Taxing corporate profits


I am increasingly of the view that corporation tax, as long as it exists (of course libertarians would aim to delete all such taxes, but that could well take some time), plays a wholly negative role in penalising corporate success. Companies that are inefficiently run pay little, but those that are well run and could create wealth and jobs pay more. Moreover, we read in the UK that some large banks manage to pay little on their large earnings, owing to losses brought forward and an array of offshore vehicles, and even that some large newspaper corporations pay almost no tax in the UK.

A profit tax is a ridiculous concept in an economy that wants to grow. I would replace these by a business turnover tax. Quite simply, no losses would be brought forward, no profits would be calculated. The tax would simply be a percentage of turnover. So all banks would pay it at the set rate; so would all newspaper corporations. Inefficient companies would have to pay it, and some could be forced into receivership by having to pay more than now; but the profitable would find they paid less. By keeping their costs down, and given that no calculation of profit or earnings would be made, they would find they paid less by simply paying a percentage of turnover.

Finally, all companies would pay on their UK turnover, so offshore financial vehicles and the like would not reduce their liabilities, thus lowering the burden on the companies that currently pay corporation tax. Accountancy costs would be lowered by the elimination of profit/loss as a basis for payment.

11 responses to “Taxing corporate profits

  1. Interesting idea. I wonder if an unintended consequence would be to negatively effect companies in economic downturns. Normally during downturns as a companies profits drop its tax bill will drop. With this taxation policy there would be no such stabilisation factor.

    Also, how would accountancy costs be reduced? Figures would still have to be compiled. This is an intriguing idea, but i am not completely convinced.

  2. I do not think that taxation is a good idea, sorry. All it can do is pay for wars that pre-capitalist-barn-barians want to pay for. That’s all there is to it really.

    I think that people should decline the invitation to join the “scheme”.

  3. Well, most taxes cannot be offset against losses. Can VAT be set against a loss? I don’t pay VAT, but I am not aware that that can be done. Can a business premises’ rent be reduced if they’re making a loss? I think the landlords would have a problem with that.

    The ideal is to do away with corporation tax, but I would like the burden spread more evenly, so that it doesn’t hit the best and most worthwhile companies hardest. Arguably if lossmaking companies go to the wall, that is a good thing – it would clear the economy of dross – and the way the tax system works is to effectively subsidise the least efficient.

    My scheme would see New International and HSBC paying tax on a level playing field with everyone else! It would lower accountancy costs, as no profit or less considerations would need to be calculated, and no overseas financial vehicles or any other create schemes would be needed.

    Tesco had sales of £42.25bn in the UK in 2010, and profits of £3.4bn. If corporation tax is still 23%, that would mean £782m in corporation tax – note, there are probably intricacies to the calculation and I am not an accountant, so the real figure is probably less. Not to mention losses brought forward and even claims in the Guardian in 2008 that Tesco has overseas tax avoidance schemes.

    But let us say that the figure is £782m. Then wouldn’t it be simply to say, not that profits are taxed at 23%, but that turnover is taxed at 1.85%? Losses in previous years would be their business, not the Inland Revenue’s business – they can cut salaries or thin out management etc to deal with their losses – and their overseas financial vehicles would simply be an irrelevance.

    As you can see the figure of 1.85% is quite low. Especially when you consider that some of the non-food items Tesco sells will have 20% VAT imposed on them – the 1.85% turnover tax would be an irrelevance.

    Now the question is whether Tesco is less or more profitable that business on average. It might be that 1.85% wouldn’t be the right figure for the economy as a whole. But I can’t find out what total turnover of UK companies is. So it is just an example.

    Or the figure could simply be added to VAT and the VAT rate raised and corporation tax abolished – but VAT has many exemptions (which ought to be abolished), so the tax system has developed luxuriant complexity.

    My key point is that we should not tax the more profitable companies more.

  4. David Davis, you make an unintelligent comment. There will always be some spending – even in the 19th century the government spend 7% of GDP, and you might realise (use a calculator if necessary) that 7 is greater than 0. Even if you were going to massively reduce taxation, it would be idle to suppose that government spending could be brought to 7% overnight. I think this is really why libertarianism has failed to take off – a penchant for absurd and unworkable comments.

  5. @dj
    I’d be rather happy if it only averaged out at say 7%, or whatever you reckoned it was. Certainly as an interim measure on the way to zero. I was in Monte Carlo in 1978 for a sales conference, when the equivalent of the local radio station announced that the King (or whoever he is or was) had just cut the tax rate to 6% from 8%, as the Monaco treasury was being overwhelmed with so much money that it could not cope.

    You and I both know that the problem with libertarians is that we are idealists and that we all know what the solution is. At least we don’t go about shooting or gassing each other, like the socialists do. We’ll have to just do the best we can as a binliner full of screaming and disagreeing cats.

  6. But dj I do agree with your previous Tesco-type analysis.

  7. Let me just add that if corporation tax were abolished and the difference added to VAT, it wouldn’t mean a rise in prices for the consumer – because it is swings and roundabouts for Tesco the various headings tax comes under, and if they didn’t have to pay corporation tax, they could lower prices, so that when VAT was added it the prices came to the same amount they do now.

    I don’t think it would be desirable at all for taxation to be zero – that is just a silly comment. A nightwatchman state would still have some roles, eg defence, to perform. But I think 7% of GDP could be raised by indirect taxation, leaving people alone otherwise.

  8. David Bouvier

    DJ – there are two basic problems with your approach.

    First, is the huge variation in margins and hence profits relative to turnover that different businesses sectors naturally have, so the impact of the tax will be very different.

    Second, it makes taxation levels highly dependent on different corporate and supply-chain structures; essentially your are rewarding vertical integration up the supply chain rather than contracting out services to the best suppliers.

    VAT is paid on the net of output VAT over input VAT. Corporation tax is paid on the net of revenue over costs. A turnover tax is paid on the gross turnover. If you make it somekind of net turnover you are really just reinventing VAT. You would also end up investing many of VAT’s complications as well.

    Second is that it makes taxation highly sensitive to corporate structure in a way that will encourage vertical integration and discourage the creation of markets for intermediate services.

    The total turnover tax paid by the Tesco customer or absorbed by the company in the supply chain would include payment on the turnover of Tesco, the distributor, the manufacturer, the ingredients supplier, and the farmers. Unless Tesco vertically intgegrated all the way up to farming. The tax hit is as a rough example, like this:

    Tesco to customer @ £1 , pay 2p tax
    Distributer to Tesco @ 55p, pay 1.1p tax
    Manufacturer to distributer @ 50p, pay 1p tax
    Farmer to manufacturer @ 25p, pay 0.5p tax
    Total tax paid on £1 is 4.6p

    Every major retailer would look at vertically integrating up from till to famr no reason other than tax. Large conglomerates would have to reorganise themselves to avoid paying tax multiple times because of historical or technical reasons.

    Some business sectors like distribution have huge turnovers and low profits; others have much higher margins. Distributors shift a lot of goods at little profit. A company that just holds intellectual property licenses has no turnover except profits.

    There are other businesses, such as most financial services, that are outside the VAT system because it is too hard to work out the value add component – like insurers who mostly just collect, invest and payout premiums, with just a thin slice of administration costs on top.

    Some industries would boom, others would face massive unecessar y=

  9. Oh! After days of being unable to post here, I am able to post again.

    David Bouvier, you are right, I hadn’t thought about vertical integration to avoid taxation. Is there any other way you can identify of taxing the size of the business without piling up taxes on the profitable and letting off the inefficient?

    VAT – could this be reformed in some better way? What are your thoughts on the merits of a sales tax versus a VAT? Would a sales tax have the sale vertical integration effect, or would a sales tax only be charged on final goods sold to consumers?

  10. It is by no means clear who pays taxes. Are taxes passed on to consumers? Does the higher tax reduce the volume of sales?