The excellent Idle Pen Pusher argues that we should cut corporation tax.

1. It falls on workers and consumers, not shareholders.
2. It’s taxing the same thing twice. Dividends (the whole point of profits) are taxed when paid to shareholders.
3. It makes society poorer and less efficient.
4. It rewards waste and punishes success. It only applies to companies which efficiently use their resources.
5. It fuels corporate over-borrowing. Companies borrow instead of issuing shares because of it.

He's right, of course.  However, there are some practical difficulties with his suggestion.

Firstly, we need the money.  We don't want to have income tax rates higher than they are and we won't tolerate higher duties or much higher VAT.  And government isn't that willing to get even close to living within its means, so we need the income that corporation tax brings us.

Then we have the problem of overseas investors.  Without corporation tax, we risk dividends being paid to overseas investors and, ultimately, being taxed overseas. Now, there are mechanisms that you can implement to stop this.  For example, you can stick in a withholding tax that citizens can offset against their own tax bills but which foreigners can't.  This is sort of what we had up until the early 1990s, where distributed dividends came with a tax credit which taxpayers could reclaim.  But it was systematically unpicked, first by the Conservatives and then finally killed off by Gordon Brown in 1997, when he finally made tax unreclaimable by pension funds.

Then there are those that argue that corporation tax is the result of an unholy deal between governments and company managers.  Governments get the money.  Managers then support government proposals for double taxation of dividends (i.e. making tax credits non-reclaimable).  That reduces shareholder pressure to distribute excess cash, leaving more in the company to be controlled by managers (I covered this before here).

But the real killer is that it'll never fly politically.  While companies make big profits, they're just too juicy to leave untaxed.  Yes, even if taxing them means lower wages for employees or higher prices for consumers.  We won't do it, even if it might mean better outcomes.

And there are some potentially good outcomes.  If we did drop corporation tax to 10% or lower, it should attract lots of inwards investment - the Wolseleys and Shires of this world - who would bring with them jobs for British workers.  It's the model the Irish tried, only they were unable to manage their overall fiscal position sensibly, in part due to their adoption of the Euro.  But that shouldn't undermine the basic idea - companies will quite obviously do anything to reduce their tax bills.  Providing them with a low tax environment in the UK, with its well-educated workforce, stable society and enticing legal rights, would be irresistible.

However, because of all of the negatives, I'm afraid it will never happen.

Filed under: Taxation with tags corporation tax, dividends, double taxation, idle pen pusher, ireland, shire pharmaceuticals, steven bank, wolseley
41703 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F09%2Fcould-we-ever-cut-corporation-tax%2FCould+we+ever+cut+corporation+tax%3F2010-09-30+08%3A45%3A30Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D4170

Ritchie offers some free advice to Ed Miliband and the Labour party on what strategy they should adopt with respect to cuts:

If the ConDems cuts deliver economic panacea nothing Labour can do will get them back into office at the next election. Period.

If those cuts do not work, as I predict, then offering more of what the ConDems offer will be no reason to chose Labour at that election. So they won’t get back into office by doing that. Period.

So the only viable option for Labour is to offer a significantly different programme. That was why Ed Miliband had to be the choice and the risk could not have been taken on David Miliband. It is also why Ed Balls will I hope be shadow chancellor.

This is a time for conviction and EM has nothing - repeat nothing - to lose by going for it. The only viable choice is saying cuts are wrong. Partly because they are. Partly because nothing else puts Labour back in office.

He's wrong.  This would be a daft strategy.  We are in this mess because Labour totally failed to manage the budget properly while in power.  They simply have no credibility with voters with respect to public finances.

To even attempt to claim that cuts are not necessary would represent a refusal to apologise for the many errors Labour made in the last 13 years.  These were rejected by voters in May, and Labour needs to move on from them if it is to be electable again. 

But their only way out is to come out and apologise for their very many mistakes.  Ed Miliband has taken the first, tentative step towards that, but he needs to so much more.  He can't just list Labour's failures and hope to move on.  Figuratively, Labour has to walk barefoot across hot coals before they can be forgiven.  And that will probably take 2-3 leaders, of which Miliband is merely the first.  Miliband wrote Labour's manifesto, so it stretches the boundaries of belief that he can do a volte-face on so many of Labour's policies.

Labour have a long road back.  But one thing's certain - if they follow Ritchie's roadmap, they'll take an awful lot longer to get there.

However, I do share with Ritchie the hope that Ed Balls will be shadow chancellor.  He will be so chronically bad at the job, it will help sustain Labour's long period in the political wilderness.

Filed under: Politics with tags ed miliband, labour, richard murphy
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AccountingWEB reports that the building supplies firm, Wolseley, is seeking to relocate its tax base to Switzerland because it's sick and tired of the hassle of the UK's Controlled Foreign Company (CFC) regime.  Ordinarily only UK companies are subject to UK tax.  However the CFC regime seeks to drag foreign companies into the UK tax base by defining them as "controlled" by a UK company.

Wolseley has had enough, and is moving to Switzerland where it can control its foreign subsidiaries without getting messed about.  Unsurprisingly enough, Ritchie doesn't like it.  After churlishly determining that it isn't "a big deal", he then splutters about how the corporate residency laws must be made more robust so that companies can't just move their residency by changing where the board of directors meet.  He wants to see a new test, based on where the majority of the board and senior management work.

He's wrong.  As well as the comments by Worstall, which point out the absurdity of the country by country reporting advocate calling for more centralisation of tax, his idea would be incredibly damaging to the UK economy.  Let's say that Wolseley can't just hold board meetings in Switzerland to gain Swiss residency.  OK then, they really want out of the CFC regime.  So they tell all their head office staff that they're relocating to Switzerland.  That's possibly 100 high earners who currently pay UK tax and spend money in the UK economy who in future will be paying Swiss tax and spending money in the Swiss economy.

On top of which, future growth will be more likely to accrue to Switzerland rather than here.

Thankfully it's unlikely to ever be adopted by any sane government.

Filed under: Taxation with tags accountingweb, controlled foreign companies, idiots, richard murphy, switzerland, tim worstall, wolseley
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Why sharing costs across the whole community means we all end up eating lobster, even if we don't like it.

We've all been there before. You've gone out for a meal with a group of friends and you agree upfront that, in the interests of simplicity, you'll split the bill equally. The waitress arrives, ready to take your orders. The first person goes for the lamb. You'll have lasagne. Then the third person orders the lobster. Woah! Hold on a second! It's the most expensive item on the menu, costing half as much again as the second most expensive dish, and more than double the cost of yours. The next person, not wanting to be left behind, also goes for the lobster. And the next. By now the precedent is set, and everyone else orders lobster, just to make sure they get a fair deal. To further rub salt into your wounds, the first friend decides that they would prefer lobster to lamb. You're the only person who isn't having lobster.  And because you're splitting the bill, you're going to end up paying for it as if you had.

The state is full of lobster dilemmas.  If we were doing it ourselves, we'd happily settle for something less, but because we're sharing our services with other people, we want to make sure that we're going to get at least as good as they get.  And they, in turn, want to make sure that they get at least as good as we get.  The ratchet effect is continuous.

So we get daft pronouncements such as Gordon Brown's batty promise to raise expenditure on state schools to the level spent on private education (thankfully never enacted, even if it was a barefaced lie).  Or an NHS that has, over the years, added all sorts of new, unnecessary treatments that were surely never in the minds of the founding fathers.  But, because someone considers it terribly terribly important, it's made available to all.  Bugger the cost.  We'll all have lobster!

To be fair, the analogy doesn't work entirely.  In the real world, there are whole restaurants where ordinary taxpayers aren't allowed to eat but they get the bill anyway.  Or perhaps you decide you don't want to eat at the education restaurant.  Do you get a refund to spend at the private school restaurant? Fat chance.  Maybe there's a dish you really want that the NHS restaurant doesn't serve.  If you order at the private hospital restaurant, you might find yourself locked out of the NHS restaurant.

Worst of all, in the real world, the cost isn't spread equally.  The cost of our restaurants falls disproporationately on the rich.  Fair enough, you might say, but that doesn't stop left-wing politicians and their groupies calling for more.

It's important, in these austere times, that we put a stop to the lobster dilemma.  It means smaller, simpler menus.  And it means expecting those who want all sorts of fancy dishes being expected to pay for them themselves.  We never should have offered lobster, but we really can't afford to do it now.

Filed under: Current issues, Politics with tags deficit, education, gordon brown, nhs, public sector
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Vince Cable's speech at the Liberal Democrats' annual conference went down a storm with the party faithful, but like a dose of the clap with the City. At the heart of his speech was the idea that capitalism kills competition and must therefore be tightly regulated. However, this rather presumes that we all know what capital is.

Here I haven't found the literature very helpful.  "What is capital?" is clearly such a bone-headed question that even the simplest economics textbooks don't feel the need to answer it. So... what is capital?

My conclusion, having thought about it for some time, is that it can be nothing other than banked labour.  Imagine a group of cavemen, who must hunt to survive.  Anyone who doesn't hunt is worthless to the tribe and will be cast out.  They quite literally eat what they kill.  Then one day, one of the caveman thinks 'Sod this, I can find a better way to hunt' and invents a machine gun.  Now, he can do all his hunting in 2 minutes and sit around on his arse for the rest of the day.  He is able to deliver an entire day's work in a fraction of a minute.  That's worth something.  And it is worth something to other people too, allowing him to trade his invention to other people in his old age when he no longer wants to hunt at all.

That 'worth something' is the ability to forego work.  It's the amount by which the inventor has done tomorrow's work today and can therefore not work in the future.  Conversely, borrowing of capital represents a promise to work in the future.

Left wingers tend to hate capitalists as being 'against the workers'.  I disagree.  Capitalists are good workers; those who have produced more than they can consume and are living off this deferred gratification.  Conversely, people without capital have consumed more than they produce.  This is a problem where all people are supposed to contribute to society.  It's to society's credit that we look after these people instead of slinging them out of the cave.

Filed under: Economics with tags capital, liberal democrats, vince cable
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Something that's been troubling me for a while.

The banks pursued a risky business model apparently without adequate internal controls to mitigate any problems that might arise. When the liquidity crisis hit, they were unable to manage the damage to their business and faced ruin. The role of their auditors was called into question.

BP pursued a risky business model apparently without adequate internal controls to mitigate any problems that might arise.  When one of their wells started leaking in deep water in the Gulf of Mexico, they were unable to manage the damage to their business and faced ruin.  The role of their auditors was not called into question.

Two different operational problems, but two very different responses from the public.  Why are auditors felt to be blameworthy for the operational problems at banks while they're not felt to be blameworthy for the operational problems at BP? What, honestly, is the difference?

Filed under: Auditing, Current issues with tags audit liability, banks, bp
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There's a very thoughtful post by Mark Lee over at his Tax Buzz blog,  in which he reassures people that ISAs are not a form of tax avoidance.  This follows some profound flip-flopping from various hapless Liberal Democrats as they try to sound tough on people who avoid paying their fair share of tax but without wanting to actually say what they mean.  ISAs were the example Kirsty Wark provocatively put to Vince Cable on Newsnight when he failed to produce an answer of his own.

Mark attempts to draw a line between tax avoidance and tax planning by defining avoidance in terms of reducing one's tax bill by breaching the spirit of the law as intended by Parliament.

I think he's wrong.  There's no such thing as the spirit of the law; merely our impressions as to what is fair and what is unfair.  What's worse - our impressions, largely formed in unprofessional (i.e. non-expert) space, are based on considerations outside what was in the minds of either those who wrote our tax law or who voted it through Parliament.

I'm afraid that's a rather clumsy way of pointing out something rather obvious - the spirit of the law is not a concept that's fixed in time from the moment a law is written.  It's a complex amalgam of opinions and emotions, most of which are added long after the law was written.

While I'm happy for the time being to defer to Mark's experience when he states that ISAs are "simply good tax planning to make use of the facility to save money in a tax-free structure (ISA) specifically intended for this purpose", I think it's also plausible that, at some point in the future, when there are people who can afford to live off the entirely tax-free,income from their ISA investments, policy makers will seek to argue that this is tax avoidance.  They will make a case that this is a use of ISAs that was 'never intended' when the law was originally passed and will close this 'loophole' that permits rich people to 'avoid' paying the tax they should legally be paying.  Paranoia?  I don't think so.

There is further evidence on the lack of an objective 'spirit' of the law.  While some newspapers described Darling's bank bonus tax as a failure, other newspapers hailed its 'windfall income'.  Was the intention of Parliament to raise money or to send a message to bankers?

Similarly, Labour - and in particular Gordon Brown - became synonymous with the use of stealth taxes to raise money from the population without seemingly raising the middle class tax take.  If taxes are hidden from the population in this way, how can their intention be apparent to those who are meant to decide how to comply with their spirit?

The size of the tax system nowadays makes it virtually impossible for any tax expert - let alone an average taxpayer - to understand the full corpus of tax law.  Given the complex ways that taxes, concessions and benefits interact with each other, it is quite literally impossible to synthesise that body of law into something as trite as the 'spirit' of the law.  It simply cannot exist.  What tax laws mean are what tax advisors, politicians, the public and ultimately judges say they mean - no more and no less.  And if they say something the politicians don't like, they'll change them.  But that's government's prerogative to change the law; it's not evidence that taxpayers were avoiding tax.  That tax was never due because the laws - as supported by the courts - said tax was not due.

Accordingly, the campaign to stamp out avoidance is doomed to failure from the start.  It is likely to be racked by accusations of hypocrisy.  Therefore, government would be advised to focus its resources on closing the most blatant loopholes after they've happened and by ensuring they draft properly-written laws in the first place.

Filed under: Politics, Taxation with tags alistair darling, banks, bonuses, gordon brown, mark lee, newsnight, savings, tax avoidance, tax evasion
41163 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F09%2Fthe-tax-avoidance-distinction-is-unsupportable%2FThe+tax+avoidance+distinction+is+unsupportable2010-09-22+08%3A31%3A09Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D4116

Via @ACCANews, ,we arrive at this story about the early stages of the Vickers enquiry into the future of banks in the UK.  On the agenda is the possibility of breaking up the banks.  Interestingly, Sir John Vickers will also cover Santander, up till now the darling of the UK political class, as it has been called on time and time again to bail out various desperate bits of the UK sector.

Bank owners might feel a bit aggrieved.  Lloyds really only started wobbling after they agreed, unwisely, to take over HBOS as a favour for the Scottish tragedy, Gordon Brown.  Barclays and HSBC didn't take any public money but are accused of having benefited from the stability afforded by the government's stimulus package.  RBS was perhaps the only basket case among them, but even it was a solid bank until Sir Fred went loopy and bit off more than he could chew with the ill-fated ABN Amro adventure.

But there's really not much evidence that breaking them up will make things any better.  RBS's investment ('casino') banking made good profits this year, dragged down by its crappy loan book.  Breaking them apart would only expose the full horror of the awful side of its business to market forces.

And there's an interesting undercurrent to the Vickers review - the Guardian article interprets it as the government feeling that there is insufficient competition in the market.  In this regard, it's rather like the current House of Lords enquiry into auditing, which also grumbles about a perceived lack of competition.  But lots of markets have a few big players and a cluster of smaller ones - auditors and banks aren't unique here.  Supermarkets, oil companies and pharmaceuticals companies are also dominated by big players, without any real competition issues.

If you were feeling particularly unkind, you could observe that the political process suffers to a much greater extent from the domination of a few big players.  Shall we break up the political parties, even as they try to group together?

Filed under: Economics, Politics, Regulation with tags abn amro, acca, banks, barclays, big 4, competition and choice, gordon brown, guardian, hsbc, lloyds banking group, royal bank of scotland, santander, sir john vickers
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Last week, Dr Evan Harris, the darling of middle class liberals everywhere, was on Newsnight in a slot about the Coalition announcement that they did "do God", whatever that might mean.  Harris's basic argument was that it was prima facie a bad idea to allow the church into the provision of services because they tend to hold all sorts of discriminatory views about such things as gay people.

I didn't find his argument coherent and tweeted as much, leading to a brief discussion on Twitter between the two of us, inasmuch as that's possible in 140 characters a time:

And, indeed, the more I think about it, the less I agree with his position.

Charity is about helping people.  Clearly in many situations, the state will substitute for things that would otherwise be done by charities.  And in those situations, it's right for the state to set itself certain standards.  I think it entirely appropriate for the state to say that it will not discriminate in the services it offers to people.

Yet I don't agree with Harris's point of view that the state should be able to demand how charitable and voluntary services are undertaken.  They're not an exchange transaction, so the state has no right to dictate how they are done; if the state wants them done another way, then it can do them itself.

Where resources are scarce, anything that boosts the overall capacity of services offered should be encouraged.  If there were a whites-only soup kitchen I wouldn't want to donate to it or work in it.  But its very existence would free up places in the other soup kitchens that don't discriminate.

And people do discriminate anyway, whether we like it or not.  If I want to give money away to people, the state is unable to intervene in my decision, even if my motives and methods are discriminatory.  Similarly, if I decide to give food away to the poor, it should be none of the state's business how I choose to do that.

Harris's final point - that people who are turned away might be humiliated - is pathetic.  People are humiliated all the time.  We have selected some arbitrary lines in law and decided to outlaw discrimination on those grounds.  But other divisions are not prohibited; indeed some are encouraged by the state.  How else can different entitlement ages for men and women for the state pension be supported (even if they are being eliminated... slowly)?  We allow night clubs to let 'beautiful' people in but to keep the fuglies out. 

I suppose, being fair, that politically you get more credit for banning something 'bad' even if it ultimately causes more overall harm than you do for tolerating those bad things continuing.  It's a pity that a thinker such as Harris has allowed himself to be sucked into the line of thinking that the state must be allowed to interfere in virtually all walks of life.  And that's why I found - and continue to find - his argument on Newsnight thoroughly unconvincing.

Filed under: Current issues, Ethics, Politics with tags discrimination, dr evan harris, liberal democrats, newsnight, twitter
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Like Ritchie, I'm totally underwhelmed by the Accountancy Age personality of the year contest.  Heck, Ritchie probably deserves to be in it next year; sadly there are no write-in votes so you'll have to wait another twelve months for that delicious eventuality.

But there's something you can do that will royally irritate the great man.  Vote for the candidate he quite clearly likes the least.

That candidate is Andrew Andronikou, a man of whom Ritchie asked only six months ago "why is this man still allowed to practice" (sic).  And you can do so free of any fear that you might spoil the ballot, because Valukas must surely ace this one.

Vote here.

Note: as far as I can see, there's nothing in the rules that say you can only vote once, although you must give your e-mail address so they may filter it that way.  I suppose that means if you have more than one e-mail address you can vote more than once. I don't condone ballot-rigging.

Filed under: Current issues, Other blogs with tags accountancy age, andrew andronikou, anton valukas, richard murphy
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