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Richard Murphy on tax and economics

Productivity, what productivity?

Wed, 08/13/2014 - 12:58

This comes from the mornings Bank of England Inflation Report:

The message is clear: we’re working hard to go precisely nowhere.

No wonder wages are down.

No wonder the tax take is down.

No wonder the deficit remains.

This is a failing economy.

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Jobs, what jobs?

Wed, 08/13/2014 - 12:53

This is from the Bank of England Inflation report issued this morning:

Unemployment has fallen to 6.4%, but look at the trend: most new jobs are in low and medium skilled employment.

Now wonder wages are falling.

Now wonder growth feels illusory, and is expected to fall.

This is a hollowed out economy where subsistence is the best that the government can offer, and with changes in the social security system it is doing its best not to do that.

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Growth, what growth?

Wed, 08/13/2014 - 12:47

This is from the Bank of England Inflation Report issued this morning:

Look carefully at that  dark green area that represents the growth projection.  What the Bank of England are saying is that between now and June 2017 things are right now as good as they will get.

Osborne has committed the cardinal sin:  he has peaked too early.

“Growth, what growth?” you may ask,  and you would be right to do so.

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Recovery, what recovery?

Wed, 08/13/2014 - 12:41

From the ONS this morning:

Real earnings are falling.

Bonuses excluded this is the lowest increase ever recorded.

And Osborne has the nerve to say the economy is recovering.

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Risk Mining the Public Exchequer: a new report by David Quentin

Wed, 08/13/2014 - 08:16

I have recently written about Jolyon Maugham, a tax barrister who is having a real and positive impact on campaigns against tax avoidance.

I think it’s time to draw attention to another tax barrister who is, I think, also going to have a big impact on this issue. He is David Quentin. As he says of himself:

David Quentin is a barrister specialising in UK and international tax law. He has worked at leading UK law firms Allen & Overy LLP and Farrer & Co LLP, and has extensive experience advising on corporate and private client tax risk. He is also a Senior Adviser to the Tax Justice Network.

David is a barrister very firmly in the tax justice camp, and that’s important because what he brings to this issue are his distinct skills and analytical ability. These are very firmly revealed in a new paper he has written under the title ‘Risk Mining the Public Exchequer‘. This is, I think, a very significant contribution to debate on a vital issue, which is just what the difference between tax advice, tax planning, tax avoidance and aggressive tax avoidance is.

I strongly recommend reading the twenty page paper as a whole, but offer one diagram as a taster:

The vertical axis shows tax uncertainty; the horizontal shows tax saving.

David’s argument is that a tax adviser’s role can be defined in three ways. The first is to move the tax payer from a position of uncertainty to one that has as much certainty as possible. His example is in clarifying whether a person is self  employed or employed, which requires the adviser to offer  opinion on how a contract can be created which meets the desired intention. An obvious alternative might be in offering advice on the correct VAT status of a transaction. In both cases the intention is not to reduce a tax bill but is, instead, to deliver tax certainty so that the taxpayer knows where they are with regard to the law and then applies it correctly. The taxpayer’s position moves up the vertical axis  as a result.  This is, of course, a thoroughly worthwhile activity.

Having achieved that goal the tax adviser can then suggest certain courses of action to the tax payer that have no risk attached to them but which have the ability to reduce their tax bill. This is possible, of course. Contributions to pensions can attract tax relief. Allowances are due for capital expenditure and people need to know that. ISAs are completely consistent with the law. There is absolutely no risk in making use of these options, and many others, available in law. As a result it is possible to give tax advice and reduce a taxpayer’s liability and not increase their tax risk. This is represented in David Quentin’s diagram by movement to the right along the top horizontal red line.

But then, as David says:

[T]here will come a point when our filing position starts to get weaker again. There are further tax savings to be obtained but they cannot be guaranteed, or at least they cannot be said to be as likely to succeed as the filing position we would have if we did not implement the advice. New tax risk factors are being introduced, and the relative certainty in the modalities of the verbs has reversed. It is now the tax advice which produces an analysis that “might” succeed, whereas if we do not implement the advice the tax “will” be payable.

The concept of the ‘filing position’ is important here and is not, perhaps, explored by David as much as he might. It has to be remembered that a taxpayer ‘self assesses’ in the UK. That means that they tell HMRC what they think their tax position is. This is their ‘filing position’, and they have a choice to make on it. They can opt for certainty, or they can adopt a riskier position where the outcome of their claim is not certain. Once they do that they enter the downward slope towards the right hand side of the diagram. This, David argues, is where tax avoidance begins.

It is adopting this position of risk to potentially reduce a tax bill (it can only ever be ‘potentially reduce’ precisely because the outcome is uncertain  in these situations, with that uncertainty increasing as one descends the right hand slope) that creates the ethical dilemma in tax avoidance in David’s opinion, and I agree with him.

I once ran a firm that sought only to reduce taxpayer risk and offer advice within the top horizontal range of possibilities. It was, and is, my belief that firstly tax risk was not worth taking precisely because there was risk which created uncertainty, and secondly, that there were better things for me and my client to always undertake to improve their net income  then take this risk. In other words, I, and they, were better off increasing their pre-tax income than reducing their tax liability on a reduced sum. This is a factor almost never taken into account in this equation, but which is relevant because time available to take action is always an active constraint in any adviser / client and in any real time business decision taking process.

David does however, quite reasonably, not take that point but does take another, which is that:

Eventually the tax advice will be so aggressive that the chances of success upon tax authority challenge hit the bottom. The anti-avoidance law definitely applies, or the statutory interpretation relied upon cannot possibly be correct, or the commercial reality of the transaction is such that the formal analysis is hopelessly unsustainable, or the factual assertions are never going to withstand forensic scrutiny, or the accounting assumptions are false. Our filing position is, in effect, a lie. And if it is challenged it will fail. We are at the far end of our journey along the tax advice risk curve.

It is at this end of the spectrum that many recent tax schemes have operated, and failed. But before that situation is reached David thinks there is risk, which starts at he point where the downward slope begins and activity moves from legitimate tax planning to the risk assumption inherent in tax avoidance. Of this he says:

Admittedly at first the risk differential is small, but it is appreciable to a professional because pointing out tax risk, or (more accurately) identifying tax risk factors which are introduced by a given structuring option, is a tax adviser’s job. Indeed if a tax adviser fails to identify a tax risk factor which is introduced by a given structuring option and that risk eventuates, the adviser has in principle exposed herself or her firm to an action in professional negligence.

In saying this David confirms something I have always suggested, which is that the competent tax adviser always knows when there is ambiguity in their advice because they have to disclose it to their client. If they do not they are professionally reckless. So, for example, running a trade as a limited company with one dominant client and taking the reward as dividends will always be tax avoidance because there is a risk that IR35 rules might apply. It may be deemed an acceptable risk to the adviser and client but there is a risk nonetheless. That has implication. As David puts it:

Deliberately creating tax risk is deliberately creating the possibility that your filing position understates your tax liability. Between not understating your tax liability (“legitimate tax planning”) and understating your tax liability (“evasion”) lies a category of behaviour which is deliberately bringing about the possibility that you might have understated your tax liability, and this is the category of behaviour which I propose to label “avoidance”.

There is then, according to David, an answer to the question of whether there is a dividing line between legitimate tax planning and tax avoidance. That is at the point where the line in David’s diagram begins to turn downwards and tax risk is assumed. There is also an answer to the question of “what is the ‘right’ amount of tax?” As David puts it:

The “‘right’ amount of tax” is the amount of tax you pay if you implement tax advice which eliminates risk or is risk-neutral, but do not implement tax advice which actually creates tax risk.

This then gives rise to the question of what, then, is so wrong with the deliberate creation of tax risk? David answers this question by suggesting that the current view of avoidance is wrong, saying:

Avoidance is usually defined as reducing tax payable by legal means, but in fact the opportunity that is increased as you head down the avoidance section of the tax advice risk curve is the opportunity to not pay tax which is legally payable. This is because wherever there is tax risk there is a chance that (a) the filing position is wrong and that extra tax is payable, and there is also a chance that (b) the filing position is not going to get challenged (or that the challenge fails for want of evidence, or fails for technical or procedural reasons).

This is a very different view of tax  and avoidance.  Tautologically David’s first observation has to be correct:  if there is tax risk in the taxpayers position it must follow that there is extra tax payable.  At least as interesting, therefore, is the second  idea,  which is the risk factor of being ‘ found out’. David  explains this in a flowchart that looks like this:

The importance of this flowchart is best expressed by David, who says:

The innovative feature of this apparently simple flow-chart is that I put the questions in the correct order. The mistake invariably made in this context is to treat the process of tax authority challenge as itself determinative of whether or not a liability to pay additional tax arises. This treatment reflects a fundamental error of analysis. Except in the very rare case of retrospective anti-avoidance legislation, the liability is anterior to the processes of enforcement.

In other words,  tax avoidance always embraces the risk that the wrong amount of tax might be paid, and this is true whether or not the Revenue challenge the position. There is, therefore, always the possibility that the wrong amount of tax might be paid at cost to the rest of society. And this, is precisely why David says that tax avoidance has attracted the moral opprobrium that it has. This is because:

in fact any deliberate creation of tax risk, however small its shortfall as compared with maximum filing position certainty, is a deliberately-created opportunity to not pay tax which is legally payable. That opportunity is created at the expense of taxpayers generally, and is therefore anti-social conduct deserving of the opprobrium attaching to the phrase “tax avoidance”.

I think this is absolutely right.

There is, of course, more to David’s argument than I have noted here, but I think its significance is that it answers some questions in a deeply logical way that will be hard for many to refute, and it explains why tax avoidance, which is so often claimed to be legal, does in fact create risk that many people find offensive. In achieving those aims this is a major contribution to the debate on tax avoidance, the ways we should think about it, and most importantly, what we should do about it.

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Self employment is great if that’s what you want

Wed, 08/13/2014 - 07:41

I’ve been self employed for thirty years. My total employment career lasted just the minimum five needed to secure all my accounting qualifications. Then I was off. I always wanted to be my own boss and I’d recommend self employment to  anyone who feels the same way.

The trouble is that we know that self-employment is rising dramatically in the UK economy at present. Something like 80% of all the new jobs created since 2010 are, in fact, self-employments, and there are a number of things that very significantly differentiate self-employments  from jobs.

The first is security:  there is none.

The  second is durability:  vast numbers of new small businesses fail, which is one reason why I doubt the official statistics.  I am sure they record the supposed start-ups  correctly but seriously doubt if they have properly counted the  failures.

Then there is  the issue of pay. The evidence is  overwhelming  that in recent years earnings from self-employment have, on average, declined significantly.  My own work on this based on ONS data, published last November, showed the following trend:

Labour has now  picked up on this, and rightly so. They suggest that  earnings are falling by an average of £2000 a year, which is more than my data suggests.

However viewed, what is important is that this significant trend in the UK economy, which is suppressing productivity because very few of these jobs are matched by any capital intensity, and which is potentially distorting  both unemployment and earnings data, now be fully embraced by the ONS to ensure that appropriate data is available on which macro and micro economic decisions in the UK are made.

What is also important is that it be understood that a very great many of those who are currently self-employed have not adopted this role by choice, but out of necessity.  I very much doubt that there is any significant increase in the real underlying trend of those who wish to run their own businesses in the UK that has suddenly become apparent because of the recession. That just seems too unlikely to be true. And if that is the case then the fact that these people are self employed now does not mean that they do not want what they might consider to be ‘real jobs’ in the future if they can get them. There is no excuse for taking the foot of government investment programmes to create those higher paid, more secure and stable jobs as a result. I strongly suspect that they are what people want.

Self employment is great if that’s what you want. If you don’t but it’s all you can get I suspect it is a cause of constant stress. That is no solution for our economy or for the people of this country. For those who really want to be employed we have to aim to make that option available. That means the current trend is likely to be a blip in the statistics in my opinion. Let’s not forget that possibility or we will make some really serious errors of economic judgement.

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Sweden sees sense

Tue, 08/12/2014 - 06:34

Having blogged about the fact that I am about to start work writing ‘The Joy of Tax‘ it was good to note this in the FT this morning:

The favourites to win next month’s general election in Sweden are planning to reverse course on the current government’s economic reforms by limiting private equity involvement in the public sector, raising taxes and boosting spending.

The Swedes have, it appears, run out of enthusiasm for the right, who never seemed to fit their social culture but who have, nonetheless formed the government since 2006. As the FT puts it:

Sweden’s centre-right government has gained a reputation for tax cutting and increasing competition in the public sector, which has proved popular with business but voters appear ready for a change as polling data suggests they are more concerned about education, jobs, health, and elderly care.

The reasons are obvious: the policy has not worked. Quality has fallen and that has clearly begun to trouble people. The fact is that it’s worth paying for education, health care, care for the elderly and providing decent jobs. They are the foundation of a good society. And that’s worth paying for, and tax is the way to do that, and the option the Swedes appear to be going for.

If only more people would say and do so.

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The Joy of Tax is on its way

Tue, 08/12/2014 - 05:24

For a number of years I said I was working on a book called The Joy of Tax. However the immediacy of campaigning and the specific demands of particular and quite focussed projects got in the way. And I also need to write The Courageous State first.

However, yesterday I signed a contract to write a book with that title. Like The Courageous State this is a  book that’s going to be written in a hurry. The first draft is due at the end of September and the final text by the end of October. Publication is planned for next March. Transworld – a part of Random House – are my publisher. Random House published Over Here and Under Taxed.

What this means is that there are a lot of words to write in a short time. However, to put it in context, there will probably be more words put on this blog between now and the end of October than will go into the book.

So, what’s it all about? Effectively it is a manifesto for tax reform. I think we have got to the point where tax campaigns have fundamentally changed perceptions on tax avoidance, tax evasion, tax havens, corporate abuse and much else. But, what we have not, I think, yet done is put tax where it really belongs, which is at the heart of the policy agenda across the whole range of social and economic issues that it impacts on. I believe that proper tax policy has the power to transform society, and so lives. That’s what I think the Joy of Tax is.

But if you’ll excuse me I need to go and explain why. There are only about 60,000 words to go.

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UK government to quit Swiss tax abuse

Mon, 08/11/2014 - 10:09

As Reuters have noted this morning:

State-backed Royal Bank of Scotland  is preparing to offload the international arm of its Coutts private bank, separating it from the UK unit, according to a source familiar with the matter.

As they add:

The Swiss arm of Coutts is one of 100-plus Swiss banks who have reason to believe they may have committed tax offences by helping wealthy Americans evade taxes – and are eligible for a non-prosecution agreement if they come clean and face fines.

It’s good to know that the government has owned an abusive tax haven operation for almost six years, isn’t it?

Why wasn’t action taken earlier?

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HMRC is turning its attention to Inheritance Tax avoidance – but evasion may be the big issue

Mon, 08/11/2014 - 08:31

The FT has noted this morning that:

A tax avoidance crackdown is set to turn the spotlight on previously undetected inheritance tax planning schemes, where HM Revenue & Customs suspects “substantial” sums are at risk.

HMRC is seeking to close loopholes that allow some tax avoidance ruses to escape detection, amid signs that scheme promoters are increasingly turning their attention to inheritance tax as tax planning in other areas becomes more difficult.

I do, of course, welcome a crackdown on inheritance tax avoidance. It is necessary. Inheritance tax losses already, according to HMRC, cost the UK at least £400 million a year, or at least 12% of the inheritance tax yield.

Actually, I would suggest that this estimate is a work of fiction, but not because of avoidance but because of evasion. Let’s offer a simple example of why this might be the case.

Based on HMRC data for UK wealth, extrapolated from inheritance tax returns, the UK is worth about £3.5 trillion in all, or £4 trillion gross of mortgages, of which £2 trillion is housing. Now I know that was 2010 data, but in many parts of the country house prices have not changed much since then.

According to Land Registry data on housing the average UK house price is currently £172,011 and there are 19.3 million privately owned homes in the UK (4.3 million of them are let out). That makes £3.3 trillion for that one asset alone.

That difference is going to work through to the inheritance tax yield in the end (and yes, I know about the surviving spouse exemption – but we all die in the end – which is the basis on which the HMRC data works).

Something, somewhere is being seriously under-reported for inheritance tax and i suggest that it is evasion and not just avoidance in play here. As for the loss, if anything like £1.3 trillion of value is going missing from reported estates the under-declaration is going to be a lot more than £400 million a year, even given the time over which that value would have to be declared. It could run to billions a year.

We have a tax gap on inheritance tax for sure. But I suspect the government is looking at the wrong one. Evasion may be the game in town on this tax.

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Everything about a set of accounts is subjective, even the year end date

Mon, 08/11/2014 - 08:01

I was amused by this comment on the blog this morning:

You call yourself an accountant, right?

If that was so, you would know that accounts are NOT “highly subjective”.

So, let’s start with a fact or two. I am a chartered accountant, a member of the ICAEW and I do have a current practicing certificate issued by it. So I guess I can call myself an accountant.

And then let’s get to opinion, based on fact. Accounts are, as a matter of fact, deeply subjective. It’s not just me who says so. John Kay wrote in the FT recently:

There is no “right” answer to the problem of accounting for these kinds of uncertainty; only a need to acknowledge that there is never such a thing as a single true and fair view, only a range of possible outcomes. When a business has many long-term contracts, or teeters on the verge of bankruptcy, that range may be very wide.

He added:

I can see the difficulty a bank chief financial officer will encounter if they tell depositors, shareholders and regulators that annual earnings are something between a loss of $5bn and a profit of $10bn; but such a statement may be the only view of the company’s affairs that is genuinely true and fair.

John Kay was right: there is no one view in a set of accounts. Even, I suggest the year end date is subjective. First, it is chosen, and we need on occasion to ask why. More important, delineation of trading into periods is itself arbitrary; the world does not really work that way. And so, thirdly, deciding on which side of that line the impact of a transaction may fall is also arbitrary. It is a matter of judgement and the impact on profit can be substantial. In that case the cut off date – the year end for the accounting period – is itself just another subjective variable in this equation.

Then there is the question of value, which is linked to the capital maintenance concept in a set of accounts. Is the company preserving physical or financial capital as its priority? And if financial, is that in nominal or current terms? What if the two are mixed, as IFRS allow? These decisions have enormous implications on profit.

And this is before we get to any issues such as cost allocation, where the range of answers is as long as a piece of string.

Even on basic issues accounts are inconsistent. In the USA inventory (stock) has to be valued on a LIFO basis and here on a FIFO basis. In a time of inflation the impact is significant. But do either really reflect the cost of  what is being valued? And in that case is either right? The issue is of importance if only because it is a major stumbling block to accounting convergence. Whilst it remains it is yet more evidence that accounting data is arbitrary.

I often argue that there is no such thing as objectivity. Accounts are one of the best examples of that. They are inherently subjective and are, in the case of larger companies at least, always the subject of an opinion – that of the auditor. I was one of them for 15 years. And that opinion, for the record, is subjective – and I welcome the fact that recently that is being made much more apparent.

Which brings us back to the nature of opinion. There is good and bad opinion. By and large expertise differentiates the two – although  it always. Like it or not I have the qualifications to say I am an accounting expert. You may not like my opinion. But you can’t say it is wrong on an issue such as whether or not accounts are subjective when they so obviously are that they need an opinion formed on them. You can only say you disagree with my opinion. That’s your right. But if the facts don’t support you then it is for others to decide whose opinion carries the greater weight.

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The East Coast main line is anathema to the neoliberal project

Sun, 08/10/2014 - 14:42

I wrote this morning about the absurdity of re-privatising the East Coast mainline, and a number of useful comments have been made. Ivan Horrocks of the Open University added this, though, that I thought worth sharing more widely:

Two points worth adding. First, the East Coast mainline service has to be re-privatised because it’s an ongoing and deeply embarrassing illustration, for the Treasury, the Department for Transport, and government more generally, of the fact that publicly run services can be highly successful. Furthermore, it demonstrates that rather than running a service for the financial benefit of private shareholders and senior management (or private equity houses), ie. largely for the benefit of the few, profit can be returned direct to the public purse, thus potentially benefiting the many. As these features of the East Coast mainline case are anathema to the neoliberal project they cannot be tolerated under any circumstances and thus a situation must be constructed where their existence is expunged. I’ve no doubt it would have taken place several years ago if the franchising process had not been thrown into disarray by developments elsewhere.

Second, by pursuing the re-privatisation process despite the success of the current state owned company, it demonstrates beyond any doubt whatsoever that this government, and more fundamentally perhaps, departments of state (the Treasury in particular), are so ideologically compromised that they no longer act in the public interest. Indeed, across government as a whole we now see clearly that the mission of departments of state is to gift public assets and services to private interests at whatever short or longer term cost to the state (and thus to the citizens of this country). The re-privatisation of the East Coast mainline service is simply a particularly egregious example of actions of the form of public administration that a neoliberal state demands.

I think those particularly useful comments because, firstly, East Coast proves private ownership is not needed to make things work. This operation has worked not just very well but very obviously better under state control. Managers do not need to be owners or to have private owners for this to happen. That is, as Ivan says, profoundly antithetical to neoliberal ideology.

And second, I agree, that this proves that this government proves how a civil service can be disempowered to the point of undermining its own purpose by the neoliberal state.

 

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Investing in railways to the North

Sun, 08/10/2014 - 07:55

I commented last week on the subject of the wrong type of investment in railways in the North so let me offer another example of where the government is making the wrong type of investment decision on railways in the North now.

East Coast Main Line Company Limited, the state owned company that has run the line from Kings Cross to Edinburgh and beyond via York and Newcastle since 2009 is to be privatised despite paying £1 billion to the Treasury over the last five years and that despite the fact that the previous private sector operate failed to meet its franchise obligations.

If the Treasury was serious about investing in the North it would invest in this state sector success on a key artery to the North, but it is instead planning to privatise it. That did not work last time. There is no reason why it should work again. By pursuing this plan to sell with all haste before May 2015 – to the French nationalised rail system if necessary – the government is showing it has no interest in the North at all. It just has interest in dogma.

If it was really interested in the North it would keep this route in state hands and work out how to make the North more accessible. It isn’t. And that’s a serious error of judgement.

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NHS privatisation: the loss leader model

Sun, 08/10/2014 - 07:35

The Observer features the strike by care workers in Doncaster as its main story today.

I am delighted they have. This is a massive issue for the UK, for the people in question, for the poorest paid in this country, for the future of care services and the future direction of the NHS.

As the Observer notes the issues relate to Care UK, a regular bidder for privatised care contracts in the UK. It won the the supported living contract in Doncaster  after telling officials that it could deliver it for £6.7m over three years. Yet the wage bill alone for the service was £7m.

The result was that it then demanded pay cuts of up to 35% from former NHS staff and has offered new staff a pay rate of £7.00 an hour, which is less than the living wage.

There are many facets to this story, and the Observer covers them well, including in an editorial and comment by Will Hutton. They also asked for comment from me:

Richard Murphy, a chartered accountant and anti-poverty campaigner who has analysed Care UK’s business model for another union, Unite, said he recognised similarities with all the major private equity-backed care firms.

He said: “They often win contracts on the basis of making losses or small profits. At the same time they are putting in place what look to be tax-driven structures that are designed to mitigate taxes on profits. I believe that what a lot of these companies are trying to do is to undermine any chance that an NHS organisation can win contracts.

“Once they have squeezed out the state sector, and the third sector, we will then see prices rise; then we will see profits; then we will see these tax-efficient structures working.”

This is the ‘loss leader’ model at work. The dogma of privatisation is not only destroying livelihoods and care now, it is designed to cost us more in the long term. Of course I declare my interests on this issue, having looked at the accounts of this company, as the Observer note, for Unite, but the point is one that anyone with an ounce of commercial sense should appreciate and is that the model of privatisation being used now, which delivers consistent losses for companies like Care UK and requires poverty wages for its staff, is not in any way sustainable. Something will give, and at the end of the day there will be a choice between care and price. When that happens we need to ensure that profit is one of the costs that need not be funded. Right now we are guaranteeing it is in the equation. And that has to be bad news for everyone who cares about care in the UK and those who supply it.

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The Salter Lecture at the Quaker’s Yearly Meeting

Fri, 08/08/2014 - 08:06

I mentioned yesterday that I was to give the Salter lecture for the Quaker Socialist Society at the Quaker’s Yearly Meeting in Bath last night.

I duly did, using the title ‘Tax Justice: A Quaker’s Concern’, and over 400 Friends came to hear, to all of whom I am grateful.

What I said (pretty much, as I am not that good at sticking to scripts) is here. I admit it does assume a little understanding of some Quaker thinking, but not much.

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NHS bid rigged

Fri, 08/08/2014 - 07:48

The FT reports this morning that:

A plan that would have taken the NHS into uncharted territory by inviting external bids to run a deficit-ridden hospital has been put on hold, ensuring that no contest will be launched until after the general election.

Gerrymandering doesn't die. It just morphs. This stinks.

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We need a corporation tax

Fri, 08/08/2014 - 06:54

There appeared to be a spate of articles published in the USA yesterday suggesting that the US corporation tax should be abolished.

The arguments used for doing so were, I think, disingenuous. So for example, it was argued that:

The United States should either reach agreement with its trading partners on a common way to allocate profits of multinational corporations or should scrap the corporate tax and directly tax shareholders instead.

This is surreal when read in the context of the article. What the authors noted is that outside the US countries are moving towards only taxing profits where they arise. But this, they argue, undermines the competitiveness of US companies that are notionally taxed on their worldwide income, even though as we well know many ( start thinking Google and just keep going) are absolute masters at paying almost no tax at all on their income arising outise the USA. And yet, if you read the above paragraph it would seem that they’re blaming other countries for this when in fact many – including the UK – would be only too pleased to tax a much more appropriate part of the profits of US corporations arising in their states.

This claim made is then to be seen for what it is, which is best described as a misleading picture of the situation. The problem with US tax is domestic lack of willingness to tackle the obvious flaws in its worldwide tax system which leads to abuse everywhere. It is most certainly not a problem imposed by other states.

But the straw man suggestion that the US and it’s major companies is the poor victim in all this is then seen as the excuse for the real argument being put forward here, which is that the US corporation tax should be abolished because it is so unfair to those poor companies – most of whom enjoy tax rates far, far below the US headline rates (which are, admittedly, unrealistically high in the current world economic environment, although I would not reduce them to anything like UK levels).

Of course those making this argument suggest that they are not arguing for the abolition of tax. They do instead say that the tax burden should be shifted to taxpayers, almost invariably when they received dividends from the company. They also suggest taxpayers should be taxed on the annual increase in the value of their shares, but with relief given if values fall.

So, in a few short paragraphs we move from ‘poor US companies’ (a solution wholly capable of being fixed if the American Right wanted to do it) to ‘let’s abolish the corporation tax’, a long cherished aim of those on the American Right who want to increase US inequality.

So let me first of all remind you why we have a corporate tax system. First of all it raises money. Not perfectly, but it works. Secondly, the alternative is taxing dividends, which already exists. It would raise no more money. And third, taxing movements in value may just be an upfront payment on capital gains tax, which already exists,so this will raise no more money either. In other words this is a demand to reduce taxes and so reduce the size of government. Let’s be clear about that.

Second, corporate income taxes were introduced to stop tax avoidance. It was just too say to incorporate, shift income you did not need to live ontoday (something only those already well off enjoy) into a company and watch it accumulate tax free. This would, of course, happen again if the corporation tax was abolished. So, demanding abolition of the corporate income tax is simply demanding that more tax shelters be made available to wealthy people when many more complex ones have currently failed.

Third, the corporation tax is pragmatic. It includes a measure of capacity to pay – called profit. It is charged on just one entity, the company, rather than lots, the shareholders, and so it is cheap and can be effective (a sin in the Right’s eyes). But most of all, it can be collected. And that is not true of shareholder taxes because in many countries – and the US is particularly bad at this – we have no idea who the shareholders of companies are and we have no way as a result if tracing them if they decide not to declare their income. The means by which shareholders can hide their identities from view are legion, and nowhere more than in the USA. Abuse of this law would be at staggering scales.

And finally, that tax on increases in value in shares. How is that going to apply to the millions of private corproations in the US and elsewhere? Do they get an annual valuation (which is expensive) and who checks they’re not lying? This would be enormously expensive to administer so you can see the next argument already, which is that they should be exempted. Suddenly there’s another gaping loophole.

Corporation taxes aren’t perfect. Unitary taxation internationally – which the US opposes – could solve all the allocation issues though. And without these corporate taxes I can guarantee tax abuse would run riot to the sole advantage of the wealthy.

We need corporation taxes. The campaign to keep them has to get serious. The suggestion that they be abolished is a massive threat to well-being in the US and around the globe if it were to happen. And those arguing for abolition have enormous piles of cash available to them to make their case.

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Tackling ‘the boys’

Fri, 08/08/2014 - 05:50

I have written about tax barrister Jolyon Maugham and his emergence as one of the new thinkers on tax reform in this country before. Today I have a simple recommendation to make with regard to a blog he has written about one of the core problems in tackling tax avoidance in the UK. Please read it.

In the blog Jolyon turns on some in his own profession, who he euphemistically calls 'the boys'. These are the six or so, all male, tax barristers in the UK who sign the opinions that suggest that the abusive tax avoidance schemes peddled by a relatively small number of purveyors mught actually work. It is these 'opinions' that are used to validate these schemes to the unwary punters, many of whom are now discovering that the opinions are not worth the paper they are written on but that they have no claim against 'the boys' for redress.

Jolyon is right: there really are a handful of so of barristers engaged in this disreputable trade, most of whom are well known for doing so. Their rewards are high. The damage they cause is significant, to the tax system, to the reputation of the tax profession and to their victims, which is the role in which Jolyon paints those with very limited knowledge of tax who have been sold these schemes believing them to be entirely legal because of the existence of such opinions. He suggests Katy Melua and Gary Barlow are amongst such victims.

I think Jolyon may be generous on that point but not wholly without reason. What I am quite sure about is that, as Jolyon says, action needs to be taken against these 'boys', as he calls them.

Jolyon has written a courageous blog. Please read it. This is an issue whose time has come.

 

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