Mar 16 2011

More on corporation taxes, and some fun with Laffer

Posted by: Nick Shaxson in: Thoughts

My one regret with yesterday’s Guardian article I wrote is that I didn’t make the headline “Ten Reasons why we should defend corporation taxes.” That’s because the corporation tax is coming under sustained attack – especially in the UK at the moment.

Apart from the huge number of comments under the article, which are, er, a mixed bag at best, and deteriorate as you scroll down (my theory is that as day turns into night, drink and drugs increasingly begin to influence the quality of comments), the most comprehensive and coherent rejoinder to my article I’ve found so far is from the FCA blog, which has written a ten-point riposte, here.  All credit to them for trying. I have written my reply to their points in the comments below.

My reply (don’t read these unless you’ve read their blog) was:

1. I think that if most people read point 1, then your reply, they will come to the conclusion that one is obviously right, and the other is a load of sophistry. I’ll leave you to decide. And as for right wing and left wing, I’ve never described myself as either.
2. So you accept that I’m right on non-doms. And that “they would still get taxed on the money when they sought to extract it from their company.” But of course that’s a big “when,” isn’t it. Combine it with all the trickery of trusts, and all the many other ways to enjoy wealth without remitting it to the UK and triggering a tax charge, and you have a huge problem. So yes, the corporation tax does serve as a backstop to the income tax.
3. Devereux. Ah yes, the Oxford University Centre against, sorry, for, business taxation. First of all, his motivations are to be questioned. See here. http://bit.ly/gHxe6G Is he seriously objective? I doubt it. Second, if I’d wanted to write an article deconstructing his works, I would have done. Third, the links I provided demonstrate beyond doubt that Gauke’s assertion that there is a “consensus among economists” is bogus. There is a consensus among Devereux, I have to agree.
4. Goldman Sachs. If you read the article carefully, my argument was that Gauke was relying on bogus claims. What I’ve then done is to craft an argument about how the corporation tax is a good thing, whether or not the incidence is on capital owners or on employees. This point demonstrates that the tax would be essential even if, as Devereux claims, it falls on employees. So the argument stands. It’s not contradictory.
5. Sorry, this is confused. Managers do it because they’re looking out only for themselves? Or because they’re responding to employees? So managers don’t respond to shareholders. This is is new management theory. Perhaps there’s a book in this!
6. I wonder how you reach the conclusion that this is a ‘distortion of history.’ The point I make is undisputable. What you’ve written isn’t (apart from the first sentence) wrong – it just doesn’t contradict my point.
7. Not sure I follow you. Perhaps a primer in rents is in order. Imagine it costs a risk-weighted $10/b to get the oil out of the ground. The oil price is $100. That’s $90/b in rents, entirely unearned: manna from heaven. Tax it. Ok, there’s then the Resource Curse to consider- but the point is more pertinent to the UK in the case of financial rents that Turner described, and other rents earned from monopolistic or oligopolistic practices. Land value’s another big one, which I shoud have mentioned.
8. You dodged the point, and wrapped your answer in a sneer. Please try this one again. Or perhaps you’re of the opinion that tax revenues simply go up in smoke: money lost forever. Hmm, well, in that case I’ll leave you to it.
9. The incidence arguments stem in large part from notions that companies will relocate at the drop of a hat once their taxes are raised. In Zambia, that ain’t the case – that’s where the gold is. And the same goes for profitable opportunities in general.
10. The point here is, as I say at the start of the article, that corporation tax cuts don’t pay for themselves. And Mankiw calls those who argue otherwise “charlatans and cranks.” I don’t misquote him. Take a look at what Mankiw actually said.
So, in summary, nice try, but I think that every one of your rejoinders falls down. Thanks for taking the time – I think it’s important to hammer these things out.

I think that amounts to a comprehensive demolition job.

There are a couple of other things. First, there were some comments under the original article complaining that I hadn’t dealt with the argument that corporation taxes are somehow “inefficient.” Well, I think that my point 2 alone deals with that one pretty comprehensively, though admittedly I didn’t explicitly make the link. But I think that several of the others – such as the problem with political community, with taxing banks, on rents, on the inefficiency of tax efficiency, and on the general idea of corporation taxes reducing extreme inequality (and inequality generates huge inefficiencies), do address the efficiency argument quite nicely. As for the specifics of the ‘efficiency’ argument that some economists make – I’ll deal with that in a future post.

One of the commenters added this interesting link to an interview with Michael Hudson, talking about rents (unearned income) and how high taxes historically led to higher productivity, allowing highly paid American labour to out-compete cheap foreign labour.

Oh, and if you want some fun with Arthur Laffer, try this one.

one comment

AlienEdouard 3th March, 2011 9.57 pm

Nick,

Nice try to escape what must be an embarrassing line of questioning regarding your tax affairs, but it does not fly. The fact is that you make a living from UK customers, but are saving yourselves 30% taxes but being based in Switzerland. That is a very similar position to the shareholders of Boots, and trying to hide being some ‘fairly well established principles’ in the area of international taxation is just as unsatisfactory in your case as it is in theirs. Sorry, nobody will accept this. Continuing on this topic for a second, you may want to consider writing a blog addressed to UKUncut explaining how these ‘fairly well-established principles’ apply to the Vodafone – Mannesmann situation. This may help these poor souls currently lost in a very dark place to see some light.

Regarding Murphy and the TJN, I am not confused at all. It just turns out that the definition of tax compliance on the TJN’s site links directly to the page on Murphy’s blog that I attached. I understand that the TJN is trying to put some daylight between itself and Murphy but this has not yet been reflected in old entries on the site.

I am still struggling for time to reply comprehensively to your article, but here are some thoughts.

I appreciate your point #1. Corporations can only conduct their business against the backdrop of certain things provided by the state and funded by taxpayers.

My issue is that I see a corporation as a collection of inter-related contracts between various stakeholders, i.e. mainly workers, providers of capital, suppliers and customers. You take the ‘rock solid’ view that a corporation somehow bigger than the sum of these parts. It is far from obvious. Economics is not mathematics but it is also not alchemy, so it is difficult to make 5 out of 2+2.

Your supporting argument seems to center around limited liability, and the shareholders’ ability to ‘dump costs on to society when things go wrong’? I do not have any idea of what you mean with that, but it is not real the point; even if one assumes that there are somehow social costs associated with limited liability, one must also admit that there are enormous benefits of similar nature associated with it, which will result in tax revenues. But even this is not the entire problem with your point #6. What you mean when you write that ‘corporations must pay for this privilege [of limited liability]’, is really that the shareholders should pay. And that brings us nicely onto the topic of incidence.

To start with, it is totally disingenuous to use the work of the (hard) left-leaning, US-based ITEP to counter the arguments of a center-right British government based on the work of the (possibly) right-leaning Oxford Institute is unproductive. I think one can fairly assume that no Guardian reader will have ever heard of ITEP and its political heritage, but will be impressed just because it is American and based in Washington. That is a major FAIL.

Nevertheless, it is in fact very possible that Oxford and ITEP are both right, at least in relative terms. The academic consensus is that the incidence of corporate taxes on labor is higher for smaller and more open countries. So in the United States (which ITEP is concerned with), which make up over 30% of the world economy and is generally relatively closed, the incidence of corporate taxes on labor would be far lower than in the UK (which Devereux looks into), an economy 15 to 20 times smaller and much more open to foreign trade and investment flows.

But maybe the best default position is that of the COB: we just don’t know. Which means that if the target of corporation taxes are indeed the shareholders, we are really shooting at them with a thick blindfold over the eyes. There are infinitely better ways of taxing returns on capital (dividends, capital gains, etc).

You write that point #2 is the most important. If that is the case, why is your reply to FCA’s challenge so unbelievably weak? If I understand you correctly, the (‘huge’) problem is the non-doms. Come on! there are just over 100,000 non-domiciled residents in the UK (and that number is falling fast) out of 30 million taxpayers (0.3% of the taxpaying populations). They pay in aggregate about £6 billion of direct UK tax (i.e. excluding VAT). Put this in perspective: these foreigners, who have cost the UK nothing to educate, who put their kids in (mostly American) private schools, rent homes from British landlords, fly home for healthcare and only cause public disorder through an occasional parking ticket, contribute in direct tax alone the equivalent of about 3 times the median UK wage. Every non-dom pays for 3 civil servants; Over 300,000 more people would be on the dole without them. Non-doms are NOT a problem, they are an asset. If the flaws of the domicile rule are the basis of your argument in favor of corporation tax, I suggest you try to do better.

I wish I had more time to go point by point over the rest of your article. I have sympathy for some of the points, notably point #9 (hence my discomfort with your avoidance of UK tax), although I doubt that corporate taxes are the best way of ensuring that Zambians receive an adequate reward for the exploitation of their mineral resources. On the other hand, some of the rest (Goldman Sachs, Wall Street/City “rentiers”, the Saudis, etc.) reads like a rant against the ‘vast tight wing conspiracy’.

I look forward to reading your upcoming post about the efficiency of corporate taxes.

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