Sunday, 18 November 2012

Taxing Companies

Politicians think some international companies are avoiding tax by arranging their finances so that their British operations make either implausibly small profits, or no profits at all.

Profit is hard to pin down because it is a number produced by complicated calculations by accountants. I remember a pupil whose father was a farmer once said to me 'A farmer can be doing quite well and still have zero income'.

My solution is to stop taxing profits, and tax turnover instead. As turnover is much greater than profit, a considerably lower rate should produce the same tax yield, or even a greater tax yield.

Apart from clarity, another advantage of taxing turnover is that taxes would be paid by all companies roughly in proportion to the the services they receive from the government. Unsuccessful and badly run companies would pay more than they do now, and better run companies would often pay less.

I think I may have said much the same thing in this blog several years ago, if so circumstances justify the repetition.


Gerard Mason said...

So two companies, both selling products at say £200, one selling software at nbear zero marginal cost, the other selling hardware costing them £150, both pay the same amount of tax per unit sold?
And if you'd then say that the hardware vendor should put its prices up, I'd note that the demand curve for its products might make that impossible: the demand for a good relates to its price to the consumer, not to the cost to make it.
It seems to me that turnover taxation would have the effect of increasing business risk substantially in all areas, thus lowering economic activity. It would be another 2008, if not worse.
Further, a firm which made a loss in a particular year would still be obliged to pay tax on that year's turnover, quitem likely sealing its fate with little or no warning to its investors. Raising capital would become much more difficult.
Some firms make very little profit per item (e.g. stock jobbers). Indeed, the *less* they make per item the more efficient the market is. They must make their profit on the volume. Your proposal would have the perverse effect of encouraging them to raise their commission, as the incerased price would have a small percentage effect on their tax bill but a large percentage effect on their profit.
In summary: no, no, no!

Richard said...

I'd overlooked stockbrokers. I expect special rules could be made to deal with them, but that might let lots of other businesses pretend to be stockbrokers.

Banks might also be a problem, but we could define their turnover as interest and fees received.