Since it’s back in the news

I was wondering what people’s view on this was:
http://www.theregister.co.uk/2012/11/25/tax_and_tech_biz/

Summary for I struggle with long sentences

Thus taxing the returns to capital leads, where capital is mobile, to less capital being employed. We also know what determines average wages in a country: average productivity of labour. And, to a large extent, the average productivity of labour is determined by how much capital (ie, how many machines multiply their effort) is added to that labour.

So, less capital, lower productivity, lower wages. Which is how the workers come to bear some portion of the burden of corporation tax: it’s nowt to do with it being “passed on”, just the natural fleeing from the tax jurisdiction of the returns being taxed*. Empirical research seems to show that in the UK about 50 per cent, maybe a bit more, of the burden falls on wages.

I like to think Im not to shabby at understanding most econometryness but Im having trouble getting to grips with the idea that flight of capital would really put the bulk of a corporation tax burden on wages. Maybe the likes of teamhurtmore or mefty could shed some light?

Interesting extrapolation into the european tax system on the second page though too.

I find when ever someone states some thingis obvious, or trivial or common sense, its none of the above.

We also know what determines average wages in a country: average productivity of labour.

if our rulers are too stupid to write decent laws that can’t be twisted then more fool them.

This is another poor comment. Laws will always betwisted. Its due to the inexact nature of language. Add on top of that writing a law against something that lawyers and policy-makers struggle to define, be that tax evasion or “fairness” means that it will always be impossible to have a tight law.

That sounds terribly over-simplistic. Fewer labour multiplying machines = more jobs overall, for a start.

I find when ever someone states some thingis obvious, or trivial or common sense, its none of the above.

+1 it’s normally just a smoke screen for a bias / political slant in the author’s view.

+1
that’s kind of where I was getting to. The jumps in logic said with such conviction that you’re supposed to presume are incontrovertible…but I dont see how it can be extrapolated all the way to “0% corporation tax is a wonderful thing” without missing something on the way.

The brick +1

We also know…

Conclusions based on assumptions tend to support them.
Beware of politics dressed as economics.

As far as I can see the main flaw in his argument is that only some types of work are truly mobile. If I make toothpaste tubes, I can do that anywhere in the world. If I want to sell coffee and biscuits on the high street in the UK, then I have to be in the UK to do so, so I cannot just bugger off over seas (or rather I can, but the return on my capital in other countries might not be as good, as they don’t like expensive coffee and biscuits).

“0% corporation tax is a wonderful thing” without missing something on the way.

Unless you happen to be a billionaire who owns a corporation, in which case it’s fantastic and worth employing a whole marketing company to infiltrate as many media outlets as you can to spread your message. The Register appears to have been duped by them already.

If I want to sell coffee and biscuits on the high street in the UK, then I have to be in the UK to do so, so I cannot just bugger off over seas (or rather I can, but the return on my capital in other countries might not be as good, as they don’t like expensive coffee and biscuits).

Seems to work for Starbucks but then again it’s ‘not the same company’.

What I don’t like (and journalists never seem to mention) is the constant “but if we tax them, they’ll go elswhere”.

That may be true if you’re trying to get Toyota, or LG to build a factory, you need to make it appealing to them compared to building it elswhere in Europe. But Starbucks can’t really up sicks, they can’t sell £400million of Coffee to British consumers without being in Britain. You could put whatever corperation tax you liked on Coffee chains yand if we weren’t in th EU Starbucks would still be here selling coffee because it would be profitable. We’re only loosing out because we’re in the EU and some countries like Luxenburg take the piss with low rates.

I wonder if this might become a bargining chip for the EU budget, Cameron conceeds some rise, but gets changes in the Tax system. Seem’s odd that they’ve brought out so many sticks at once with which to beet the EU.

[edit] damit, spent ages writing that and most fo the points ahve been made in the meantime!

The Register appears to have been duped by them already.

Maybe not, most of the companies who advertise with The Register will be in the same boat as Google, Amazon and Starbucks. You don’t want to upset your customers do you?

aha, I think we’ve just found the root cause of the problem people…

Worstall was the press officer for UK Independence Party in the year running up to the 2009 euro elections.

http://en.wikipedia.org/wiki/Tim_Worstall

The Register, clearly making sure it’s not

I probably should have read up on the author first before trying to read too much into the piece 😉

Right wing propaganda dressed up as journalism…..

The Register just the Daily Mail without the column of celbrities in bikinis down the right hand side of the page.

The problem with that proposal – that employees pay tax and the company zero – is that companies will base their employees (all or most) offshore and just ship goods into the UK. The UK will be the big looser. This is already what Amazon, Google etc do and if the rules where changed as proposed this practice would spread.

Starbucks business model involves hiring cheap people in the UK, eg lots of part time people, who pay little tax and national insurance and then adding debt and licence costs into the business so that they pay little UK tax.

There needs to be a change in the law – perhaps licence payments should not be tax deductable, nor should inter company loans where funds are lent offshore

License payments between different parts of the same corporation should fall under a catch all for ‘methods created solely for the purpose of avoiding / minimising tax’.

We’re only loosing out because we’re in the EU and some countries like Luxenburg take the piss with low rates.

<simpleton> I’d assume the tax gap caused by companies sheltering in Luxemborg is a problem for a lot of the bigger european countries, not just the UK. Would there be a net revenue gain to the rest of the EU if they simply booted out the little tax haven principalities? </simpleton>

Stoner – only read it quickly and once – its so badly written, I couldn’t face doing more. His argument is poorly presented and jumbled/simplified.

At its core is basic idea that corporation don’t pay tax. Ok, this is a very old concept (he cites Seligman 1899 etc), ie, the “burden” of tax is not borne by an corporation but by one, or a combination of:

1. Its workers, through lower wages
2. Its provides of capital, through lower dividends
3. Its customers through higher prices.

Loads of work on this and plenty of debate. But fair to say that in general (1) does share the bulk of the burden. So he could probably end his argument there as this would be one simple point to debate. There is an obvious irony here in the whole debate, but lets leave that for the moment!!! What he then does is present a pretty jumbled analysis on labour productivity, capital allocation etc. If you are interested in the idea then one of the core works on this topic comes from the US in 2006.

http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/75xx/doc7503/2006-09.pdf

The analysis in this widely quoted report suggests that (under certain assumptions), “domestic labor bears slightly more than 70 percent of the burden of the corporate income tax.” The article is a crude summary of this report, although he could be quoting plenty of other ones as not surprisingly there is lots of work on this.

HTH

Luxemborg take the piss with low rates.

Why do we put up with this? Tax “havens” within the heart of Europe.

I’d be all for kicking them out of the EU and imposing massive taxes on anything coming out of there.

Am I right in thinking that the US taxes on Gross Revenue rather than profit? That would surely stop some of this intra-corporation lending.

cheers THM> Just off to flick through the CBO paper abstract then….

We also know what determines average wages in a country: average productivity of labour.

Haha, that’s a beautiful leap of logic

Is the argument ‘force corporations to pay proper taxes and they will unfairly heap the burden on the lowest-paid workers’? Marvellous.

footflaps – Member
Right wing propaganda dressed up as journalism…..

You may be right. But if large bodies of research indicate that, on the contrary, workers “do actually” bear the brunt of increases in corporation tax and vice versa, then left wing politicians etc would do well to think carefully about it! The Law of Unintentional Consequences and all that – or more simply the irony in the current party posturing over the whole tax evasion debate!

Its like increasing wages – on its own that doesn’t max the benefit of workers. Without increases in productivity it means that fewer workers will get paid more. Is that the best objective (of TUs)? Or is a better objective to maximise total wages or the number of employed. The classic TU dilemma! Of course to increase pay and employment, you have to increase productivity (as economists would say, in order to shift the demand curve for Labour to the right). Jumbled up somewhere in this article is this idea basic idea – I think!

methods created solely for the purpose of avoiding / minimising tax’.

If politicians and civil servants took that common sense approach to law writing, they’d all be out of a job – that’s why it will never happen.

The rolling nineteenth-century prose of the Vagrancy Act 1824 made flashing an offence:- to “willfully, openly, lewdly and obscenely expose the person with intent to insult any female”.

Seems simple enough to me!

Since then there are any of half a dozen laws that you could convict someone for the same thing with, covering reams of legal documents and acts and bills of parliament and books and lawyers and drafting and parliamentary time. None of which were needed, as it was already illegal…

druidh – Member
Am I right in thinking that the US taxes on Gross Revenue rather than profit? That would surely stop some of this intra-corporation lending.

Druidh, I dont think that you will find that to be the case (other than sales taxes). Are you thinking about the proposal to avoid the anomalies caused by tax evasion, that the tax bill is calculated normally (ie after expenses etc), but then paid according to where sales are generated? This is being proposed again at the moment.

You may be right. But if large bodies of research indicate that, on the contrary, workers “do actually” bear the brunt of increases in corporation tax and vice versa, then left wing politicians etc would do well to think carefully about it!

To me that would simply be further evidence that there should be some kind of legislation to enforce a certain ratio of worker pay/executive pay/shareholder dividend. It seems corporations can’t be trusted not to be bastards, so we need to legislate to stop them being bastards.

I read all the comments on that last week and the commentards handed him his bottom on a plate towards the end of the list. It took a while though and I needed a dark room afterwards to calm down.

grum – the problem in this case I think is said to be that mobile capital will flee the burdens that it can leave on immobile labour. Legislation wont stop that, capital will still flee. Its not the capital that stays that is the problem, its the capital that has left …I think.

However, Id still like to see a corporate version of the US AMT http://en.wikipedia.org/wiki/Alternative_Minimum_Tax
(alternative minimum tax) which sets a floor that is calculated as a rate of turnover. SO that to an acceptable extent, corporations can minimise their tax bill by offsetting investment or interest costs, BUT not take the piss.

EDIT: First rule of online journalism: NEVER read comments. Whether it be Daily Mail, CiF in the Guardian or The Register.

Allister Heath wrote a similar piece in the Daily Telegraph which can be found here. I think this is a better piece but I must admit I have not read the underlying studies so can not judge how fairly their conclusions are reported.

I see where both are coming from, it is could be presented as simply an extension of the argument that withholding taxes stifle efficient capital movement and therefore hinder economic growth. They are saying tax at a corporate level is equivalent to a withholding tax and therefore a similar conclusion applies. All interesting stuff. The questions I have are first how do you recognise the ability to defer taxes at the corporate level when there is the ability to realise the return through sale of shares rather than by dividends or interest. Secondly, how does theory hold for intangible assets such as processes etc?

The questions I have are first how do you recognise the ability to defer taxes at the corporate level when there is the ability to realise the return through sale of shares rather than by dividends or interest

Surely the sale of any asset “pregnant” with tax is reflected in the transfer price? The selling shareholder has not avoided any tax at that stage since the asset he’s sold is still discounted for the deferral? No?

grum – the problem in this case I think is said to be that mobile capital will flee the burdens that it can leave on immobile labour. Legislation wont stop that, capital will still flee. Its not the capital that stays that is the problem, its the capital that has left …I think.

Aye, which is why we need a worldwide socialist revolution. 🙂

after you comrade…

A one, a two, a one two three four….

The people’s flag is deepest red,
It shrouded oft our martyr’d dead
And ere their limbs grew stiff and cold,
Their hearts’ blood dyed its ev’ry fold.

Surely the sale of any asset “pregnant” with tax is reflected in the transfer price? The selling shareholder has not avoided any tax at that stage since the asset he’s sold is still discounted for the deferral? No?

What happens if the purchaser is a pension fund? If the income can be “washed”, the market will generally find a way to “wash” it leading to a market tax assumption close to the lowest rate available.

Its like increasing wages – on its own that doesn’t max the benefit of workers.

Depends on whether the cost is lower dividends to shareholders or less workers. Higher wages doesn’t necessarily mean fewer employees.

Are we talking about tax on dividend/capital gains or corporation tax here, mefty?

Another point, is distribution of wealth – a small increment to those least well off (low paid workers) will be circulated in the economy very quickly as they will most likely spend the wage increase due to suppressed demand (low wages). An extra billion or two for a ‘fat cat’ share holder will have a much reduced effect as it is less likely to get spent.

So to boost the economy, you’re much better off increasing wages and cutting dividends.

footflaps – I think the argument goes, if you increase wages, and therefore lower dividends you lower the total return available to capital. If capital wont get out of bed for less than X, then less capital will be made available until the fixed amount of profit delivers a return of X. Less capital means smaller economy (less investment in labour using equipment etc) means less jobs etc etc.

SINGS SECOND VERSE

Tears rolling down cheeks