A liberal approach to corporation tax reform

As the values of liberalism direct us towards what David Laws highlighted as the four pillars of liberalism – social, political, economic and individual, we must identify a fine balance between all four. The application of tax reform, of all kinds, must be utilised as a means to desirable ends. Here, we must also look to the reasoning of taxation, of which there are two prominent reasons; to collect money to fund social programmes and to discourage certain behaviours. The discouragement of actions by taxes is, of course, an uncomfortable idea, for why is the government so moral as to explain to citizens what they can or cannot do, especially if such an action does not harm others? To identify what taxes could be deemed as moral, we must approach this topic with the concern of what might harm others; and in the context of taxation, what moral actions can we make most profitable?

The proposal for this tax reform would be to have five points where corporation tax could be reduced, if a corporation is: I. a fair wage employer; II. environmentally friendly; III. embracing of diversity; IV. an ethical trader and lastly; V. positively engaging in the community – supporting local charity events, and so on.

The next stage would be to identify the appropriate level of tax reduction for each point achieved. Here, I would suggest 2% tax reduction for small corporations, 1.5% for medium-sized corporations and 1% for large corporations. This way, for arguments sake, if the standard rate of corporation tax is set to 25% for all corporations prior to the tax reductions, then if all the five points are fulfilled, small corporations could be on 15% corporation tax, medium on 17.5% and large on 20%.

Now, to address new corporations on the market, which are setting up and would automatically be placed on the highest rate. There should be some consideration here to those companies that would be fulfilling the full five points yet are new on the market, so they do not receive the benefits. Here, during the process of registering a company, the new corporation must be able to indicate which of the five points that it would be able to fulfil and then it should receive the correct tax rate for when it comes onto the market.

This way, we can ensure competition in the market, with companies that are socially desirable reaching the lowest rates of tax. There are, of course, other issues concerning what is deemed environmentally friendly, embracing of diversity and of course, if a company starts to commit to a downturn and cannot pay a fair wage, and so on. However, these are concerns which could be easily discussed in a longer paper, not in 500 words. For this article, the challenge is to persuade the reader to utilise taxes in way that promotes individual profitability as being the most moral, which in turn promotes that of the social good. As Adam Smith wrote in his Wealth of Nations:

By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for good.

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15 Comments

  • Peter Martin 11th Feb '19 - 8:24am

    @ Ben,

    “the reasoning of taxation…….. to collect money to fund social programmes and to discourage certain behaviours.”

    OK but where does the money come from before it is available to be collected? Logically, it must follow that the spending must come first and then, later. it is removed from the economy in taxation.

    It may seem a minor quibble, but it the key to understanding just how the Govt is not a household. The Gov is not, like the rest of us, constrained by the amount of money it has. In fact the Govt can neither have not not have any money in the way the rest of us can.

    http://neweconomicperspectives.org/2014/05/taxes-mmt-approach.html

  • William Fowler 11th Feb '19 - 9:09am

    The govn can create as much money as it likes but the price that is paid is a ruined currency and hyper-inflation – this is recognized in the eurozone by limiting the deficit to 2-3 percent. Were the UK totally self-sufficient in goods and food rather than pathetically reliant on other countries, govn might be able to fiddle things to print as much money as they like.

    The assumption in the original post is that the more money the govn has to spend, the better things get but the more money a govn has the more power over citizens the State has. Personally, I would prefer to see business rates replaces with a turnover tax, which as outlined above would vary according to the merits of the company and its directors. I would use the internet to let the populace censor companies by popular vote, so if someone like Philip Green ran off with a lot of pension money from one company his other companies would then end up paying a much higher turnover tax. The latter better than corp tax because clever accountants can’t easily fiddle the books. If the LibDems actually wanted to win an election I would also get rid of council tax in favour of this business turnover tax.

  • Joseph Bourke 11th Feb '19 - 9:36am

    Good article, Ben, but I would think carefully about calling this a Liberal approach. One of the key premises of tax law is that all taxpayers are treated equally before the law. We do of course levy excise taxes on alcohol, tobacco and fuel and there is a good case for Pigouvian taxes to offset the costs of negative extarnalities to society as a whole. We also allow tax deductions for charitable contributions. However, the tax system is a blunt tool for encouraging behaviours such as a fairer wages; environmental responsibility;diversity; ethical trading and corporate social responsibilty.
    Corporate taxes have been cut drastically in recent years, while funding for local government and welfare provision has been reduced well beyond any prudent level of reform. This is not the right approach in my opinion. Corporate taxes should not have been cut in these circumstances and we need to think more carefully abot the right balance of taxation, public services and welfare benefits in society.

  • Peter Martin 11th Feb '19 - 10:11am

    @ William,

    “The govn can create as much money as it likes but the price that is paid is a ruined currency and hyper-inflation – this is recognized in the eurozone by limiting the deficit to 2-3 percent.”

    What’s special about 3%? Sometimes that can OK. Other times it isn’t and Govt should aim to be higher or lower. According to prevailing conditions to prevent excessive inflation or excessive recession.

    Anyway back to the OP. The difficulty with corporation tax is that multi-national companies can easily switch their profits from one country to another. Naturally they’ll fiddle the figures, sorry use perfectly legitimate accounting techniques, to move their profits from high to low Corporation tax areas. So before anything else is done on Corporation tax, it’s perhaps worth thinking about other forms of taxation for multinational companies.

  • @Joseph Bourke

    “all taxpayers are treated equally before the law”

    um… The tax system and “unequal” taxes are used massively to drive behaviour. Sin taxes, when we had leaded petrol – differential taxes between leaded and unleaded petrol. ISAs etc. And in the corporate sector tax relief for R&D for SMEs etc. The only way all taxpayers are equal is that they have to abide by the tax code and even that is questionable if you are rich enough to afford a good enough accountant / tax advisor.

    Firms have a duty to shareholders to maximise profits. I support this as it leads to efficient markets and better and cheaper goods and this may well involve acting in the way described to sell to “ethical” consumers etc. But it seems that logical to say to companies if you act in a way that we as a society deem “better” and hits the bottom line then we will reward that with less tax.

    And it is worth pointing out that some of the behaviour outlined caused increased costs to the taxpayer. Clearing up pollution and low wages causing increased benefits. But some of it might be better tackled through other means – pollution directly and increasing the minimum wage. How does a very small company of say 1 or 2 people meet a diversity requirement?

    It is though often easy to point out holes in such proposals but it is an interesting and worthwhile proposal to further develop.

    The biggest problem I have is that corporation tax is not that large a tax – 19% and on profit and raises well under 10% of the total tax take – so I am not sure how much “better” behaviour the proposal while interesting would actually encourage.

    As it happens I am not a great fan of corporation tax it sounds nice and fluffy to tax nasty big businesses but I would prefer to get them here doing business and tax the subsequent economic activity in other ways.

  • Michael Cole 11th Feb '19 - 1:31pm

    Ben, your intentions are good, but you say “The proposal for this tax reform would be to have five points where corporation tax could be reduced”.

    Who decides whether a company meets any or all of these criteria ? Presumably it would a special body within HMRC . But their Commissioners would be deluged with innumerable claims and appeals; arguments would be dragged into the Courts; disputes could continue for years. A whole new bureaucracy would be created.

    Is that what you really want ?

  • @William Fowler – “so if someone like Philip Green ran off with a lot of pension money from one company his other companies would then end up paying a much higher turnover tax.”

    Much better to fix the holes in the existing pensions legislation, known about and unfixed since Maxwell raided the Mirror Group Pension Fund…

  • Graham Evans 11th Feb '19 - 1:59pm

    @ Roland I think pension scheme liabilities should be joint and several in respect of associated companies, i.e parent companies should be responsible for deficits in the pension schemes of their subsidiaries, as should all other companies in the group. The limited liability company is too often used to shield the ultimate controlling shareholders from bearing losses arising from mismanagement.

  • Peter Martin 11th Feb '19 - 2:14pm

    “five points where corporation tax could be reduced, if a corporation is: I. a fair wage employer; II. environmentally friendly; III. embracing of diversity; IV. an ethical trader and lastly; V. positively engaging in the community – supporting local charity events, and so on”.

    This is going to be completely unworkable. We’d have lengthy debates in the law courts over of employees skin tones and hair curliness. Presumably a collection of solicitors wouldn’t have a problem with high salaries, and be able to support a few local charities and be well versed in the right buzzwords to demonstrate the right ethics. On the other hand a struggling collective might have a problem and end up paying higher tax rates.

  • @Peter Martin

    I think you are being over-critical and Ben acknowledges that these issues need more fleshing out. The point is to put them on the agenda. “Embracing” diversity does not necessarily mean exact quotas but the whole gamut of measures including job interviews with at least one BAME representative, career mentoring etc. – the sort of things outlined in Conservative Peer, Ruby McGregory-Smith’s report https://www.theguardian.com/money/2017/feb/28/bme-career-progression-could-add-24bn-a-year-to-uk-economy

    And you would of course put the requirement more onerously on bigger businesses which I believe employ half of the private sector workforce.

    It is fairly shocking that BAME employment is 62.8% compared to 75.6% for white workers and 35% of Pakistanis report being overlooked for promotion against 23% of white workers.

    The report says that improving this aspect would add a not insubstantial £24 billion to the UK economy.

    And you could of course @Joseph Bourke do it in a revenue neutral way – increasing taxes for those that don’t meet the requirements if you prefer but having a differential tax.

  • @Graham re: “I think pension scheme liabilities should be joint and several in respect of associated companies…”

    That, I suggest is a deficiency in current pensions legislation, not corporate taxation.

  • How interesting to read your article Ben – ive been discussing just such an idea with my local party. I’d be very interested to hear from you if you’d like to discuss developing this idea further. [email protected]

  • The first thing is for all corporations to pay what they owe and put sufficient resources into that. What they owe must be clear and fair so there is no need for expensive tax accountants. The penalties for tax avoidance must mean that it does not pay. Then the idea of rewarding positive effects of that business by reducing corporation tax seems a sound one. Why all businesses pay the same rate is baffling.

  • Vince Cable in his pre-budget speech last November noted:

    “…our Corporation Tax Panel, has been reviewing business tax. Its interim conclusions are that the system is overcomplicated and full of unintended incentives. They suggest:
    • A stable and predictable corporation tax reform with a competitive rate of around 20%.
    • All companies bidding for government contracts must be clearly seen to be subject to tax in the UK and preclude the use of offshore tax havens.
    • Rapid progress on limiting tax deductibility of corporate interest
    • Recognising the special problems presented by digital companies which currently find it easy to shift profits to low tax jurisdictions.
    • The complex capital allowances regime must be reformed to incentivise and not penalise capital investment.
    The introduction by the Coalition of the General Anti-Avoidance Rules and an open register of beneficial ownership put the UK among the tighter jurisdictions and the estimated ‘tax gap’ between actual and potential receipts is now one of the lowest – 6% of revenues. This still, though, amounts to a large sum. One necessary step is firm action against dependent territories and crown colonies which encourage aggressive tax avoidance.”

    The IFS in its report https://www.ifs.org.uk/publications/9207 writes:
    “Cuts to corporation tax rates announced between 2010 and 2016 are estimated to reduce revenues by at least £16.5 billion a year in the short to medium run. Accounting for measures that raise revenue, including anti-avoidance measures, onshore corporate tax policies over this period reduce revenues by an estimated £12.4 billion a year. Changes to corporate tax have represented some of the largest giveaways in both parliaments since 2010.”

  • David Evershed 16th Feb '19 - 2:41pm

    We should all remember that higher tax rates can mean lower tax revenue and lower tax rates can mean higher tax revenue.

    Also Vince Cable is right to consider the competitive corporate tax position versus other countries.

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