Dear Lord this is pitiful:
Now, at the meeting at the Social Market Foundation I attended this week HMRC director Judith Knott confirmed that HMRC have accepted another key element of right wing tax dogma – which is that companies can’t pay tax and only people do. She explicitly questioned as a result why we have a corporation tax.
Well it’s an interesting idea. So let’s explore it for a moment.
First, imagine there wasn’t a Marks & Spencer when you went into a store marked M&S. That’s what you’re being asked to believe. You’re being told M & S and all other companies are just make believe. You’re told they’re just a bunch of shareholders. Except that’s not true. You don’t contract with the shareholders. You do contract with M&S. And you do that because there would be no M&S without there being a limited liability company. No one would have taken the risk of creating M&S but for that limited liability. So not only is it not true there is no M&S, the reality is that the company called M&S facilitated something no person would have done. It’s real therefore. The claim that company is just an agent for its shareholders is wrong; it’s something much more than that, and its limited liability form has an impact for beyond anything that the shareholders would do, so it is an entity in its own right, and not a mere agent. That makes it taxable in its own right. It has profits all of its own, not due to anyone else that should be taxed – and the existence of retained reserves in almost all companies is sure indication of that fact. Denying this – as Judith Knott did – is simply an excuse not to tax a form of capital that has been captured by the management of these companies for their own gain.
Second, no one knows who a company represents. Most of the time a company has no idea who owns it. Some people own the shares in companies for fractions of seconds. How would we attribute profit to them to be taxed? Others hold their shares through other companies. How far do we have to go to find a person? Others record their ownership in tax havens to seek to avoid or evade tax. Why should we encourage them to do so? And how do we tax ownership where no person can be identified as having ownership rights – as in a discretionary trust? The argument that only people are taxed is simple to roll out – and impossible to apply. Knott should know that and yet she offered this glib explanation when there is in fact one excellent reason why we must tax companies – which is that they are by far the cheapest and most effective agent to tax to ensure that their owners, whoever, wherever and whatever they might be, are taxed to at least some degree on the income they derive from the company.
Knott would, presumably, rather lose the income to tax havens or tax avoidance: that’s the only reasonable interpretation of her adopting this trite argument that looks good on a blackboard at the Oxford Centre for Business Taxation and whose real world application is to encourage tax abuse, the shifting of the tax burden from capital to labour and from rich to poor and which will mightily increases the income and wealth gaps; all of them aims I am sure Oxford’s Centre is delighted to share. You would not consistently fail to point out the flaws in the argument if you didn’t believe in those consequences that have to flow from promoting it if that was not the case.
Look, I’m sorry, but Edwin Seligman published on this in 1899 at which point all economists went “Oh yes, how obvious”.
The argument just isn’t about whether a corporate structure exists or not, nor whether there is a legal ability to tax such a corporate structure.
As I have explained innumerable times over the years Ritchie is just being pigheaded in his refusal to understand the actual argument.
All taxes, by definition, mean that someone’s pocket gets lighter. The study of tax incidence is “whose?”.
We do this all the time: do onsumers really pay VAT? What about income tax, is that really on wages (largely, yes)? How about employers’ NI? Does that come off the wages of the employee or off the profits of the employer? Now I know that Ritchie agrees with the general view on that NI because he’s said so. It depends upon hte various elasticities and the general iew is that some to all of employers’ NI actually comes off the worker in the form of lower wages.
All we’re doing in looking at the tax incidence of corporation tax is trying to work out whose pocket get lightened by it? Sure, we can see the money leaving the company but so can we with employers’ NI? What happens next is what we’re trying to work out.
And again, we’ve got a general view. The more mobile capital is the more it is the workers in the form of lower wages who pay it. The less mobile capital is the more it is the shareholders in the form of lower returns. All of this isn’t in doubt, it’s, as above, one of those things economists have looked at and gone “Oh Yes, obviously!”.
We can have lovely arguments about how much, what the elasticities are: even Adam Smith pointed out that even in a world of perfect theoretical capital mobility we won’t in fact have perfect capital mobility (this is where the one and only mention of “invisible hand” in Wealth of Nations comes in).
And do you know what really bugs the shit out of me? If Ritchie actually understood al of this it would be something helpful to his own arguments. He’s said often enough that he thinks that capital is too mobile. That it ought to be more constrained. And tax incidence is actually a great argument for him to be using: look, we want to constrain capital mobility so that we can tax capital returns rather than workers’ wages bearing the brunt of corporation tax.
But he’s so insistent that cdorporations themselves must be taxed, so ignorant of the underlying economics, that he misses this open goal.