On this tax incidence thing, that taxes aren\’t fact paid by corporations but by some combination of the stakeholders.
So, we’re left with a pretty stark choice. Those who say they pay the tax in business are either wrong or the economists are. For evidence that business thinks it is the economists who are wrong look at Tescos at the weekend saying they paid disproportionate tax: the Devereux / Mankiw argument is that they are deluded in saying so, since they actually pay none according to their hypothesis. Which is it to be?
Well, given that economists are pretty much wrong about everything else on business there’s a very good chance it is them. After all, if we were to believe economists all businesses set out to maximise profit which is defined as the net present value of future cash flows. Of course, no business actually knows what this might be which either makes it easy to achieve or an absurd assumption, depending on your point of view, but quite useless in practice either way. As a result it’s not hard to believe that the economists are wrong.
Economists are wrong and yah boo sucks!
It\’s an extraordinarily compelling argument, don\’t you think?
Compellingly delusional. Tescos is paying tax on behalf of its shareholders, consumers and employees – if he bothered to asked Tescos management I am sure they would agree.
“Tescos is paying tax on behalf of its shareholders”
Corporation Tax.
“consumers”
VAT.
“and employees”
NICs and PAYE.
Pretty straightforward.
@ KT – not even.
Tesco pays £x in corporation tax + VAT + NICs + PAYE. You’re right that CT is proportional to how much profit it makes; VAT is proportional to how much revenue it makes; and NICs/PAYE are proportional to how much it pays its workers.
But that’s not necessarily where the *incidence* lies. Doubling VAT wouldn’t just hit consumers – it would hit profits, and probably lead to lay-offs or wage cuts hitting workers. Doubling income tax wouldn’t just hit workers, it would probably force Tesco to raise wages, hitting profits, and raise prices, hitting consumers.
In Econ101 theory, corporation tax *should* fall exclusively on the shareholders, because the company should already be profit maximising (and therefore, if corporation tax were raised, there would be nothing the company could do to increase profits). But in practice, it’d be likely to lead to higher prices and lower wages as shareholders sought to keep their returns up.
Tim has cited academic studies here before that suggest that raising CT hits workers harder than it hits shareholders. These are speculative, correlation-based econometrics, so aren’t necessarily accurate, but certainly deserve reading and thinking about.
Would it not be better if you stopped talking about this fucking arsewipe? You’re surely giving him some kudos by continuing to argue with him when patently he’s delusional and living in la-fucking-la land with the Brown one.
No more than 2 more Brown years to go. Then perhaps the Dick will fuck off to some other socialist haven where some fuckwit might take some notice of him.
“some other socialist haven”
You think Labour are socialist?
*dies laughing*
Kay Tie: nearly there.
Corp tax – borne by shareholders
VAT – shared between customers and supplier (depending on price elasticity of supply and demand)
PAYE and NIC – borne by employer (employee works for net wages) BUT he gets corporation tax relief on total cost, so the net cost to employer is (gross wages x 70%) minus net wages, in practice about 18% effective, but again there is relative prices elasticities of supply and demand for labour.
Anyroad, if you’re a fan of Polly, Richard etc, why not invite yourself to this?
http://www.tuc.org.uk/economy/tuc-14867-f0.cfm
Highly recommended for people who enjoy the sensation of wanting to tear off their own eyelids, stab themselves with a fork etc.
Blooody hell; a gathering where the head of the TUC is the most economically clued-up speaker is a terrifying gathering indeed…
[…]profit which is defined as the net present value of future cash flows.
Since when? I am not an economist, but that strikes me as one of the most fucking retarded things I’ve seen Murphy come out with yet, and that’s against some truly robust competition. Perhaps the poor deluded idiot meant to say something like the net present value of a company is the sum of the discounted flow of estimated profits in the future, which has the usual quality, as this blog’s subtitle suggests, of being both true and boring. But in the corporeal world which Murphy seems to glimpse so dimly, profits are revenues minus costs (and all the jiggery-pokery entailed by accounting and tax law). Or am I hopelessly wrong?
No, according to Econ101, Murphy is right – “profit maximising” means that firms seek to maximise the NPV of all future profits, not that they seek to maximise profits for FY08.
[and in the infinitely long run, cash generated is theoretically equal to accounting profit]
So from an accounting point of view, the profit that a company makes in a given year is augmented by its projections of how much money it stands to make in the future? I can see that that is plausible from a theoretical standpoint, but does the taxman want more than just a take on your actual yearly profits or does he take future cash flows (effectively an annuity, or perpetuity if you take it far enough) into consideration as well?
What I mean to say is, do corporations pay more tax now, because they expect to be still profitably trading at some point in the future? Not, is the present value of the company higher than one year’s profits – we all know that to be the case. But a stream of income (profit) x per time period discounted at r over that time period has a NPV of x/r. Is corporation tax levied on x or the NPV or something in between? Who sets the discount rate? The P/E of the share value indicates where people think it should be for the purposes of buying the company, but what about the man from HMRC?
Of course a company will seek to act in a cost-minimizing/revenue (and thus profit) maximising way. But do such examples of good corporate governance translate into higher tax bills TODAY? If I’m CFO of a business, the profit from which is projected to grow for the next five years, will I be expected to fork over more lolly when I write the corporation tax cheque for this fiscal year, before those profits have materialised?
Tim adds: No, no NPV calculations in corporation tax. It’s historical only.
Tim is right. But that isn’t Murphy’s point here – he’s simply saying “economists are wrong because they think firms seek to maximise the NPV of all future profits, when we know that that’s impossible. Therefore, economists are sometimes wrong; therefore, they might be wrong about tax incidence”.
His argument is still a bit daft: real professional economists don’t, in fact, believe in the Econ101 model of a firm as profit-maximising based on perfect information and with perfect alignment of incentives between management and shareholders, because that’s a silly thing to believe.
But he’s not making any kind of claim that taxation or accounting is now, or should be, based on expected future profitability.
[note: I’m currently in a project room with four qualified accountants, all of whom laughed and looked horrified at the concept of performing an audit on projected future profits…]
Ah, I think I see where my confusion arose: I was in a state of cognitive dissonance between Murphy’s claiming that economists did impossible X whereas in reality they do Y.
Order has returned to my universe.