Companies don’t pay taxes – but employees, owners and customers do
THIS WEEK sees the launch of The Single Income Tax – the final report of the 2020 Tax Commission. As one of the commissioners, I’m proud of the result: a 417-page blockbuster of thorough analysis and sensible, yet radical, reforms.
A Single Income Tax would ensure that taxes were cut to 33 per cent of national income; no marginal tax rate would exceed 30 per cent; and taxes on labour and income would be abolished and replaced with a tax on distributed income. In addition, we suggest abolishing transaction, wealth and inheritance taxes, cutting transport taxes, and funding local authorities through local taxes. It is a massive step forward in terms of simplifying the tax code, and I hope it can change the public debate.
Indeed, one of the main arguments against corporation tax in its present form is that people do not understand how it works.
In an article published in February 2011, The Guardian reported that in 2009 Barclays Bank paid just £1.13bn in UK corporation tax despite making profits of £11.6bn. However, this misses three important facts. Since corporation tax is supposed to be 28 per cent something seems wrong. And indeed, something is wrong.
Firstly, their pre-tax profits were actually just £4.6bn. Most of the difference relates to proceeds from the sale of Barclays Global Investors, which is not subject to corporation tax.
Secondly, the profit relates to the entire global business, plenty of which was earned outside of the UK and is therefore not subject to UK corporation tax. Their domestic tax liabilities were in fact £1.07bn. Once you account for the losses made in 2008 that get carried over into 2009, there is no scandal here at all.
The main problem with corporation tax is that people tend to treat it as a free lunch. But corporations are legal fictions; they are not capable of paying any taxes. It’s like thinking that dogs pay for dog licenses. Just because companies have their own bank accounts, doesn’t mean that they bear the burden. Only people pay tax, and therefore any levy on companies must come from one of three sources:
1 Employees – through lower wages
2 Owners – through lower dividends
3 Customers – through higher prices
Plenty of studies have attempted to analyse the “incidence” of corporation tax, and in the US a 2006 Congressional Budget Office report found that 70 per cent was borne by domestic labour. If gross wages fall by 0.5 percent for every 1 per cent increase in corporation tax – which is in line with other studies – then a 5 percentage point cut in corporation tax could boost the UK average wage by over £500. Of course, these figures are estimates, but the important point is to reveal that corporation tax harms workers and that there are better ways to raise revenues.
Anthony J. Evans is associate professor of economics at London’s ESCP Europe Business School. www.anthonyjevans.com [email protected]