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October 07, 2006

Why So Tentative?

Damian Reece in the Telegraph seems really rather wimpish to me:

But the message is loud and clear. Large international companies, such as HSBC, that are based here may well move out if taxes keep on rising.

Well, yes, they might. And as under the Bolkestein Regulations  they cannot be stopped or even impeded when they do so you'd rather hope that someone would wake up to this.  A company can shift its tax domicile just by moving Head Office, to any EU or EFTA country. Liechtenstein, for example.

The thing is, the payment of corporation tax is largely voluntary under this regime.

On tax we have to remain as low down the league table as possible. That's not to say we should use places such as Monaco or the Turks and Caicos as our benchmark, but we should certainly be comparing ourselves against places such as the US, the Netherlands and Ireland.

Why don't we compare ourselves with those places? Why don't we abolish corporation tax altogether? Companies don't actually pay it anyway, some combination of workers, investors and customers do: this is an idea called tax incidence which points out that the people who pay a tax are not necessarily the people with their name on the cheque.

As Greg Mankiw points out, 70% of the corporation tax is paid by the workers in the form of lower wages and 30% by the investors in lower returns. So, why not? Set the Corporation Tax to zero, see wages rise (and the Treasury gets a chunk of those), returns to investors rise (and the Treasury gets a chunk of those) and we get an influx of lots of highly paid people paying tax as the HQ's of companies from all over Europe settle in what is, after all, our globally most competetive industry, The City.

Abolish Corporation Tax! You know it makes sense!

October 7, 2006 in Taxes | Permalink

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Comments

There is a case that the limited liability nature of Ltd companies does deserve a premium - I think Ireland's 10% about right.

Scotland's next election will see not only the SNP campaigning for lower corportion taxes there but the Tories are also, in principle, in favour.

Posted by: Neil Craig | Oct 7, 2006 2:44:33 PM