Unhappy with your treatment by HMRC? Think you've been mistreated by the UK authorities? Want to get overpaid tax money back?

Richard Murphy thinks you're trying to profit at expense to the publixc purse at a time when that purse needs all the cash it can get.

Actually, the case looks like a fairly simple application of the statute of limitations. In other words, the Government is applying an arbitrary cut-off in order to rip off people who have overpaid tax and now can't get it back.

Right amount, right place, right time, Richard? Or do you discard your principles when it suits you?

Filed under: Other blogs, Taxation with tags franked investment income, idiots, richard murphy
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Over at Murphy's den, 'Carl' suggests that we tax dividends on distribution.

You could tax dividends upon distribution as a withholding tax. (EU rules are a huge problem, of course, but in principle it would work.) I do not see why this is regressive. In order to get it progressive, the withholding tax would have to be high (50 percent) and reclaimable for low incomes.

We can only hope he means instead of, instead of incremental to, the existing corporation tax. But, given that companies can choose when to distribute, yet can't as easily choose when to make a profit, I suppose he must mean as well as corporation tax.

Carl's idea would have an immediate impact - it would, overnight, stop every single UK company from paying a dividend. Instead, they would force shareholders who want income from their investments to sell portions of their holdings to realise capital gains. This isn't that smart an idea, really, because some people (think pensioners) need income.

I suspect the move would be very bad for the UK pensions system too. Increasing the tax take from UK companies would have a very detrimental effect on those seeking to save for their retirement. This is dumb - we should be making it as easy as possible for people to save, not making it more expensive.

Incidentally, Steven Bank has written an interesting academic paper on the history of double taxation of corporate earnings (i.e. a corporation tax on profits plus tax on dividends in the hands of investors). Rethinking Double Taxation's Role in Dividend Policy: A Historical Approach suggests that corporate managers agreed to double taxation of profits between WW1 and WW2 because it helped them resist calls by shareholders for them to distribute excess cash.

Filed under: Academic research, Other blogs, Taxation with tags dividends, double taxation, pensions, richard murphy, steven bank
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Prem Sikka has a new working paper out, co-authored with Hugh Willmott. Entitled The Dark Side of Transfer Pricing: It’s Role in Tax Avoidance and Wealth Retentiveness (the apostrophe is Sikka's, not mine), it is full of the usual scary stuff about how bad companies are and how they use transfer pricing to rip us all off.

The article doesn't appear to have been peer-reviewed. In fact, it's such a shoddy piece of work, I doubt whether it would be publishable in any reputable journal.

On page 18, he refers to a paper by Pak and Zdanowicz (executive summary available here), who

provide some instructive examples. Plastic buckets from the Czech Republic have been priced at $972.98 each, fence posts from Canada at $1,853.50 each, a kilo of toilet paper from China for $4,121.81, a litre of apple juice from Israel for $2,052, a ballpoint pen from Trinidad for $8,500, and a pair of tweezers from Japan at $4,896 each. Examples of export prices include a toilet (with bowl and tank) to Hong Kong for $1.75, prefabricated buildings to Trinidad at $1.20 each, bulldozers to Venezuela at $387.83 each, and missile and rocket launchers to Israel for just $52.03 each. For the year 2001 alone, such practices may have deprived the US government of US$53.1 billion of tax revenues

Pak/Zdanowicz is snappy sensationalist stuff, but it's flawed. Let's think about, say, that toilet paper from China. I don't need to defend the price. The flipside of expensive toilet paper means lots of profits in China, which will be taxed in China. Aren't tax advocates supposed to support higher taxes in developing economies? Similarly, products that are exported too cheaply will also lead to higher profits in other countries.

Also, higher import costs means higher import tariffs, which means more money received by US Customs. This is a good thing, right?

Thirdly, Pak/Zdanowicz assume that all avoided taxes would have been taxable. It's a somewhat reasonable assumption, but they still need to do more to prove it.

The upshot of all that is that the purported net cost to the US of $53.1 bn is pretty shaky, and also is offset by a net gain in other poorer parts of the world.

The rest of the paper is taken up with Sikka's usual litany of naughty companies. If you already believe that companies are bad, you'll probably be persuaded. But there's little proof here, just a lot of circumstantial evidence. The very fact that organisations like GlaxoSmithkline and Microsoft have been fined heavy amounts by nation states rather disproves Sikka's earlier line (p.9) that companies are too powerful for our own good. It's a popular line of reasoning, but it's wrong - countries are infinitely more powerful than companies.

Filed under: Academic research, Taxation with tags hugh willmott, idiots, john zdanowicz, prem sikka, simon pak, tax avoidance, transfer pricing
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Via Accountancy Age, we learn that HM Treasury has issued for consultation a tax framework for business.

At two pages long, it's mercifully short. It sets out the following principles, which it will consider in deciding what changes to make to business tax policy:

• Competitiveness - The Government is committed to maintaining the UK’s competitiveness and will ensure that the UK remains an attractive location in which and from which to do business.
• Fairness - The Government will seek to ensure fairness within and across the tax system, so that businesses pay their fair share of tax.
• Minimising distortions - The Government will seek to maintain a tax system that minimises distortions to commercial decisions, while  recognising that the tax system can have a role in supporting the UK’s competitive strengths and addressing market failures.
• Simplicity - When developing and reviewing business tax policy, the Government will consider simplicity alongside other policy objectives, and will seek to avoid unnecessary complexity when designing and developing new business tax legislation.
• Stability and certainty – The Government recognises the value of  stability and certainty to business. It seeks therefore to avoid unnecessary changes to tax legislation. Where the Government proposes to amend legislation, it will set out the policy reasons for doing so and explain how the amended legislation will deliver these policy objectives.
• Tax administration / Compliance costs - The Government will maintain its commitment to lowering compliance costs for business, while balancing this with the need to operate a cost-effective tax administration. It will continue to improve tax administration by developing the approach set out in HMRC’s Review of Links with Large Business and, for small and medium sized enterprises, in Delivering A New Relationship With Business.

HM Treasury notes that the relative weighting of these principles will vary depending upon the circumstances, and as a result the Government will need to make trade offs between these principles.

They're certainly worthy aims. Yet the document is probably not long enough to be anything more than a point of minor interest in the tax policy arena. How can the framework be used to challenge the decisions made on how conflicting principles? How in practice will HM Treasury resolve the requirement to be 'fair' with the requirement to provide stability and certainty to taxpaying businesses? And will politicians see themselves as bound by the framework, or will they operate to a different agenda - and expect HM Treasury to play along with it too?

It's also a real shame that HM Treasury has failed to prioritise the needs of smaller businesses over larger ones.

Filed under: Regulation, Taxation with tags accountancy age, business, hm treasury, politicians, small businesses, tax framework
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In his post UK superfast broadband, Richard Murphy asks whether big companies know what they want. This is because businesses say they want more investment in broadband infrastructure, but don't want to pay for it themselves, nor do they support the proposed broadband levy.

Richard believes that tax compliance means four elements: right amount, right place, right time and coincidence of substance and form.

Perhaps business believes that taxing everybody equally is a bad way to ensure that everyone in the country can have superfast broadband. It certainly doesn't meet the 'right place' test above.

I see no reason at all why someone who lives in, say, a shed in Norfolk shouldn't be prepared to pay more compared to the millions of people who live in more urban areas, and accept the benefits and disadvantages that brings. A flat tax unfairly impacts people in cities compared to those in the country. And that's why it should be opposed.

Filed under: Current issues, Other blogs, Taxation, Technology with tags broadband, idiots, richard murphy
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In the comments to Let’s blow this myth apart: companies do pay tax, Richard Murphy gets into some interesting territory with regard to a fundamental question - just what is a company anyway?

Richard tells us to accept that companies ‘exist’ and are more than a bundle of contracts. In response, 'Adrian' disagrees. So who is right?

It's not an easy question to answer, so let's look at an academic viewpoint. A good paper on how we justify taxing companies is Reuven Avi-Yonah's "Corporations, Society and the State: A Defense of the Corporate Tax" (available from SSRN).

Avi-Yonah presents three different views of what a company is:

• The aggregate view. This is the theory that a company is a jumble of contracts that connect the shareholders to the company's customers (without putting words into his mouth, I guess this is what Adrian believes).
• The artificial entity view. This is the theory that a company is a construction that exists thanks to the will of the state.
• The real entity view. This is the theory that a company is a real entity that exists separate from its shareholders and from the state.

Avi-Yonah argues that you can justify the idea of corporation tax under each of these three approaches (although some arguments are, in his view, better than others).

Under the aggregate view, you tax companies because that's where the money is. It's an administrative nicety to tax the company rather than each of the shareholders individually; anyway if you tax shareholders you have to choose between waiting for the company to pay dividends or taxing shareholders on their non-cash gains.

Under the artificial entity view, companies exist solely because the state permitted them to. The state gave them certain advantages, such as limited liability and permission to operate in our society, and corporation tax is how they pay us back.

Under the real entity view, companies pay tax just like the rest of us. Also, tax is a very useful way of controlling the power of managers.

Which view is right? I guess it depends on which view you find more plausible. UCLA's Steven Bank's papers (also mostly on SSRN) are also excellent sources on this fascinating topic.

Filed under: Academic research, Other blogs, Taxation with tags history, reuven avi-yonah, richard murphy, steven bank, theory of the firm
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So comments are back on again at Murphy Towers.

This is a pretty humiliating climbdown, but the very idea of a blog without the ability for external commentary is ludicrous. RM has allowed some of Worstall's comments, which is good.

It's especially important in the field of regulation that you have discussion and debate, in order to avoid unintended consequences. We've seen time and time again the complete and utter mess the Government has gotten itself into because it failed to consult properly. Tax policy is particularly prone to huge problems of these kinds.

Richard has some great ideas, but they are in desperate need of refinement and reflection. Nobody's perfect, and it's only by putting your ideas out to serious challenge, and listening, that you can ever hope to learn anything and move on. So here's to his comments facility remaining open (just like comments are here).

Filed under: Other blogs, Taxation with tags comments, consultation, fraud, individual learning accounts, richard murphy, tax credits, tim worstall
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There's a fascinating report out recently from Oxera on the credit card market and the care that needs to be taken if the regulation of credit cards is to be changed for the better.

A few extracts from the report:

On minimum payments

The perception is that this level of minimum payment barely covers the interest charges incurred by cardholders, leading to a level of debt which may take decades to pay off. BIS has calculated that it would take 29 years and three months to pay off a balance of £1,856 using a 2% minimum payment. A cardholder on this payment schedule would, over that time, pay interest many times the size of the original debt.

[M]any cardholders do make the minimum payment in a given month, with 27% of accounts making a minimum payment at some point between July 2008 and June 2009.

Survey evidence suggests that those cardholders who make repeated minimum payments may have rational reasons for doing so. Cardholders with a balance transfer offer, for example, typically pay no interest and thus have no reason to pay more than the minimum payment for the duration of the offer. This accounts for approximately 15% of cardholders who pay the minimum.

Overall, the empirical evidence suggests that, while cardholders frequently make minimum payments, very few do so consistently. This in turn would mean that very few would be accumulating the sort of interest payments that would result over 29 years, and so the contribution of minimum payments to indebtedness may be more modest than previously thought.

So, credit card borrowers, even those who make minimum payments, are not victims. They're rational borrowers.

On increasing credit limits

[E]mpirical evidence shows that the consumers actually receiving credit limit increases are typically low-risk and mid-utilisation cardholders.

Furthermore, the data shows that there is no significant difference in the default rates of cardholders who received an increase in their limit compared with cardholders (in the proxy control group) who did not receive a credit limit increase.

People whose credit limits are increased aren't being maltreated by cynical companies. Unilaterally increasing the limit doesn't increase the risk of default.

On the implications of restricting access to credit cards

One can easily imagine that, if denied access to the mainstream credit card product, high-risk (possibly vulnerable) customers may have to resort to alternative forms of credit which are often more expensive, such as home credit or pawnbrokers. Such forms of credit can carry annual percentage rates (APRs) that are far higher than those on credit cards. For example, a 2009 study by the UK Office of Fair Trading estimated that, for home credit, the APR varies between 150% and 500%, for pawnbroking 100%, for payday loans over 1,000% or 2,000% (given the short-term nature of the borrowing). Thus, restricting access to credit cards by high-risk groups may actually exacerbate over-indebtedness, contrary to BIS’s original aim.

Richard Murphy's idea that the rates credit cards can levy should be capped is still a terrible one that will only drive people towards payday loans and sharks. How kind.

Filed under: Economics, Other blogs, Regulation with tags credit cards, oxera, richard murphy
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Via Tim Worstall, we learn why the Spirit Level is wrong. Well, of course it is, but it's nice to see the figures being thrown back at them.

Being an avid people-watcher, I observe that some people are motivated by internal factors - they have their own goals and they judge themselves according to how well they're doing against them. Other people are motivated by external factors - they look at how well others are doing and judge themselves according to where in the pecking order they are.

I'm sure it's a fact that some of these 'external' people get very unhappy at being down the pecking order compared to other people. It's indeed true that redistributing money from richer people would make them happier. It would allow them to buy things that they don't currently have but can't afford, and would mean they would be more 'equal' compared to their peers. I'm sure that in some cases their unhappiness leads them to make bad lifestyle choices that have health implications, or in extreme situations it can manifest itself in physical illness.

That seems plausible. But it's a massive step from there to a policy that makes equality an objective in itself and uses redistribution by force to make it happen. It overstates the rights of recipients and unfairly discounts the rights of those whose money is taken. Put another way, is eliminating petty jealousy a worthy policy goal?

Filed under: Other blogs, Politics with tags inequality, jealousy, mass observation, redistribution, spirit level, tax, tim worstall
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The most annoying tax quote of all time, annoying because it crops up everywhere, must be that wretched quote from Jean-Baptiste Colbert. Colbert (1619-1683), who was Louis XIV's Finance Comptroller, said that tax is:

the art of so plucking the goose as to secure the largest amount of feathers with the least amount of squawking

While researching something on US income tax, I came across the following little gem about Colbert:

[He was] a really great statesman who, when he died, had to be buried at night, for fear of outrages by vindictive "geese."

Filed under: Taxation with tags geese, jean-baptiste colbert, louis xiv, plucking
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