Why stopping tax evasion would not increase prices


2:28 pm - October 12th 2011

by Richard Murphy    


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The almost inevitable response to Action Aid’s report on tax haven abuse by major corporations has already arrived on my blog. A commenter says:

The whole tax haven thing is nonsense, Where do companies like Vodafone get the money to pay taxes? From their customers, so by asking for corporations to pay more taxes you are implicitly saying you want the cost of things you goods/services they provide to go up in price.

Such claims are simply wrong. It;’s not how the world really is.

Let me for a moment unpack some of the assumptions inherent in this claim:

1) A company only generates cash inflows from customers;

2) The company has no choice about paying tax;

3) The company can always pass any tax charge it has to pay on to customers;

4) The company is a neutral party in all this: a rational, automaton, independent agent;

5) No one else but customers can pick up the tax charge placed on a company and it follows that customers get the benefit of law taxes.

None of these things is true.

First, companies are massive recipients of tax benefits. They get trained staff, for free. Their staff get healthcare provided for free, meaning they turn up in the morning. When staff can’t work they’re cared for by the state, for free. Much of staff’s pension is paid for by the state, not by an employer. The company enjoys the infrastructure of the satte, for free (or very little). Even the company structure itslef and the right for it to claim property is provided by the state, for next to nothing. So it’s not true that cash into companies comes only from customers. Massive subsidies come from the state to all businesses.

Second, a company has a massive choice about where and how to pay or not pay tax, which is what Action Aid were highlighting. It can relocate profits almost at will, and as the report from the US I have referred to this morning shows, that is exactly what they do. And they take these choices to benefit a particular group in society – and that’s the well off and not customers.

Third, there’s no evidence at all that companies can necessarily pass on all tax they pay to customers. If they can then it is very obvious that competition is not working – because if it were that would not be true. So free-marketeers can’t have it both ways. Either competition prevents generic passing on (generic VAT rises perhaps apart) of the fact that tax is passed on proves that monop[oly power is in operation and a bigger issue arises of tackling it.

Fourth, companies are biased in this. I again refer to the report from Carl Levin in the US. If tax haven use clearly benefits a few at cost to the many companies choose to do that. Never ever believe any claim that companies are neutral agents: they are not. They exist to redistribute income to their management first and members second unless competition prevents it. The evidence is clearly that the competitive pressure is not there – but in that case that is the issue that needs to be addressed.

And finally, if real markets existed then shareholders would pay the cost of extra tax just as right now the benefit of that abuse does not flow to customers but goes instead to shareholders. And if the beenfits flow to shareholders then we need to ensure that the costs do too. But tax havens prevent that. And that’s why they matter. Because they increase poverty. Ands that’s not by chance. That’s by choice. And it is a choice that has to be prevented.

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About the author
Richard is an occasional contributor. He is a chartered accountant and founder of the Tax Justice Network. He blogs at Tax Research UK
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Reader comments


Oh Boy…

They get trained staff, for free.

Um, what?

‘Companies are massive recipients of tax benefits’

None of the items listed are actually ‘cash inflows’ so….

4. Luis Enrique

why why why? what possesses you to publish this garbage?

it’s not even internally consistent. point 1. has nothing to do with whether taxes are passed on in prices (what would it matter if companies generated cash inflows from elsewhere than customers?) and the rebuttal starting under the heading ‘first’ goes on to list non-cash benefits enjoyed by firms, not “cash inflows”.

here’s the meat of the issue:

there’s no evidence at all that companies can necessarily pass on all tax they pay to customers. If they can then it is very obvious that competition is not working – because if it were that would not be true. So free-marketeers can’t have it both ways. Either competition prevents generic passing on (generic VAT rises perhaps apart) of the fact that tax is passed on proves that monopoly power is in operation and a bigger issue arises of tackling it

Who is claiming “necessarily” or “all tax” is passed on?

[Side issue: If “free marketeers” were trying to claim that we live in a world of perfect competition, perhaps it would be inconsistent for them to also claim taxes are passed on in prices (I’m actually not at all solid on the relevant theory here). But back in the real world, nearly all firms have some pricing power and thus some ability to pass on taxes in prices].

You can’t just slip in “generic VAT rises perhaps apart” and then skip on – why do you think VAT gets passed on in prices but not other taxes? Why do we proposed special taxes on alcohol or fatty food, if not because we think taxes get passed on in prices?

Here’s an idea – instead of embarking on a quixotic quest to deny taxes are passed on in prices, why not say: “Of course, taxes have to come from somewhere, and better tax compliance could lead to any combination of lower profits, lower pay, higher prices. That’s fine.”

Acknowledging that some prices may increase to some extent if corporations cough up more tax in no way weakens the argument for cracking down on tax evasion.

Richard Murphy: a one man credibility wrecking ball

5. Luis Enrique

[n.b. I am rather embarrassed by my ignorance here – can anybody point me to the relevant theory of when firms will pass on taxes in prices and when they won’t?]

“They get trained staff, for free.

Um, what?

I think the point being made is that staff are educated and kept healthy by the state through public services, so you could argue this is a benefit companies recieve from government spending.

7. Luis Enrique

this really is a particularly fine vintage.

I love the way that that 5 “assumptions” that he claims to “unpack” have bugger all to do with what that commentator is claiming.

[afaics, the only important and false assumption being made is that the only way firms will respond to having to pay more tax is to raise prices]

I think the point being made is that staff are educated and kept healthy by the state through public services, so you could argue this is a benefit companies recieve from government spending.

But it isn’t for free is it? Companies pay their staff directly (obviously) and also pay the government for the privilege of employing them.

That’s ignoring the fact that ‘trained staff’ implies staff trained to do the job they are paid for – something most companies end up paying for themselves. A more accurate sentence might be ‘companies have access to an educated workforce’ – and there have been a fair few comments recently from companies that would dispute even this.

Not going to disagree with that Tim, Richard expressed the point poorly.

It would have been better to write that companies (should) recieve the benefits of an educated and healthy workforce and should thus contribute to this through taxation rather than avoiding tax and getting the benefits of public services for free.

10. Luis Enrique

I’d have thought that if firms do things like dodge taxes in order to maximize their profits, they’d also try to pass on taxes to customers, rather than accept lower profits.

RM appears to somehow be arguing that assuming firms are “rational” and “independent agents” is one of the mistaken assumptions behind thinking firms will pass on taxes in prices, although what being “rational” and “independent” has to do with being “neutral” is anybody’s guess.

RM appears to somehow be arguing that assuming firms are “rational” and “independent agents” is one of the mistaken assumptions behind thinking firms will pass on taxes in prices, although what being “rational” and “independent” has to do with being “neutral” is anybody’s guess.

But then he also says that the assumption is that companies are “rational automatons”. Since automaton means “a machine or control mechanism designed to follow automatically a predetermined sequence of operations or respond to encoded instructions” I would hazard a guess that the whole thing is just word soup.

12. Robin Gitte

Richard Murphy is right.

Most people know tax dodging is wrong.

Trouble is, when you get in the slightest bit complicated, you get a deluge from closet tax haven apologists, as above.

If we lived in a decent democracy without rampant corruption, the will of the people would put tax havens out of business.

Here’s an idea – instead of embarking on a quixotic quest to deny taxes are passed on in prices

Does the article say this?

No it doesn’t.

It says ‘there’s no evidence at all that companies can necessarily pass on all tax they pay to customers.

I know you dislike Richard Murphy but you could at least do him the courtesy of not misrepresenting his arguments.

14. Luis Enrique

Robin Gitte, your cognitive skills appear to be on a par with RM’s.

Here’s a basic but crucial point: “tax havens are bad” and “tax dodging is wrong” have no connection with “taxes are not passed on in prices”, the topic of this post.

(I love the idea we’re struggling with the complexity of the great man’s thought)

People do actually think that pointing out the ignorance and incoherence of the sainted Murphy is tantamount to defending tax havens etc., don’t they? I despair.

I know he’s supposed to be on our side, but personally, I think we should care about atrocities committed by our own troops, so to speak.

15. Luis Enrique

bubby,

perhaps you are right – I could have been thrown by the headline – the headline writer evidently thinks the article says taxes will not be passed on in prices.

However, does the article read to you like a discussion of how taxes will be passed on in prices, lower wages, lower profits? Is RM saying here: “yes, taxes may well be passed on in prices”?

This article starts with the claim that asking companies to pay more tax amounts to asking them to increase prices and says “such claims are simply wrong“.

@5,

I could explain it quite easily with this graph.

Amobile phone company wants to adjust prices to maximize the yellow area on the graph. Profits are the yellow area minus fixed costs (those of instrastructure etc). Regardless of the %age tax on profit, maximising yellow area will maximise profit, therefore a rational profit-maximaliser will charge the same price regardless of profit.

If the tax was levied on revenue, such as VAT, this analysis wouldn’t hold, and increasing the tax would probably increase cost to the consumer.

“Third, there’s no evidence at all that companies can necessarily pass on all tax they pay to customers.”

No one has ever claimed they can.

The actual claim (started by Seligman in 1899, so you should have heard of it all by now) is that a corporation tax, a corporate profit tax, will not be paid by the company. The tax burden will be carried by some combination of customers in higher prices, shareholders in lower returns and or workers in the form of lower wages.

This basic logic is not, please note, in doubt. I’ve seen both Vince Cable and Larry Elliott make this point in The Guardian, just to show you that it really is agreed.

Now, the interesting point is who bears what in which proportion with which tax? A VAT is largely (but not entirely) bourne by the customers. The existence of the VAT does reduce demand a bit, certainly it reduces demand for vattable goods as compared to non vattable and thus there will be some, but probably a small, effect on the shareholders and workers producing vattable instead of non vattable goods/services.

Corporation tax however we know gets split between workers and shareholders, customers don’t really come into it. And no, it’s not the absence of market competition that causes this: it’s the existence of market competition that does. Capital can choose to bugger off and get taxed less elsewhere. Thus there’s less capital in the jurisdiction taxing the returns to capital, less capital added to labour means less productive labour and less productive labour in general means lower wages in general. The burden, in a world of mobile capital, lays ever more heavily upon labour then.

There’s no disagreement about this either. The only disagreements are about how mobile capital needs to be to put how much of the burden on labour. They are empirical arguments, not logical ones.

“If they can then it is very obvious that competition is not working – because if it were that would not be true. So free-marketeers can’t have it both ways. Either competition prevents generic passing on (generic VAT rises perhaps apart) of the fact that tax is passed on proves that monop[oly power is in operation and a bigger issue arises of tackling it.”

No, it’s precisely that there are different tax regimes that capital can invest under, that there is a market in tax regimes, that leads to labour bearing some portion of the tax.

This is one of the things that so annoys me about you. If you just listened, absorbed, what people were telling you you’d end up with great arguments for your own desires. If you want capital to carry all of the burden of corporation tax then you’ve got to do one of two things. Have capital controls, so capital cannot move from one market or tax jurisdiction to another. Or have one corporate tax regime globally so that there is no such market, no competition.

Either of these would work in making corporation tax stick to capital, not labour. But because you won’t listen when we tell you that some portion of corporation tax currently sticks to labour you’re not able to make that connection, are you?

18. Biffy Dunderdale

Its brave of Richard Murphy to expose his “thinking” to the comments of others. On his blog he will only publish comments that agree with him. Doen’t seem to be working out for him here though….:-(

19. Luis Enrique

@16

ah, Phil, that’s perfect, thanks. So there is a good argument for why taxes on profits might not affect prices. And why other forms of tax will affect prices. I presume it is RM’s disdain for “blackboard economics” that prevented him from using that simple argument.

[I presume that argument needs modifying if you allow for (de facto) collusive behaviour amongst competitors, that gives them some ability to shift their demand curves around (if firms A, B & C change their prices, the quantities firm D will be able to sell at each price will change too)? Plus there are probably more complicated arguments concerning investment decisions to think about. But if you are looking at an individual firm – say Vodafone – being required to pay more tax whilst everybody else in the industry is held constant, there’s no reason to expect that Vodafone would want to change its prices].

@4 Luis

“why why why? what possesses you to publish this garbage? ”

Just to check you’re still there, one suspects. Murphy really is a red rag to you, isn’t he?

Sadly he and NEF seem to be de rigeur with some progressives, the Greens in particular. Despite having shaken off the homeopaths at their national conference they still have a long way to go before they become a credible alternative, apart from the sainted Caroline Lucas, of course.

21. Luis Enrique

so, some egg on my face (I knew my lack of knowledge here was an embarrassment), in the context of taxes on profits, rather than being a quixotic quest to argue taxes aren’t passed on in prices, it is in fact the standard economic analysis from which you’d have to depart to argue profit taxes are passed to consumers. I am pleased to have learned something.

But whilst this makes some of what I have written wrong, I don’t think it improves the quality of RM’s post.

Tim, I am keen to learn more. You say “Corporation tax however we know gets split between workers and shareholders, customers don’t really come into it.” and go on to explain that it’s the level of capital investment that is doing the work. But if the level of investment is varying, don’t cost curves shift so that the profit-maximizing price changes?

22. Luis Enrique

Murphy really is a red rag to you

yes he is!

23. Luis Enrique

more … so in context of a transaction tax, which is not a tax on profits, we should expect tax to be passed on in prices? I think so.

“and go on to explain that it’s the level of capital investment that is doing the work. But if the level of investment is varying,”

The effect isn’t on hte workers of the particular company that is being taxed. It is upon hte wages of all workers in hte jurisdiction.

There’s a world return to capital (“natural rate of profit” etc). So, if you tax that profit then some of the capital will leave, going elsewhere where it is not taxed. In fact, enough capital will leave until returns to capital are bid up again to that natural rate of profit.

This obviously means less capital employed in htat economy.

However, average wages in an economy are determined by average productivity in that economy. This is why a hairdresser makes more in London than Cairo. Because of the alternative jobs that are available, the average productivity of all jobs.

But as a result of our tax on returns to capital we’ve now got lower levels of capital in hte economy. Lower levels of capital lead to lower levels of average productivity of labour and thus lower average wages.

“more … so in context of a transaction tax, which is not a tax on profits, we should expect tax to be passed on in prices? I think so.”

Yup, Mirrlees and Diamond, Nobelists both. Further, transations taxes on intermediates cascade: they get charged at many intermediate steps. They are therefore contra-indicated when some method of taxing final production is possible.

Luis: I love the way that that 5 “assumptions” that he claims to “unpack” have bugger all to do with what that commentator is claiming.

Erm, that’s because he is unpacking the assumptions made in the original claim, rather than specifically rebutting them… which is also done by proxy anyway.

Seriously Luis, try less frothing at the mouth when you respond to Richard’s article next time?

27. Luis Enrique

Tim @24 …. oh OK well then the distinction between changes in wages and changes in prices has collapsed because you are looking at W/P, and saying real wages fall, which you can think of either as W falling or P rising. I don’t quite know how that would look on the kind of graph Phil referred us to at @16, but changes in the capital stock will shift cost curves so shift the profit maximizing price even in a partial equilibrium analysis?

So what was I thinking?I think I had in mind changes in taxation imposed upon a sub-set of firms, so economy-wide capital intensity does not change, but the price of these firms goods relative to other goods may change. For example if those companies that engage in tax-haven, lawyered-up tax dodging were to stop doing so, that would represent a change in the taxation of a sub-set of firms. And if, say, all the banks or all the mobile phone companies found themselves having to pay more taxes on profits, I thought they all might put their prices up (as well as accepting lower post-tax profits, lower bonuses). I still think they might, if they are able act collusively.

28. Luis Enrique

Sunny,

yes, maybe the red mist has clouded my vision … but isn’t he claiming to “unpack” the assumptions implicit in the claim that: “by asking for corporations to pay more taxes you are implicitly saying you want the cost of things you goods/services they provide to go up in price”?

I still don’t see how any of the assumptions he claims to unpack have anything to do with that original claim. Can you explain, for example, why the assumptions 1), 2) & 4) lie behind the claim corporations will pass on taxes in prices?

@17: Capital can choose to bugger off and get taxed less elsewhere.

A UK-based mobile phone network can’t. If they’re not based in Britain, they won’t be doing much custom here!

Luis,

The right do actually say this. They say it all the time. Example Mail headline:

Obama bullies BP into £13.5bn fund for oil spill victims… but British pensioners will pick up the bill

http://www.dailymail.co.uk/news/article-1287222/BP-oil-spill-British-pensioners-pick-BP-compensation-fund.html

See, gulf-ruining BP has investors. Investors have savings. Some savings are in private pensions. Some rich people have those.

Therefore the angry black man is coming to kill your granny (see headline).

It’s a game of six degrees of separation to LABOUR KILLS POOR. Tim Worstall’s version is less hysterical, less extreme, but still highly dubious.

And Richard Murphy is right to say so.

31. Luis Enrique

splem

well I heartily agree the Daily Mail is daft, but isn’t RM arguing here that taxes are paid by shareholders, not passed on to customers, in which case by his logic BP shareholders will pick up the bill? [the daft bit is suggesting this is somehow a reason not to fine the crap out of gulf-ruining BP]

Tim,

… so this means, for example, that if brewers are uses charges for central services plus brand ownership (paid to subsidiaries in tax havens) to reduce reported profits and thus avoid taxes in some countries (like SAM Miller in Africa), and this practice is ended, they are likely to reevaluate their desired level of investment in those countries … and if that changes the market supply curve in those countries the price of beer is likely to change as a result? It may not change the market supply curve if investment is largely irreversible.

[gyac – this is in no way a defense of SAB Miller, who are tax dodging swine. I’m still trying to understand, using examples, when taxes are passed on in prices and when not.]

32. Luis Enrique

Phil Hunt,

no, but over time investors can reduce the amount they want to invest in UK mobile phone companies, meaning they will reduce the amount of custom they are doing in the UK, because doing custom has become less worthwhile. This is the kind of thing that only emerges slowly, because capital adjustment is slow, and does, as Tim acknowledges, require mobile capital plus cross-country variation in capital taxes, if it is to happen.

“so this means, for example, that if brewers are uses charges for central services plus brand ownership (paid to subsidiaries in tax havens) to reduce reported profits and thus avoid taxes in some countries (like SAM Miller in Africa), and this practice is ended, they are likely to reevaluate their desired level of investment in those countries ”

Yes, and stop there. Other things being equal, more capital employed in Zambiua (say) increases average productivity of labour in Zambia and thus average wages in Zambia. Reduce incoming investment and reduce both.

We don’t need to change supply curves for beer or anytihhng else.

Erm, that’s because he is unpacking the assumptions made in the original claim, rather than specifically rebutting them… which is also done by proxy anyway.

Seriously Luis, try less frothing at the mouth when you respond to Richard’s article next time?

Sunny, in what sense are the following “cash inflows” to a company?

“trained staff”
“healthcare”
[statutory sick pay]
“pensions”

Separately:
In what sense do companies “get trained staff, for free”? Does Murphy mean staff are volunteers?
In what sense do staff “get healthcare provided for free”? Does he mean they haven’t paid tax?
When Murphy wrote, “When staff can’t work they’re cared for by the state, for free”, did he mean that statutory sick pay has not come from the public purse and/or staff had not paid tax?
When Murphy wrote, “Much of staff’s pension is paid for by the state, not by an employer”, in what sense does this make the companies “massive recipients of tax benefits”?

Genuine questions, as you appear to have a different understanding of the OP than mine.

35. Luis Enrique

Tim

are you sure stop right there? In this example, if investment in the Zambian brewing industry has changed, the productivity of Zambian brewery workers will have changed, but the economy-wide level of productivity hasn’t moved, or rather, average productivity has only fallen to the extent brewing productivity has fallen and real wages will only fall to the extent beer prices have risen. If you don’t drink been, why would your wage change because brewing is less capital intensive. And I think the industry-wide supply curve does matter for the price of beer.

If we were talking about all industries in Zambia getting hit with higher taxes, fine … I was still trying to think through what happens when taxes imposed on sets of firms change.

But Luis, it doesn’t matter how far capital runs, the market is here. The people who are happy to exchange valuable moneys for phones aren’t going to the Bahamas. As long as they want to sell to here, they have to sell here. The reason we let them pay taxes in the Virgin Islands is because we… let them.

In other words:

“If we keep taxing the ice industry they’ll only start selling to Eskimos.”

“average productivity has only fallen to the extent brewing productivity has fallen”

Yes, correct.

38. Luis Enrique

splem,

I half agree – meaning that I doubt the extent capital is fully mobile, and I think multinationals want to be in countries for various reason, so that in practice I am skeptical about how responsive investment is to tax rates … none the less, I will try to defend this idea taxes on capital matter.

you say “the market is here” – agreed. So, each country contains people wanting to buy mobile phones. Selling them mobile phones requires building networks that require investment. Your reward for making investment is post-tax profit. Now compare 2 countries, one where every £ of investment gets a 30p post-tax return, and one where every £ gets 10p (both have same pre-tax profits). Where would you invest your next £?

If you think banks/corporations are money grubbing bastards, and that they do everything they can do reduce their taxes, doesn’t that behaviour translate to their investment decisions in the real economy?

Luis.

Yes, of course. But that’s why states shouldn’t be allowed to write “get out of tax free notes” to other states’ business. And it’s not so difficult, seeing as Osborne had to actively sabotage the latest anti tax haven law.

There are, I understand, laws and treaties and disincentives applied to Sudan just dumping toxic waste in the Nile and letting it float down to Egypt. Deliberately pursuing tax flight really is an aggressive act. Since it’s a race to the bottom it’s more like India poisoning the Indus to get at Pakistan.

If states then are money grubbing bastards, and that they do everything they can do raise more taxes, surely there will be a will.

40. Luis Enrique

splem,

well I think we are in agreement about this being a reason why tax havens are toxic.

however, even if there were no tax havens, if you go back to the question of whether taxes on capital are felt by workers or shareholders, which I thought we were discussing, think about what happens when you vary your profit tax rate, holding other country’s rates constant. You will be varying the post-tax returns to investment relative to other countries, thus making your country more or less attractive, and the argument runs, that will eventually be felt in worker’s real wages. if all countries had the same rate or moved their rates in unison, it wouldn’t happen, which is one of the points Tim makes above – if Richard bothered to follow the arguments about tax incidence he’d find some of them strengthen the case for things he likes, like tax harmonization.

Luis, I think if I hang around any longer the limits of knowledge might be exposed,

Which is probably why I’m sticking to the tax flight argument rather than the tax incidence argument, which involves a lot more data assessment and economist legwork to prove than “I can’t help but notice Royal Dutch Shell doesn’t have any employees in Jersey”. That’s why Tim is citing those nobel prizes for the guys who argue tax incidence is high, forcing us liberals to flee to the Nobel prize winning economists who might disagree like Paul Krugman.

Hmmm.

This is unsurprisingly the usual hotchpotch of drivel. However, Timmy is not quite correct to say that customers do not really come into it. It depends on the type of market that the firm operates in. So on the one hand Richard Murphy is correct to say that competition should compete away super-normal profits. Yet, lumping all firms together as a homogenous whole is bonkers. A firm selling t-shirts is always going to be operating in a more competitive market than a utility firm producing electricity. No matter how much you reform the latter that situation will prevail due to the huge amounts of capital that must be sunk for decades, consequent risks then to that capital and barriers to entry. Therefore, the former firm operating in a competitive market will reduce prices as their tax burden falls and raise them as the tax burden rises. In the latter case of firms operating in less competitive markets raising taxes will lead to reduced wages for workers in that industry.

Beardsley Ruml, Chairman of the Federal Reserve Bank of New York wrote as long ago as 1946 about this and it is a tragedy that we are still debating it in 2011.
http://home.hiwaay.net/~becraft/RUMLTAXES.html

The tax incidence issue really is a zombie that refuses to die. When we raise taxes on petrol who pays the petrol tax?

The car?

The petrol station?

The oil company who supply the crude oil?

The end consumer of the petrol?

Cars consume petrol but they do not bear the burden of the tax. The petrol station collects the tax and may sell less petrol. However, in the short-run demand for petrol is pretty inelastic so the tax will only marginally be borne by the collector of the tax. The tax on petrol makes no difference to the oil company. There are hundreds of different tax regimes in the world. Yet, the price that the oil company obtains in the international market is the same no matter how much it cost to obtain the crude and ts final destination. Therefore, the real bearer of the petrol tax burden must be the end consumer regardless of who collects the tax. Why is it so difficult to understand in other areas that the entity collecting the tax need not be the same as who bears the burden?

” A corporate income tax, which allows interest to be deducted prior to the determination of taxable income, induces debt-financing and is therefore undesirable. A corporate income tax also allows nonproduction expenses such as advertising, marketing, and the pleasures of the executive suites to be charged against revenues in determining the taxable income. As advertising and marketing are techniques for building market power and as ’executive style’ is a breeder of inefficiency, the corporate income tax abets market power and inefficiency just as the corporate income tax abets the use of debt-financing. Elimination of the corporate income tax should be on the agenda. ” Hyman Minsky

Minsky has become something of a left-wing hero was here railing against the corporate income tax because it creates bad incentives and debt-financing as opposed to equity-financing. Lefties should listen to Minsky who was a very good economist rather than Richard Murphy who is not.

If we accept that our system of corporation tax encourages debt-financing, it must logically follow that it discourages equity-financed investment. Here the recent Mirrlees Review on taxation tells us that the consequence of our current system of corporate taxation will make workers poorer

” By raising the cost of equity-financed investment, the corporate income tax also tends to reduce the overall level of corporate investment. In an open economy, the cost of this distortion will largely be borne by domestic workers. Owners of capital can invest elsewhere. Lower investment in the UK implies less capital per worker and lower labour productivity. In the long run, this will be reflected in lower real wages, making domestic workers poorer. ”

http://onlinelibrary.wiley.com/store/10.1111/j.1475-5890.2011.00140.x/asset/j.1475-5890.2011.00140.x.pdf?v=1&t=gtoj9xpk&s=0528461d4a9eaf8d54018f059eef2363c6ce7b14

Luis – point one is simple: a company gets benefits conferred by the country’s infrastructure. The more trained a workforce, the more companies benefit – yes? And the higher productivity is and the more they get paid.

The point is there is an inherent subsidy to companies from the state, and that should be taken into account when assuming that companies are completely independent of the state and get nothing from operating from a jurisdiction.

Point 2 simply rebuts the claim that there is a direct relationship between paying tax and costs imposed on customers.

4 deals with the assumption that companies don’t make specific choices whether or not to pay taxes… with the assumption that they would automatically choose to evade tax if the opportunity is there.

44. Leon Wolfson

@17 – Fine. Remove the market from tax regimes then.

A company has to open it’s books. If it cannot prove that it has paid as much tax as it would in the UK for it’s overall operations, then you calculate based on the percentage of their operation in the UK, (or as if a percentage of their workers equal to that were in the UK, that might work better…) what they WOULD have paid, and charge them any underage. Done.

Oh, and you could also vary a corporation’s tax burden based on their price trends…

@42. Sunny Hundal: “…a company gets benefits conferred by the country’s infrastructure. The more trained a workforce, the more companies benefit – yes? And the higher productivity is and the more they get paid.”

This argument gets tricky*, doesn’t it? Just as companies benefit from well educated workers who benefit from a society that provides a safety net, so do workers. Traditionally, the concept that everyone benefits from social provision means that we do not charge anyone for 5-18 year education or for the NHS. We don’t hypothecate taxes on the basis that workers at company X got “more out of the system” than at company Y; personal tax and corporation tax rates are the same, based on income. We don’t try to invent reasons why a dental practice (employing better educated workers) pays different levels of tax than a plumbers merchants. Companies simply pay corporation tax on the basis of income.

*It gets tricky because the UK (noting differences in Scotland) will effectively impose a graduate income tax from 2012.

46. Leon Wolfson

@45 – No, it will put commercial-rate loans with an income threshold for paying them back. Which cost you money over your working life to take.

It’s no longer in the worker’s interest to go to University. So we can bank on a MASSIVE fall in the lower classes interest…

47. Luis enrique

Sunny,

RM reports the claim that getting firms to pay more tax will result in higher prices. He says that claim is wrong. He then promises to “unpack some of the assumptions inherent in this claim”.

I agree firms benefit from tax funded expenditure. But you are yet to explain how assumption 1) is inherent in the claim in question, nor what bearing the point about firms benefiting from govt. spending has on whether firms will raise prices.

Assumption 2) does not appear to be inherent in that claim either. The question concerns what happens if tax havens, an avenue through which firms may choose to avoid tax, is shut down. Either they end up paying more tax, or they don’t. If they do, the claim is they will raise prices. This claim does not rest on the assumption firms have no choice about paying taxes. Richard’s supposed rebuttal, that companies do have discretion, and exercise it to benefit the wealthy, is if anything more supportive of the idea firms will seek to pass on tax increases, if they can. You say assumption 2) and Richard’s supposed explanation of why that assumption is false “rebuts the claim that there is a direct relationship between paying tax and costs imposed on customers”. I can’t see anything about that at all in either assumption 2) or Richard’s response to it.

I can’t make any more sense out of your parsing of assumption 4) than the original. Is the assumption firms are “neutral” inherent in the claim they will pass on taxes in prices? What does that even mean? Richard supposed rebuttal of that assumption talks about how companies dodge taxes to benefit the few rather than the many. Fine. Now, does that mean they will or won’t pass on taxes in prices?

48. Paul Newman

I wonder if , as it is easier to move the place of profit , that services and , for example web based Companies are at an advantage to manufacturing in a high corporate tax country
Its possible isn`t it that there are costs associated with a high tax on profits in terms of distortions which are born ina what may be a diffuse way but a pretty tangible way when the shit hits the fan and your supply side is found to be dependent on relatively luxury purchases

It musty have some structurall effect anyway ?..Or not ?

Yup, which is why taxes on govt protected monopolies, primarily on land rental values, but also patents, radio frequencies, landing slots at airports, cherished number plates, taxi drivers’ licences, whatever, are the least bad taxes because they cannot be passed on to anybody; they are a tax on monopoly profits which the consumer is having to pay anyway.

We do sometimes wonder why Mr R Murphy doesn’t accept this – we suspect it’s because he’s a landowner, BTL landlord or similar.

Just as companies benefit from well educated workers who benefit from a society that provides a safety net, so do workers.

Yes – agreed. But the point is still that companies benefit from that infrastructure investment.

nor what bearing the point about firms benefiting from govt. spending has on whether firms will raise prices.

Luis – that comes into it because the assumption is that companies are fully mobile creatures that can easily move without loss to another country and uproot all staff without costs.

Assume Vodafone says they’ll move to India because taxes are lower there. Fine. That is blackmail, but it happens. The point is that Vodafone would be pretty stupid to assume it does not get subsidies from the UK govt in the form of a well educated workforce, and for that it must pay taxes.

If corporates don’t pay taxes for the benefits they get in a country, then over the long term those corporations and the workforce loses out. Simple.

On point 4 – the claim is that the choice of not paying tax and evading it, or choosing to pay tax willingly, is not a choice simply down to incentives. It is also down to company agency. A company can *choose* to pay taxes or it can invest loads in dreaming up schemes to avoid taxes. The point is simply to say it is a choice rather than a straightforward automatic decision.

On point 4 – the claim is that the choice of not paying tax and evading it, or choosing to pay tax willingly, is not a choice simply down to incentives. It is also down to company agency. A company can *choose* to pay taxes or it can invest loads in dreaming up schemes to avoid taxes. The point is simply to say it is a choice rather than a straightforward automatic decision.

Who claimed or implied it is a “straightforward automatic decision”? Do you think a salesman pursuing bonuses does so unconsciously or as an “automaton”?

That is not what “incentive” means.

52. Luis enrique

Sunny,

The claim being “unpacked” concerns whether getting firms to pay more tax will result in higher prices. The idea that firms can costlessly relocate is not inherent in that claim, and neither the idea that companies can choose to pay taxes or avoid them. Those points are unconnected to the claim, not inherent in it.

@19: I presume that argument needs modifying if you allow for (de facto) collusive behaviour amongst competitors, that gives them some ability to shift their demand curves around (if firms A, B & C change their prices, the quantities firm D will be able to sell at each price will change too)?

Firms sometimes do collude to raise prices. But I doubt if the possibility of collusion means that corporation tax would raise prices.

Plus there are probably more complicated arguments concerning investment decisions to think about.

Yes. However, in the case of a 2G mobile phone company, their network is already built, it’s a sunk cost. But if a company was considering setting up a new phone infrastructure, then corporation tax would be a factor in deciding how to price it (and whether to build it in the first place).

Article: “Third, there’s no evidence at all that companies can necessarily pass on all tax they pay to customers.”

Tim Worstall: “No one has ever claimed they can.”

With respect, every time a tax increase (or indeed an absence of further tax cuts) is proposed on companies, someone appears on television from the CBI or some similar organisation making *exactly* that claim.

“It’ll only get passed on to hard-pressed consumers” (the “only” implying 100%, all of it) is standard issue rhetoric from corporate interests whenever any new tax is proposed.


Reactions: Twitter, blogs
  1. Richard Murphy

    Why stopping tax evasion would not increase prices | Liberal Conspiracy http://t.co/P99qqCUb

  2. Fold

    Why stopping tax evasion would not increase prices | Liberal Conspiracy http://t.co/P99qqCUb

  3. David Lewis

    Why stopping tax evasion would not increase prices | Liberal Conspiracy http://t.co/P99qqCUb

  4. Harry Dump-Rich

    RT @RichardJMurphy: Why stopping tax evasion would not increase prices | Liberal Conspiracy http://t.co/JNR1rIAo

  5. Pucci D

    Why stopping tax evasion would not increase prices | Liberal Conspiracy http://t.co/P99qqCUb

  6. Jarno Mäkelä

    Why stopping tax evasion would not increase prices | Liberal Conspiracy http://t.co/P99qqCUb

  7. Rob

    Why stopping tax evasion would not increase prices | Liberal Conspiracy http://t.co/P99qqCUb

  8. Jack Barker

    Why stopping tax evasion would not increase prices | Liberal Conspiracy http://t.co/9eTGLndj via @libcon

  9. Christie Malry

    Over at @libcon, Richard Murphy gets ripped a new arsehole http://t.co/SrpG5tfC

  10. jorjun

    Over at @libcon, Richard Murphy gets ripped a new arsehole http://t.co/SrpG5tfC

  11. Murphy J Richard

    It seems a lot of people think I'm wrong about tax havens. http://t.co/tdLmr3x0 Neo-Libyan baker apologist tourists the lot of 'em.





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