever rate it chooses. So each multi-national just submits one worldwide tax return and whatever info is needed to enable total profits to be apportioned between all the countries in which it operates. The various countries taking part in the scheme then chuck all these returns on a pile and agree on how to apportion profits.

* Radical proposals for reform include a tax on turnover, a sales-based corporation tax, and formulary apportionment of multination profits. While these reforms might curb opportunities for tax avoidance, they would have damaging side-effects of their own.

Boo to turnover and sales taxes, the worst taxes of all. All tax on income is arbitrary and so the formula will be arbitrary, so what? In theory at least, reducing avoidance means that a lower tax rate can be applied overall to a larger amount of taxable income (which must be a good thing).

* The only radical reform that would improve on the status quo without introducing new distortions would be to replace corporation tax with a tax on the income distributed to shareholders. Such a system would overcome the weaknesses of the current system, while also reducing incentives for avoidance, and raising revenue in a growth-friendly way.

Here we go again. These people do not live in the real world. That is exactly the position that Apple is in - it siphons off most of its surplus/rental income into tax havens and parks the money in government bonds. For psychological reasons, it does not want to use that to pay dividends, because transferring the money back to the USA triggers a high tax bill. So Apple shareholders never get their dividends and no government ever gets the tax (they have to borrow money from Apple's offshore companies instead!)

Or to use an analogy: wild animals are free gift of nature but a bit scarce. People like catching and eating them, so the government decides to levy a tax. Surely it makes sense to levy the tax on actually catching the animals to minimise the number of animals being caught. With a reduced number of animals being caught, we can be pretty sure all those caught will be eaten. What the Faux Libs propose is zero tax on catching animals, but then imposing a tax when they are eaten. The result if this will be that many more animals will be caught a lot of them will be wasted. Plus being even more difficult to police.

* This reform could be implemented in stages to ensure the UK’s international tax treaties are updated. Once fully implemented, the new system would see UK shareholders taxed on their worldwide capital income, while foreign shareholders in UK firms would be exempt.

That's a terrible idea. We can safely assume that people in rich countries own more shares in companies in poor countries than vice versa. So governments in poor countries would be getting less tax and governments in rich countries would be getting more tax.

The only way to do it would be to make companies pay tax when they pay dividends, which means that companies will end up sitting on vast piles of untaxed cash, like the Apple situation.

* It is important to recognise that this discussion is about tax structure, and not necessarily the overall level of taxation. Those who wish to maintain existing levels of taxation would be better served by the proposed reform than by the status quo.

They don''t understand the maths of it. Corporation tax in the UK is a nice low 20% and roughly half of profits are paid out as dividends. To remain fiscally neutral, the tax on dividends would have to be about 40%. This is such a high rate that companies will either not pay dividends (meaning cash is just parked in government bonds and not put to its best use) or they will find devious ways of dressing up dividends as capital payments (like share buy backs and so on) which are usually taxed at much lower rates. As a tax advisor, I say bring it on, but I don't see why anybody else would be in favour.

Ranking Americas Industries by Profitability and Tax Rate

Some interesting charts over at FTAlphaville Link

(they might ask you to make one of those free accounts to read it and then mercilessly bombard you with pleas to buy the FT) 

Particularly like this one.

The Laffer Curve in action

From City AM:

Corporation tax rates have been falling globally for decades. In 1981, the average rate across the OECD was 48 per cent. It has now plummeted to 24 per cent. In the UK, the decline has been even more stark, with the rate dropping from highs of 52 per cent to just 20 per cent today...

Despite the reduction in the UK’s main rate of corporation tax since 2010 from 28 per cent to 20 per cent, revenues have remained remarkably resilient. In 2013-14, onshore corporation tax receipts (excluding the volatile North Sea oil and gas sector) were £35.7bn compared to £35.3bn in 2010-11.

In the year so far, onshore corporation tax receipts have been 10 per cent higher than over the same period last year – despite a further two percentage point reduction in the rate. The simple truth is that higher taxes do not always lead to higher revenue.

Also from City AM:

Changes to stamp duty in December’s Autumn Statement mean that homes worth below £1m received a tax cut, but those at the very top end of the price scale have to pay a far bigger levy. Under the tax changes, the average London home selling for £510,000 saw its tax bill cut by £4,900. But a property worth £2.1m saw its tax bill rocket by £18,750.

In the first quarter of 2015, there were 638 prime London transactions, down from 949 in the same period a year earlier – a fall of 33.1 per cent. And the stamp duty haul raised from those sales fell from £125m to £93m, down 25.6 per cent.

Of course, this is City AM, so they pretend that corporation tax and SDLT are the worst taxes; they are bad taxes but far from the worst.

So they seldom mention the Laffer Curve as it applies to the worst taxes VAT or National Insurance; the trick here is to look at total tax receipts from all taxes on economic activity. So while a cut in VAT or NIC rates would no doubt mean a reduction in VAT or NIC receipts in isolation, you have to balance that with increased revenues from income tax or corporation tax (the rather less bad taxes).

(With good taxes there is no Laffer effect whatsoever, of course.)

Tories and Labour - both deliciously wrong on tax, as usual.

From City AM:

Labour and the Conservatives will today lock horns over the levels of tax imposed on companies, as business takes centre stage in the fiercely contested General Election campaign.

Real policy differences or Indian Bicycle Marketing?

Labour will announce today that, if elected, the party’s first Budget will cut business rates, in a move they say will be worth an average of £400 for 1.5m small businesses.

Pandering to the landowners. Boo.

During a visit to a small business, Balls will say: “Under the Tories, higher business rates have cost firms an average of £1,500 a year and are an ever bigger part of their tax burden. So instead of another corporation tax cut for large comp­anies which helps fewer than one in 10 firms, we will cut and then freeze business rates for small firms instead.”

What the Tories have proposed, quite sensibly, is to have a flat rate of corporation tax of 20% for all limited companies, instead of 20% for small ones and 21% for large ones.

Yet the Tories argue that such a move would equate to a one per cent rise in corporation tax, as it would mean reversing a cut from 21 per cent to 20 per cent that will come into force tomorrow.

No, keeping the rate at 21% is not a rise, it is simply not a reduction.

Treasury minister David Gauke said: “You have it now in black and white – Ed Miliband and Ed Balls will whack up corporation tax in their first budget. This would be the first time corporation tax has risen in over 40 years.”

Keeping the rate the same is not exactly "whacking up" corporation tax, is it? Sticking 2.5% on VAT or 2% on National Insurance, that's closer to "whacking" and that was the Lib Cons who did that (the fact that Labour would probably have done it had they won in 2010 is neither here nor).

But he is lying.

My trusty tax tables tell me that until 2006 or so, Labour experimented with corporation tax rates of 0% and 10% for very small companies and 19% for small/medium sized companies (a stupid idea if there ever was one).

Nonetheless and despite that bloody great lie, the Tories win this one on points. Cutting and simplifying corporation tax is clearly better than reducing business rates. But no mention of the biggest taxes on business (rather than on 'business owners') which are VAT and NIC.

What we need with business rates is a revaluation, which is due to happen in 2017 and which will solve a lot of problems...

BNP Paribas Real Estate predicts that following the 2017 re-evaluation, the Uniform Business Rate – the multiplier used to calculate rate payers’ bills – will rise to a record 50p in the pound England, earning the government £26bn. It named retailers in Leeds and Bristol as likely winners from the next revaluation, with their bills likely to fall by 40 and 20 per cent respectively.

Mayfair and other prime West End offices are also set to benefit with no change in their rental values since the peak in 2008. However, retailers on Bond Street and Oxford Street face rises of 60 and 40 per cent. Offices in King’s Cross face a 79 per cent rise in rents.

Arcane musings about tax

Lola said, here:

Or, you levy LVT on their landlords and scrap all the awful things like VAT, CT NI Withholding Tax etc. etc. and therefore any need for double taxation agreements and off we go to the races.

I was thinking about that recently and it's not that simple.

In UK domestic terms, that's the best thing we could possibly do, but having a zero % corporation tax rate is not necessarily of interest to foreign investors.

This is because foreign countries have two ways of dealing with profits from UK-based subsidiaries in the hands of holding companies based in their country:

1. Some of them simply exempt profits earned by subsidiaries in non-tax haven countries which are then paid to the holding company as dividends.

2. Others tax those dividends again, but give a credit for UK corporation tax paid. So if the corporation tax rate in the other country is 20% or higher, the UK corporation tax is not a net cost.

Basically, any country which charges much less than 20% is probably on the tax haven/CFC/naughty list and gets looked at very closely. But companies don't get any sort of credit for LVT (i.e. Business Rates) paid in the UK.

So, it would make the UK relatively more attractive (for a given amount of tax revenue) if businesses (whether tenant or not) continued to pay the higher of
a) 20% corporation tax and
b) the LVT on its premises,
but the total tax would be expressed as a % of that businesses' earnings. Or they are charged 20% with a full reduction for any LVT already paid.

So if Starbucks has £50 million UK profits and an LVT bill of £15 million, its profits are taxed at nominal 30% (with credit for LVT already paid; net corporation tax £nil); if its LVT bill is £5 million, its profits are taxed at flat 20% (with credit for LVT already paid, so another £5 million UK corp tax to pay).

Or something like that.

Now, these businesses and their tax advisors aren't stupid, they know that their sweet spot is to declare UK taxable profits which are equal to their UK LVT bill x 5; there's no incentive to declare anything more or less than that.

In other words, in reality, the business is paying LVT in the UK (for which it would not get a credit abroad) but to the outside world, the company is paying UK corporation tax at around 20%, (for which it gets a credit against foreign tax, or which means that the other country treats dividends from the UK as tax exempt in their country).

Economic Myths: corporation tax

A Faux Lib stretches his legs at City AM:

Corporation tax is one of the worst on the books and it should be abolished as soon as possible.

No, in terms of deadweight losses, VAT and NIC, which between them raise £200 billion are infinitely worse than corporation tax, which raises £43 billion. So that's an unsubstantiated and incorrect statement of fact (i.e. a lie), which he emphasises by following it up with the word "should"

Corporations can hand over the cash, but they can’t bear the ultimate burden of tax, because they are legal constructs. In the end, the burden of corporation tax must fall on some combination of consumers (through higher prices), workers (through lower wages), or investors (through lower capital values or returns). There is no consensus among economists but, on average, empirical studies point to about 60 per cent coming out of wages. The other 40 per cent hits investors, meaning pension funds as well as the rich.

Quite possibly true, but so what? You can apply the same logic to VAT and NIC. He chucks in the Poor Widow Bogey (pension funds) and 'the rich' as an afterthought. Very few taxes are specifically on 'the rich', it's just that they have more income than everybody else, so inevitably they pay more income tax than everybody else.

But if we are really concerned about taxing the rich, we have better tools.

Yes, Land Value Tax. It's not so much that this hits 'the rich' per se, but it prevents concentration of unearned income and wealth, so with LVT there are fewer obscenely rich people to worry about; those who become rich with LVT in place have truly earned it.

Taxing investors reduces investment…

Corporation tax is not a tax on 'investors', he's contradicting himself now. He just explained that companies don't actually pay it, and it is companies which do the investing; shareholders just buy and sell shares and get dividends. It is only the original subscribers to the company who can be described as investors.

And it is not a tax on 'investment', not by a million miles it isn't, because by and large companies pay for investment out of pre-tax profits; a company which reinvests all its profits would pay little or nothing in corporation tax. Yes there are stupid quirks and timing differences, but the point stands and this applies to most corporation tax systems world-wide.

And what is 'investment'? If is when somebody has some spare money (profits) and decides to give it to other people to create stuff for him. Whether they design a new production line, software, new advertising campaign or a shop refurbishment, it's all ultimately labour - other people's efforts. So it is taxes on labour (NIC, income tax, red tape) which add about two-thirds to the cost of investments and reduce it accordingly. If you are a VAT-exempt business, the cost of investment is doubled.

… and if there’s one thing economists can agree it is that investment means higher productivity and living standards for future generations. Cutting corporation tax on small businesses is a start, but it would be better to get rid of it altogether.

Twat. Investment means higher living standards today for all the people doing the work to create the investments. And as I have shown, even scrapping corporation tax entirely would have little impact on the level of investment, especially if it were offset with correspondingly higher PAYE and VAT.

Economic Myths: Capital is internationally mobile

This is half of a larger over-arching economic myth, i.e. "We can't have corporation tax because capital is internationally mobile".

I've already covered the fact that corporation tax is, by and large and if so only inadvertently, not a tax on capital, duh, it is a tax on profits however they arise*, so let's do the second half.

(* This does not make it a good tax - far better to have zero tax on normal business profits, earned income and return on real capital, of course, and a much higher tax on rental and monopoly income of course - but at a low flat rate of about 20% on everything, it is far from the worst tax).

From e.g. here:

The question of who bears the burden of the corporate income tax is important and controversial.

Proponents of higher taxes on business argue that these taxes mostly fall on firm owners and thus redistribute income from ‘rich to poor’.

Critics object that higher taxes on profits will not be borne by capital because capital is internationally mobile, with the burden of higher corporate taxes will be shifted to immobile factors of production, in particular labour.

If their bleeding heart, crocodile tear logic were true, then owners of "capital" have nothing to fear from corporation tax as they are passing it all on to somebody else, and if not they can evade it by moving their "capital" abroad.

I suspect that the real objection is because the burden of all nearly all taxes - be they corporate or personal - are shifted to the least mobile factor of all… the rental value of land.

Even if we take the extreme, simplistic view that all corporate profits are derived from "capital" then we can draw up a list of sources of/reasons for corporate profits, and consider how "internationally mobile" are. The seven broad and overlapping categories which immediately spring to mind are:

1. Reclassification of self-employment income as corporate profits.

Let's imagine a bloke who started out as a sole-trader plumber, painter and decorator who has built up a good reputation in his area, has got two dozen employees, a dozen vans and all the tools etc, if he ends up paying income tax/NIC at 42% and 47% of his profits but doesn't need to spend it all, he'd be well advised to transfer his business to a limited company so that he only pays 20% corporation tax on the profits which he doesn't need to take out as dividends or salary to fund his lifestyle.

Although he could move his vans and tools at the drop of a hat, he can't take his customer base and his employees with him, so his business is not mobile in the slightest, he can try and expand his catchment area to the nearest few towns, and that's about it.

2. Paper profit shuffling crap

Agreed, to some extent large corporates can deem their turnover and profits to arise anywhere they like, i.e. wherever they get away with paying least tax, by mucking about with transfer pricing, reclassifying dividends as interest, setting up letterbox companies, rewriting contracts so as to downgrade a taxable branch or subsidiary to a non-taxed "representative office". This changes nothing on the ground in the real world. The business is where it is, it is just the profits which magically appear somewhere else. That's a whole separate topic, which generates more heat than light.

And of course bank balances can be shifted from anywhere to anywhere in the world but that changes little or nothing on the ground either, we also observe that most people prefer having a bank account or a mortgage with a bank from their home country anyway. Many people will move savings or mortgage from one UK bank to another to get a bit more/pay a bit less interest, but few will use an overseas bank.

3. Rental income - access to markets - customers

Retailers especially need to have the best sites, i.e. where they get the most customers, i.e. where most people have the most access to the site, which could be in the middle of town if there is enough parking space/high enough population density and/or in out of town retail centres with good transport links and plenty of parking. A few hundred yards either way can make a huge difference.

The rental income element is a huge chunk of business profits. The total rental value of UK commercial land and buildings is £90 billion a year (£60 net rent and £30 Business Rates) against total corporate profits of about £160 billion. About half the the rental income is included in corporate profits (because a business is owner-occupied or because the landlord is himself a corporate), so the true split is non-land profits of £115 billion and land profits of £90 billion (albeit taxed at higher rates due to Business Rates).

4. Rental income - Access to market - labour and raw materials

An employer needs labour and raw materials.

With retailers, the pool of potential employees is directly proportional to the number of potential customers. Then there are highly specialised employers who are all fishing in a smaller pool of potential employees, which is why we see agglomeration or hubs - all the banks are in the City of London, the high tech businesses are at Silicon Roundabout or in the M4 corridor, car manufacturing is (or was) all in the Midlands etc.

Formula One is, along with golf and tennis, the most truly international sport, but half of all constructors have their main base in the UK, and all within a small arc across the south and east of England.

Even if a business breaks new ground and e.g. Honda sets up a brand new assembly site near Swindon, after a while, you will find that there are a lot of good, trained car workers and sub-suplier businesses in that area. So if another manufacturer wanted to set up a new plant in the UK, the obvious places to start would be in the Midlands or near Swindon so that he can poach workers and sub-suppliers rather than starting from scratch.

And if you want to make steel, the best place to make steel is somewhere near where the coal mines and iron ore mines are. If you make oil rigs, then Aberdeen was a good place to be for the last forty years, but if and when the oil runs out, those businesses will re-train as oil-rig dismantlers and then the whole industry will vanish.

5. Goodwill, brand name, customer loyalty etc

Some brand names are known all over the world (Rolls Royce, Coca Cola, Manchester United etc) but many businesses only have a brand name in one single country or even in a much smaller area.

So McDonalds is known world-wide, Greggs is UK-wide and while Percy Ingles has a baker's shop on most high streets in north-east London, but people anywhere else in the UK have never heard of them.

The advantage of this brand name depends on how internationally mobile their customers are. So if you like McDonalds (the world's best public toilet operator, if nothing else) and you are in a strange land, you are quite likely to visit one. If you like Greggs and are in a different town in the UK, you will visit a Greggs if there is one. And if you are from Leytonstone and like Percy Ingles and happen to be a few miles away in Walthamstow, you will visit the Percy Ingles in Walthamstow.

This is where UK retailers have often come a cropper. Marks & Spencers or Tesco means a lot in the UK, so a new M&S or Tesco branch anywhere in the UK will immediately attract business. Their management then get big headed and think they can apply their business model in other countries and so far have always fallen flat on their faces and lost huge amounts of money.

So this type of "capital" in its widest sense has to be slowly built up by trial and error, and is a kind of self-generated rental income.

6. Intellectual Property Rights

These are capital (the result of earlier investment in skilled labour) up to a point, and can be exploited anywhere in the world.

So a pharma company can sell its whizz-bang new drug anywhere in the world. But no pharma company is going to say "We will only sell our drugs in countries with a low corporation tax rate", they will simply sell as much of it in as many territories as possible (probably using price differentiation, i.e. selling at higher prices in rich countries and at lower prices in poor countries, which then requires enforceable contracts preventing reselling in the grey market).

So if they can sell the drug in the UK paying 20% corporation tax, this does not discourage them from selling it in the USA paying 40% tax, because the net profits in the USA are still incremental extra profits.

7. Real actual capital that arises as a result of real investment

Yes, physical plant and machinery can easily be moved around the globe, and even if not (too large), such capital constantly has to be replenished out of new income, so it might happen that a company allows its asset base in one country to be eroded and starts investing/creating new capital in another country.

But again, it is a constant process, a company can only create capital in the first place if he has access to skilled labour and raw materials. The Antarctic is the only territory which is not part of a nation-state and has no taxes of any kind whatsoever as there is no nation-state with the right to enforce them, but so far, very few businesses have decamped there because nobody lives there and nobody wants to live there.

8. Question

Having examined the evidence, how "internationally mobile" are all these things, even if we are prepared to accept that they are all capital in the first place?

Economic Myths: Corporation tax is a tax on capital

More Faux Lib tomfoolery in City AM:

... what has not filtered through to the public debate is the question of who bears the economic burden of [corporation] tax – is it fat cats, or could it secretly come out of wages or turn up in higher prices?

If this is confusing, this is because, for economists, a tax’s burden is borne by who it makes worse off. For example, though shops hand over VAT to HMRC, it is generally accepted that consumers bear the burden through higher prices...

Nope.

Basic logic as well as any sort of fact-based study show that suppliers bear the bulk of VAT; prices do rise slightly but output, and hence profits and employment, go down.

So what he is saying is: I will make up facts as I go along to support my preconceived notions.

And while employers hand over national insurance contributions, economists tend to think this money comes at the expense of lower wage offers than there would otherwise be.

Yes of course, you can't redeem yourself that easily though.

There then follows a load of drivel which you can dismember at your leisure. Here's my favourite bit:

First, higher corporation tax means less profit for firms and workers to bargain over.

Nope.

The amount of pre-tax profit is exactly the same; workers and employers share this between them and then each pays tax on his own bit.

Second, higher corporation tax means less relative reason to tie up investment in capital as opposed to consuming it in general, and in particular less relative reason to tie up investment in capital in a given country.

Yes, all things being equal, businesses prefer countries with a lower tax rate, but that is way down the list of concerns. Nobody is going to relocate from Oxford to Afghanistan to save a few quid corporation tax (paper profits get shuffled around a lot, but not real profits).

But…

1. "Investing" or "making profits" is not an alternative to consumption, it is the flip side of consumption, you can't have one without the other. So if you decide to 'consume' not 'invest' you are merely pushing up other people's profits and thus the amount other people will be prepared to invest to tap into those profits.

2. Corporation tax is not a tax on 'capital', however defined, in the first place.

It is a tax on profits accruing to businesses owned by limited companies/shareholders regardless of how much capital and of what type the company owns. Those profits arise if people are prepared to consume the business' output = turnover, and that turnover is in excess of costs incurred.

The profit element might stem from goodwill i.e. customer inertia/loyalty, dominant market position, low wages, monopoly rights (patents etc), owning the best sites (to trade from or rent out), simply doing everything a bit better than most of the competition, whatever.

Unbeknown to this idiot, corporation tax is anything but a tax on 'capital' as reinvested profits are not taxed and there is tax relief for capital investment (yes the capital allowances system is a bit shit, but broadly speaking it nets off). And if you set up a business with loads of capital assets but make no profit, you pay no corporation tax either.

Further, the amount of 'capital' owned by a business bears little or no relation to its profits. A well-run employment agency owns a few computers, telephones and desks, that's it; if it makes more profit than a capital intensive business like a steel works, then it pays more corporation tax.

Less capital per worker means lower productivity, and lower productivity means lower wages.

Workers/labour are capital and capital is workers/labour; capital is accumulated work/labour; if anything, taxes on wages are taxes on capital (because for a given £1 expense, the employer/investor gets less capital in return), not corporation tax.

Indian Bicycle Marketing

The Red and Blue Armies have declared Phoney War and as their battleground have chosen a storm in a teacup over very minor tweaks to two of our relatively less bad taxes. (They steer well clear of even mentioning the worst ones, 20% VAT on gross profits; 25.8% National Insurance on wages; and income-based withdrawal of benefits of around two-thirds of all wages up to a median income.)

Take it away, Matthew Sinclair of The TaxCollectors' Alliance...

ED MILIBAND made two big new pledges in his speech yesterday: lower business rates for small businesses, paid for by higher corporation tax on larger firms; and a freeze in energy prices for 20 months from the date of the next election.(1)

Economic reality would quickly bite for any government that tried to introduce either policy. There is nothing wrong with cutting business rates.(2) Lower rates would be a relief for many – particularly small firms and retailers. They often effectively pay half as much again on top of rent.(3)

But higher corporation tax rates for larger firms would not raise government revenue, except maybe in the short term. Just as firms in competitive markets cannot increase profits by charging higher prices, governments cannot just hike taxes and expect more revenue in return. Higher corporation tax will drive away investment and mean fewer jobs, lower wages and – in short order – less revenue for the state.(4)

1) This is indeed a stupid idea, seeing as it is UK government policy to push up consumer prices with all sorts of bizarre green taxes and rules, many of which Mr Ed himself introduced himself a few years ago. Let's get rid of those first, think seriously about nuclear power, fracking, improving competition and so on and see what happens.

2) There is everything wrong with cutting Business Rates across the board. This only makes sense in very run down areas where the rates are in excess of the site-only rental value.

3) That's the whole point, you wanker. Business Rates are - officially - supposed to be 46% or 47% of the rent payable to the landlord. So if some are paying "half as much again" then that is not far off and within a reasonable margin of error anyway.

More to the point, it is a circular calculation and the tenant does not actually pay a penny in the long run - if he knows that a place has a total rental value of £14,600 then he works backward and decides that a fair rent is £10,000 because there will be £4,600 rates on top. So really, the rates are only 31% or 32%.

4) Oh do fuck off, Mr Sinclair. All Labour have suggested is pegging corporation tax at 21% for large businesses instead of reducing it to 20% a couple of years in the future (i.e. the current mainstream rate is 23% and the Lib-Cons have proposed reducing it in 1% steps all the way down to 20%, which certainly has the merit of simplicity).

If the Tories really thought that 21% is so terrible, why have they set the rate at 23% for the current year?

I am a devout believer in the Laffer Curve, and if corporation tax were the only tax, whether it is 20% or 21% is completely irrelevant, they are both on the upward slope of the Laffer Curve, the deadweight costs of such a low tax are negligible (1% of GDP?).

The effect he refers to only kicks in if taxes are above 60% or whatever the revenue-maximising rate is and are reduced to below 40% or something where there is a noticable reduction in deadweight costs.

But of course, corporation tax is not the only tax, and is a relatively minor tax in the grander scheme of things, it raises one-third as much as VAT and one-third as much as National Insurance, why not have a think about those first?

Assistance sought of competent or semi-competent number cruncher

Because, to be fair, I am not either, but there I was reading this piece - Why isn't a global tax on multinational profits on the agenda for G8? by Ben Chu in the Indy - when this started me thinking - never a good idea - but, all the same:-

Of course, what Mr Schmidt and Google love isn't us Britons as individuals, but our money. The UK is the second-biggest advertising market for Google in the world, recording $4.9bn (£3.2bn) in transactions here in 2012.

Now I don't pretend to fully understand the ins and outs of how that £3.2 billion materialises, but I felt it must in some way be linked to people in the UK using that famed search engine.

And based on the number of days in the year, and the numbers of hours in the day and the number of minutes in an hour and the number of seconds in a minute (I did confess to lack of competence earlier, so be fair) that, I decided with the aid of a calculator, worked out at just about £101.50 a second.

And I felt reasonably sure that "just the one" search per second was unlikely to generate revenue of £100 plus, there would probably have to be "a lot of them per second" - even if each search raised as much as say the majestic sum of 2 pence for Google, well that's 5000 plus "searches" in the UK every second.

That's a lot of searches. Some of which I guess will be of a "serious research type nature" conducted by businesses and others of a "serious research type nature" by people wishing to become the customers of businesses; and some of a "serious research type nature" by people seeking facts and enlightenment which could be business related, or of an educational nature, even if a lot are considered shall we say, frivolous.

Now just supposing Ben got his wish and Google was subjected by the UK, and indeed just about everywhere, to "a tax levy based on how much business they do in each jurisdiction". Ben doesn't specify the level of the levy, nor ascribe a cash figure to what he expects it to generate for HM Treasury.

But as this ruckus has blown up around "alleged failure to pay sufficient corporation tax" it seems safe to assume he would want the levy to equate to the amount of 'unpaid' UK corporation tax that Google is accused of dodging, and that it would be related to that £3.2 billion revenue figure.

So I just idly wondered how much that might be, and whether it would be sufficiently big enough to convince Google to start making that quite useful search engine (and yes I know there are others, so presumably any of them available in the UK would be subject to the same levy if they generated "revenue") only available on payment of some "user subscription" and how much it might be.

Assuming they couldn't extract much more from the people buying their advertising (who presumably would pay extra if they felt they could pass on their extra costs to customers, but cut back their advertising if they felt they couldn't, thus probably reducing Google's UK generated revenue) because if Google really aren't making much in the way of profit in the UK, then the proposed levy is probably going to turn that into a biggish loss, and despite their "do no evil" ethos, I think they would be evil enough to think "we ain't no charity, and we certainly can't afford to be one."

Oh no, not them too

Prepare to be shocked, only another previously thought to be purer than the driven, well established UK name has been outed. And the evidence is pretty damning...

Orders made through the new site by customers from France, Germany, Ireland or other countries are all shipped from M&S's UK warehouses – but the transactions are all made with, and charged to, Marks & Spencer (Ireland) Limited, a subsidiary located in the Republic of Ireland, which has the lowest corporation tax rates in Europe.

Marks & Spencer's UK branch is paid a wholesale price for the goods it ships by M&S Ireland, and this is subject to UK corporation tax, but then the rest of the retail markup is then subject instead to Ireland's much lower corporation tax rate of 12.5%.

This process of using internal billing between countries in order to ship goods from one country when doing business in another is referred to as "transfer pricing", and while perfectly legal is the practice highlighted by tax campaigners who object to Amazon. However, Marks & Spencer only uses this structure for sales outside of the UK: all sales in UK stores and online to UK addresses are processed through the UK and are subject to UK corporation tax.

Lock 'em all up and throw away the key, or failing that, at the very least, as one very angry G commenter points out:

That's it no more shopping at M&S, if all their customers took this stance it would make them pay their taxes like I do.