Saturday, February 10, 2007

Company taxes and dividends

I know, I know, I said that I wouldn't write about the Tories for a while, but this proposal is seriously warped.
> Policy summary

To close the tax-loophole whereby directors pay themselves dividends out of their own companies in place of a salary which often results in a nil tax liability whereas the typical employee of the same earnings would be paying 22% income tax and 11% national insurance.

This is something that I would expect a NuLabour or even LibDem arsehole to come out with, not a fucking Tory (albeit a Scottish one: they don't have much experience of private enterprise up there).

Look at the language, the way in which Andrew Morrison phrases it in order to wring the maximum amount of jealousy from employees. "Look!" he is saying, "You have to pay 33% tax, whilst your evil employers, who work you into the ground, pay nothing at all on the first £32,000. Let's do them down, you and I! Let the workers of the world unite!" The spite is bad enough, but he has overlooked some serious fucking problems too.

First, being an employee brings a certain amount of security: yes, you pay taxes, but you also get holiday pay, sick pay, etc. The self-employed, whom Mr Morrison is really attacking here, do not get any of those things.

Second, dividends are paid out of company profits which, in case Andrew Morrison hasn't noticed, are now taxed at 40% (there used to be an examption for the first £10,000 but this no longer applies). So, the shareholders have already effectively paid 7% more than the 33% combined income tax and NI.

So, could there be a solution? Well, as we all know, companies don't pay tax. No, really, they don't. Here's Tim Worstall at Tech Central Station, illustrating this point.
In the case of the corporate income tax we've also just been told who it is that really pays it and no, it isn't the company. Some of it is paid by the investors in the company, in the form of lower dividends or returns on their investment. But as a working paper [PDF] from the Congressional Budget Office tells us:
"Burdens are measured in a numerical example by substituting factor shares and output shares that are reasonable for the U.S. economy. Given those values, domestic labor bears slightly more than 70 percent of the burden of the corporate income tax."

Now I do hope I don't have to point out that the CBO is in fact non-partisan, that they are the closest we get to an informed and non-ideologically driven examination of such matters?
...

There are many alternative ideas about how we should best tax investment returns but the idea of abolshing this specific tax in order to stick it to the tax lawyers and accountants has its features, does it not? Plus, of course, we would be lifting a burden from the backs of the working people, for as our CBO report tells us, they in fact pay 70% of the tax through their receipt of lower wages.

Quite. Corporation tax is paid by people, not by companies: companies simply provide a convenient bank account from which to take the money.

So, how about this as a really simple solution: simply make all tax personally payable. What I mean is this: don't tax company profits—indeed, Estonia taxes company profits that are reinvested at 0%—and simply tax people. No loopholes, nothing.

Let us take UKIP's proposal for a Personal Tax Allowance of £9,000 (I'd like it to be a wee bit higher, but never mind) and a Flat Tax of 33% (with NI amalgamated into and treated as an the income tax that it so obviously is) as an example.

It doesn't matter where you money comes from; it could come from labour, from share income, from selling assets, from company dividends, from any source whatsoever. You declare that money, you take away £9,000 (your PTA) from what you have earned, and you pay 33% of whatever is left in tax. Here's what a typical Tax Return might look like, and my example figures.
  1. How much money did you earn from labour in the period from 1 April 2006 to 1 April 2007?
    £19,000

  2. How much money did you earn from other sources (share dividends, asset selling, etc.) in the period from 1 April 2006 to 1 April 2007? £5,600

  3. Add together your answers from Qs 1. and 2. and write down the total.
    £24,600

  4. Subtract £9,000 and write down the remainder.
    £15,600

  5. Divide this figure by 3, and round down to the nearest whole pound. What is the result?
    £5,200

  6. Congratulations! You have just calculated how much tax you owe for this year.

    Now, pay up. If the cheque isn't with us by Friday, we'll send the boys 'round.

Now, isn't that a really fucking simple Tax Return? Everyone should be able to cope with that one, surely.

And this is the only Tax Return. There are no Company Taxes, no NI Returns, no exemptions (other than the PTA) and no fucking about. There it is. Seems sensible to me, and Mr Morrison would agree, I am sure, that it closes this so-called loophole by providing precisely no loopholes whatsoever.

Because if you fail to fill in the Tax Return properly, then that is tax evasion (not tax avoidance) and thus illegal; and we make the punishment for not honestly declaring your income so absolutely fucking huge that no one in their right mind will risk under-declaring. Anyone caught is made an enormous example of.

In the meantime, we could sack enormous numbers of civil servants: wouldn't that be nice...?

UPDATE: thanks to various people for pointing out that Corporation Tax is not 40%. To quote Tom Tyler:
Although it doesn't invalidate your proposals, I have to point out that Halstead above is right, corporation tax is not 40%, it's 19% for profits up to £300K, rising gradually to 30% for all profits over £1.5m. Thus what you say in your fifth paragraph is incorrect.

Duly noted and thanks for the information.
Tim's article appears to relate to the USA rather than the UK. I bow to his knowledge as an economist, but I'm sure he would agree with me that in the UK, the idea that "only people, not companies, (ultimately) pay C.T" only applies to small companies like my own, and then only when ALL profits (minus a directors salary equal to the personal allowance) are distributed as dividends.

No, that's irrelevant. Tim's point is that, regardless of what bank account the cheque is paid from, it is the workers who pay the tax; because businesses have to pay Corporation Tax, the workers get lower wages (obviously there are market factors to consider here but the point still stands: if a company wanted the best workers, they could offer more pay but are restricted from doing so by the amount that they have to pay in Corporation Tax).
Ah well, at least this isn't France - their equivalent of NI is 20% for the employee, and, get this, 40-45% for the employer! I'm amazed that companies can afford to employ anyone at all, there.

That, of course, is absolutely fucking insane. But that's the French for you; just remember that they are one of the countries that are driving the direction of the EU...

2 comments:

Jack Peter Gunning said...

Taxes on postcards, the best tax policy going. I love it, everyone else would if only someone told them about it, since the Tories won't...

Anarcho's Cap said...

Whilst entirely agreeing with the thrust of your article, where do you get the 40% tax figure on comapny profits from?

http://www.hmrc.gov.uk/rates/corp.htm

I thought it was 30%. Did I miss something?

Anarcho's Cap