Corporations: No Taxation without Representation4th March 2013
You’ll know about the 1773 Boston Tea Party. I had the pleasure of visiting Boston a few weeks after the shocking events of 9/11, at a time when Americans were only too pleased to see travelling Brits, so my welcome was a great deal fonder than it might have been back in those heady days leading up to the American Revolution.
240 years ago, 342 chests of tea were dumped from three ships after colonists objected that taxes were imposed on their tea by a British parliament, a parliament on which they had no representation. Of course there was rather more to the story that that, involving the Government imposed monopoly of the East India Company, disgruntled smugglers who had brought in illegal but cheaper Dutch tea, and legitimate tea importers who previously dealt with a variety of British merchants but were no longer permitted to do so.
It is a mere footnote in history that the British parliament had actually reduced the total taxation on tea, so that the going price for a pound of common tea dropped from 3 shillings to 2 shillings, even undercutting the smuggled Dutch leaf. But it was the very visibility of the duty imposed, the principle of taxation without representation, and maybe the government abuse of free trade that led to the stirring of the colonials.
Much has been spoken on Liberty ever since. But of course politicians regularly exploit sections of the populace with selective taxes on “unpopular” activities or sections of society, and we have yet to catch on that when they start with one unpopular target group, eventually we all get mugged and end up paying the price.
With our leaders nowadays proudly emphasising democracy rather than liberty, would you be surprised that in the UK a quarter of taxes are paid by someone without a vote? Even in this era when targeting of certain sections of society is justified as being “fair” (or do they really mean “fair game”?) it seems incredible that we tax those who have no say. So who is this downtrodden minority?
In the UK Income tax accounts for 29% of the Treasury’s tax revenue, National Insurance 18%, VAT 16%, Fuel Duty 5%, Council Tax 5% and Tobacco duty 2%. That totals 75%. Where does the rest come from?
Not so fast, lets look at National Insurance …
Most employees that I know have absolutely no idea that a huge chunk of NI is paid by their Employer. Employees generally think that they pay NI – which they do – but are unaware just how much their employers pay – at 13.8% on all income above £144 per week, and you never knew because it never appeared on your payslip. It is an extra cost that your employer incurs just for giving you a job.
This is crazy. The average wage is £472 per week, and for every 10 staff an employer might have afforded at that rate, he can now only pay 9. With employment in the UK at 29.7m, and unemployment at 2.5m, it doesn’t take an advanced mathematician to realise that with an effective policy waiving Employers NI for additional employment we could rapidly achieve full employment.
Despite an employer’s commercial imperative to continually enhance the service offered to his customers, and to motivate and reward good performance to retain good staff, he faces tough choices and real costs if he tries to do the right thing. No doubt about it, Employers NI costs jobs, and recent research also suggests that workers bear 70% of Employers NI in the form of lower wages. Ouch!
Business Rates …
At home, we get fed up with Council Tax, but at least out waste bins get collected. But a business paying Business Rates doesn’t even get that.
The higher the quality and demand for premises, the higher the property costs, and generally the higher the business rates. So they are generally highest on the high street. The Portas Review into the future of high streets, highlighted “a minefield of issues – tax and business rates, rents and contracts, planning, parking restrictions, delivery curfews and classes … Doing business on the high street needs to be a more attractive and economically viable option than it is at the moment … we need to get back to basics, with business rates that work for business, decent parking and no unnecessary restrictions…” But the really telling bit in the report is that “Quite frankly, the costs of trading in many areas far outweigh the benefits of being in town…”
A decade ago I was deeply immersed in running a rapidly expanding retail, call centre and online business that we took from £4m to £42m turnover over 5 wonderfully active years, eventually paying Business Rates of £250,000 a year. Every £ we made was re-invested in business improvement and expansion. No wonder we went on to invest only in the online future as the optimum way of reaching our customers – it was just so much more cost-effective and sustainable.
Nowadays, when rents in many high streets and business parks are dropping to levels that are affordable to new entrants, Business Rates are still levied at historic levels, so much so that some Business Rates are now higher than the rent! Talk about holding back recovery…
Corporation Tax …
When looking at “fair shares”, it is most welcome that Corporation Tax is now slowly reducing. It enables businesses to retain a little more of their scarce resources, and gives a reason for international business to prefer basing themselves in the UK compared to other domiciles. Of course other taxes, market and competitiveness issues must be taken into account, and we are still nowhere near as good as we need to be.
So what rate of Corporation Tax to pay? 0%, 22%, 100% or infinite? Anyone running a small business knows that much, if not all of their profit gets ploughed back into the business, typically in investment in essential premises, equipment and technology, or to fund commitments to growing numbers of staff, suppliers, stock, work-in-progress, credit terms to customers etc. If you make a profit then that is very rarely represented at the end of the year by a wad of cash in the bank account – in fact often the very opposite. The myriad legislative adjustments to “profit” to arrive at “taxable profit” do little to help, more often that not reflecting the latest Chancellor’s headline grabbing budget-day opportunity.
Yet despite this, that strange accounting creation “profit” is apparently worthy of tax, a tax that can threaten the cashflow lifeblood of a business, and denies a growing business the ability to satisfy more customers. Corporation Tax is a very blunt instrument, penalising successful growing companies that could otherwise be investing in their future. As the Sweden’s Prime Minister pronounced in 2012, “This is the most harmful tax of all”.
We rightly complain at the unfair competition generated by international companies who domicile their tax arrangements elsewhere, although I suspect that British companies operating overseas generally do the same. This is not a reason for more complex regulation, or higher taxes, but for scrapping a bad tax altogether to create a level playing field.
Does this mean that businesses pay no tax? Far from it, for mature businesses who are in the happy position of surplus cashflow reward their owners through dividends and see their shareholders pay large sums of tax. There is also plenty of valid research and real experience demonstrating that lower taxes generate greater tax revenue, as motivation improves and the incentive for evasion and avoidance reduces. The impact of Corporation Tax falls most harshly on preventing the growth of smaller businesses, who are the lifeblood of most societies and the cornerstone to local employment. We are all the poorer for it.
Taxation without Representation …
Corporation tax generates £43bn, Business Rates £23.6bn, then add the Employers element of NI, and add a little irrecoverable VAT, import duties, Petroleum revenue tax, Fuel duties, Stamp duty land tax, Air passenger duty, Insurance Premium tax, Climate Change levy, Vehicle excise duties, Temporary bank payroll tax, Bank levy, Environmental levy and a few more …. and bingo, thats over £130bn of corporate taxation.
So there we have it; 25% of the UK’s taxes are paid by businesses who have no vote. Of course businesses have workforces and owners, and you could argue that they will take into account their work and investment when casting their vote. I do hope so.
The Starbucks factor …
But when such a high proportion of society is disconnected from business it is an easy political target. Maybe that was what lay behind the pathetic behaviour of the Public Accounts Committee in shaming named businesses when they were simply applying the tax rules set by our parliament. Imagine what the Bostonians would have made of that!
Even more pathetic was the reaction of those businesses. Take Starbucks, who rather than rolling over and playing dead, could have extolled the virtues of the millions who freely choose to use their services every week, set out the investment they have made in this country, the 9,000 UK jobs they have created, the VAT and payroll taxes they collect and pay, the Employers NI and Business Rates, and the worth they have created within society. This company pays huge taxes to the UK purse, but the mainstream media and political class (and the company itself) seem to prefer to ignore these realities.
If I had been the man from Starbucks, I’d have offered the members of the Public Accounts Committee a cup of coffee each, but given them a choice. First, a caffe latte at current prices, and secondly an identical caffe latte at zero-tax prices. I wonder how much less this would cost … 25%, 30%, 40%? And I wonder which would be more popular amongst consumers? But thats a story that is sadly never told …
We should be encouraging overseas companies to bring their capital and employment opportunities to this country, not sending mixed messages so they decide it is easier to grow elsewhere. As a result of this debacle we have probably lost or had deferred £100m of investment they had planned destined for our shores.
Personally, Starbucks does nothing for me. My visit to Boston was a revelation in the days before coffee shops had yet to establish themselves on the UK High Street, especially the coffee and caramel. But nowadays my liking is for tea, so my tastes – in beverages, taxation and Liberty – are rather more aligned with those of the Boston rebels of yesteryear.
Is all business good? No. But in a free market the bad ones get found out and lose their custom.
If applying business capital is all about meeting the needs of society (which it is, through employment and the competitive provision of goods and services that people want or need, in order to generate additional capital for the next good idea) then we should be encouraging business, not penalising it. It really is farcical that the state takes essential funds from business with one hand and then complains that the banks are unwilling to provide the essential funding to business with the other!
The more taxes that are levied on business, whether through turnover, employment, location, activity or profit, the higher the price paid by the populace for the goods and services they wish to enjoy, and the less competitive our exports. No wonder we complain that too few have a living wage. Who ends up paying businesses taxes? The people!
Want to improve Britain for everyone? Then slash the biggest drag – business tax. In the process business will increase employment, pay rates, lower selling prices, encourage constructive competition, attract investment from overseas, and we’ll actually give growing business the opportunity to really grow. And who would benefit most? Yes – the people!
It really isn’t rocket science. But if we can’t understand it, perhaps we should give each business a vote.
 OK, the maths may be a little too simple, as not all new jobs will be available at the average wage rate, and I have ignored distinctions between the Private and Public sector. Some economists say that short-lived unemployment is oddly beneficial, as the flow of people in and out of jobs makes talent available for growing employers, and encourages re-training to increase the skills base and earnings capacity of the majority.
 http://www.voxeu.org/article/who-really-pays-social-security-contributions-and-labour-taxes. Fancy a 10% pay rise, then scrap Employers’ NI.