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Companies Should NOT Pay Tax

by on December 29, 2012

A corporation tax creates unfair competition and decreases jobs, so instead of enforcing it we should scrap it.  Taxes are unpleasant so the least damaging option should be chosen.

Following the recent row in the UK with Google, Amazon and Starbucks paying very little corporation tax in the UK, I could not help but find it strange that companies pay any tax at all. The tax does not make any sense and  is also avoidable. The UK receives 569.5bn in tax a year of which 43.1bn from corporation tax. This is 7.6% of the total tax take. The OBR (Office of Budget Responsibility) has forecast that this tax take will decrees to 5.8% by 2017-18 (see chart). I think that in a globalised world this tax receipt may fall even further. The UK should at least face the OBR’s forecast and cut this tax to the bare minimum and replace it by a smarter more sustainable tax system – stop taxing jobs and increase taxation on consumption.

COR

Firstly taxing companies does not make any sense as taxing companies is taxing that what is desirable, jobs. Companies create jobs and add value. Without value addition companies would not exist. It does not make any sense to tax these companies you reduce the number of companies (all else equal) . Taxing booze, landfill and Tabaco makes sense as we would like to reduce these activities.

Secondly taking money out of companies in tax reduces the amount these value adding entities can reinvest in adding more value or pay out in remuneration or dividends. If the company does not reinvest and pays out more in remuneration or dividends this money does not escape the economy but will be reinvested or spent

Many forget that companies pay huge sums VAT (value added tax). The total tax take on VAT was 98bn or 17% of the total tax taken. This tax is expected to be stable over the next 5 years. It would make more sense to raise more tax from a stable VAT base and cut taxes to companies.

The question then is raised on how to fill the gap left by corporation tax. As the tax receipts are expected to dwindle the gap that needs to be closed is diminishing. This gap though could be closed by a rise in VAT. Of course a rise in VAT leads to a rise in prices which is partly absorbed by companies by lessening profits and partly passed on the consumers. This will mean that people pay more tax when consuming their income but their income should be higher as companies the job creating vehicles will be taxed less.

VAT

In a global world a company is a too larger entity to tax. People live in a country and benefit from the having a government which needs to be funded. Companies though don’t really live anywhere and actually add to the wealth of a country by providing employment, innovation and goods that people want. Taxing this is no longer viable in a global world. As the IBR forecasts the receipts from taxing these entities will diminish.

The argument of course is that companies do use the public resources. My argument though would be that they are a public resource in their own right (being employed generally makes people happier) and that companies regularly pay the higher business rates for public services.

Finally corporation tax in a globalised world is unfair on small businesses who can’t as easily avoid this tax. The tax is an added business cost which its larger competition may not have. To create a level playing field the archaic tax should be cut.

In a global world where corporation tax (a jobs tax) can be avoided it is archaic to keep expecting tax receipts. The OBR has realised this (to a certain extent) and it is time for politicians to take note.

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