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September 05, 2005

Academia is Screwed.

Here is a column by a Professor of Accounting.

The top fifth of earners pay a smaller proportion of their income in tax than the bottom fifth. Corporate tax payments now account for just 2.5% of national income, the smallest share ever.

One good point, that our current tax system is not actually progressive at all. One bad one, about taxes on companies. The thing is, as he should know and be teaching his students, that corporations don’t pay taxes in any meaningful sense. They hand the cheque over, sure, but they’re merely collecting the cash. The money actually comes from the customers, the workers, or the investors (which depends on some complex calculations of elasticities etc and is different in each case). So complaining about how much tax is paid "by companies" is silly, as it is always none.

His figures also show us that we could abolish the corporate taxation at a very low cost. Anyone think that there isn’t 2.5% of Govt spending we couldn’t do without?

And here is a terrible point:

The tax avoidance industry is on a collision course with civil society. Elected governments take months and years to develop tax laws, but in pursuit of private profits accountancy firms can undermine them within hours of a chancellor's budget speech.

Every example he gives is one that has been ruled illegal. That is, he is not talking about tax avoidance at all, but tax evasion. When a Professor, of Accounting no less, fails to make that distinction then I think we can safely say that the education system in the UK is screwed, completely cocked. Who would want to be "educated" by someone ignorant of that most basic distinction?

September 5, 2005 in Taxes | Permalink


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Tim, this talking point doesn't even fit in with your previous ones. If corporations are "just collecting the cash", then why shouldn't the government be free to chase after the customers, workers and investors for arrears? Answer, because companies have legal personality, and one of the concomitants of that legal personality is that they pay tax.

Also, you appear to be talking about 2.5% of national income in your second paragraph and 2.5% of government spending in your fourth, the two are quite different.

Oh and another one. No, he is right (this is not surprising as he is a professor of accounting). There is legal avoidance, illegal avoidance and evasion. It is legal to arrange your affairs in such a way as to minimise your liability (legal avoidance). If it turns out that a transaction that you believed to have reduced your tax liability (and therefore paid too little) was based on a faulty understanding of the law then that is illegal avoidance and you are liable for the tax and potentially even a fine for underpaying, but it is not the same as evasion. The difference is the mens rea.

Posted by: dsquared | Sep 5, 2005 11:11:08 AM

dsquared: National income is just another example of lefty new-speak -- it means tax revenues. A more accurate name would be national forfeiture. In a technical sense you're right: 2.5% of money in isn't the same as 2.5% of money out thanks to the One-Eyed Bandit(tm) borrowing tens of billions every year to try to make it look like we're getting value for money.

Posted by: Andrew Gleadall | Sep 5, 2005 1:07:44 PM

I would normally assume that national income means national income, of which the government is roughly half. Btw I don't believe that 2.5% figure; I suspect that at the very least the author is ignoring taxes and license fees on oil and suspect that some editor has erroneously corrected "Corporation Tax" to "corporate tax".

Meanwhile, using Tim's "no such thing" logic I suppose I could argue that nobody really pays tax, since all of the money comes from customers, workers and investors and goes to benefit recipients, owners of gilts and government employees.

Posted by: dsquared | Sep 5, 2005 1:43:02 PM

The incredible thing is that this guy blames the "tax avoidance industry" for the loopholes in tax law. Of course, the loopholes are created by the over-complication of tax law. Were taxes lower and simpler, it wouldn't be worth anyone's while.

How exactly does he propose to stop people seeking to reduce tax when it obviously pays them to do so?

As an accountant he obviously has an interest in maintaining complexity since people like him are paid to manage it. As an accountant acquaintance of mine said, "Labour governments are great news for accountants" . Undoubtedly true in the short term, at least. In the long term, of course, we're all poorer.

Posted by: HJHJ | Sep 5, 2005 2:23:07 PM

Of course, the loopholes are created by the over-complication of tax law

No they're not, not usually. The substance of an avoidance scheme is usually quite simple; I would guess that three quarters of them revolve around one of the following three principles:

1) Claiming depreciation allowances on capital assets that you do not own.
2) Offsetting profits (usually capital gains) against losses that you did not legitimately make
3) Exploiting difference in tax rates and allowances between different countries

The ingenuity comes in because there are all sorts of ways to, for example, become the legal "owner" of a capital asset without actually being exposed to the economic risks of ownership, or to take over another company's losses, or to pretend to make all your revenues in the Cayman Islands while incurring all your costs in Switzerland and claiming tax relief in the UK against the difference.

The tax law is complicated because of avoidance, not the other way round.

Posted by: dsquared | Sep 5, 2005 2:46:19 PM

How low do taxes need to be before a company with $200 billion in revenue stops looking for loopholes to lower their tax burden? $200 billion times "low taxes" still equals a ton of money. Until their annual tax burden drops below the salary of an accountant or two it is still worth their while (and arguably their duty to shareholders) to look for loopholes.

Posted by: Justus | Sep 5, 2005 5:33:59 PM

I can't agree with dsquared.

Let me give you an example: Gordon Brown's R & D tax credits. Brown decides that there isn't enough R & D going on (he's an expert, of course). It totally escapes him that companies invest in R&D if, and only if, they think they can make an acceptable return from it. One of the reasons they find this increasingly difficult is because he has made R & D more expensive because it costs more to employ R & D staff than it used to, due to his increased taxes (e.g. NI increases and pension funds raid).

So now tax experts and accountants go around companies trying to classify anything they can (often pretty spuriously) as R & D in order to receive tax credits. No actual new R & D takes place (in fact R & D spending in the UK has declined since Brown intoduced tax credits). In fact, the only gainers are the tax accountants and the tax inspectors who are paid to reclassify spending as R & D and to approve the tax credit application.

This stuff goes on all the time in industry - it's a waste of time and effort and a very large part is due to the higher taxes and additional complication introduced by Gordon Brown.

It's naive to think that the complication is there primarily due to avoidance. Avoidance effort is hugely increased by high tax rates and complication.

Posted by: HJHJ | Sep 5, 2005 8:33:53 PM