Debate: Which tax would you axe? (Part 2)
Abolish corporation tax, says the IEA’s Chief Economist Julian Jessop
Corporate taxation is no longer fit for purpose. Globalisation has made it easier to shift profits around the world and harder for governments to determine how much tax a multinational should pay in any particular jurisdiction. New technologies make it possible for companies to earn large revenues in countries where they do not have a physical presence. The growing importance of intangible assets, such as brands and computer algorithms, has also made it easier for companies to claim more value is created in countries where tax rates are lower.
There are two ways in which to respond. One is to try to modernise the system. Proposals include taxing companies according to the amount of sales they make in a particular country, and the people and assets they employ there. The EU has suggested a digital turnover tax. But these all risk introducing new distortions.
The other, more radical approach is to phase out corporation tax (CT) altogether. This proposal is not meant to upset the social justice warriors. Instead, it starts from the fact that all taxes are ultimately paid by people, not companies. Firms are simply groups of people coming together to work more efficiently. Some of the burden of CT is borne by shareholders, as presumably intended. But some also lands on consumers, as higher prices, on employees, as lower wages, and on the wider economy in the form of fewer jobs and lower investment.
What’s more, the company itself is simply a legal entity: it does not go to school, use taxpayer-funded healthcare or receive a state pension. When its activities do take up resources, such as labour or property, it already pays for them with something extra on top for the government, including employment taxes and business rates.
Of course, governments will still need to raise money. The obvious thing to do is to replace CT with a tax on dividends when these are actually paid out to shareholders. Estonia already levies corporate income tax on distributed profits. This would be more efficient, but also fairer. Shareholders will typically be better off than the general population. Shifting the burden further towards dividends would therefore make the tax system more progressive. This is surely something even the most blinkered of “fair tax” campaigners would support.
Andy Mayer, the IEA’s Chief Operating Officer, would scrap the Apprenticeship Levy
The Government clearly views youth training as a “market failure”. This is contestable – we have very different economies and employment cultures to countries like Germany, where uptake of such schemes is higher. Yet even if we accept this premise, their preferred policy solution remains very flawed indeed.
The Apprenticeship Levy is a 0.5% charge on employers with a payroll above £3m, akin to National Insurance, tied to the specific purpose of financing apprenticeship training. On launch it led to a dramatic 30-60% reduction in apprenticeship starts. Given that the policy aimed to incentivise a 25% increase, it therefore fails the first and most important test of good policy – actually achieving the desired outcome.
It is also needlessly complex. The Levy on payment is converted into digital vouchers, topped up, and these can then only be spent on accredited training listed on a national register supported by a cumbersome process of vetting provided by an ineffective authority. Unspent vouchers are surrendered and redistributed, but only to firms with the capacity to absorb them – often not those who would have needed the incentive in the first place.
It is a tax, not an incentive. Training is roughly £1 in every £4-5 of expense on an apprentice, the rest being pay and benefits. A firm with a £1m levy bill would have to spend £4-5m to get back the £1m. They’re only going to do that if the incremental spend delivers benefits beyond the cost, which if possible would be true regardless of the levy.
It ignores real behaviour. Apprentices require close supervision and, therefore, management capacity. Firms are, therefore, reliant on ‘bottom-up’ signals of intent and capability in order to place new hires. In practice, they can’t just drop young workers in offices and ‘watch the magic happen’. The best schemes require leadership, commitment and sufficient business resilience to experiment. The levy supports none of things and actively damages the latter.
Finally, it targets the wrong issue – assuming market failure in quality training provision, which in reality is a competitive market. Firms that want or need apprentices develop programmes in house or through suppliers. If the outcomes are inadequate, they change. By contrast, the National Register distorts price and reputation signals, replacing them with licence to operate by ticking boxes. And boy are they slow to tick those boxes.
All in all, the tax has added deadweight costs to an issue that might not even exist. Ditch it.
Abolish Stamp Duty, says Calvin Chan, an IEA intern
A myriad of ill-advised policies have harmed the UK housing market, yet, in a crowded field, Stamp Duty Land Tax (SDLT) remains one of the more obvious villains.
Though it might raise revenue for the Exchequer, it causes enormous distortions in the process. Not for nothing did Stuart Adam of the IFS once term Stamp Duty “a strong contender for the UK’s worst-designed tax”.
By penalising any move from one property to another, SDLT discourages transactions, with the result that houses change hands less often than they should – often, by a serious margin. One recent LSE study found that just a 2 percentage-point increase Stamp Duty reduced the annual rate of household mobility by 37 percent.
This means a poor distribution of existing housing stock, and harmful bottlenecks in the market. One recent DCLG estimate suggests that 51% of owner-occupied households in England are currently under-occupied, and Stamp Duty clearly exacerbates this problem.
Those who wish to downsize, for example, are deterred from moving because they cannot afford the exorbitant rates. This, in turn, reduces the availability of appropriate housing for younger people, such as couples hoping to start or expand their families. Two groups of people suffer as a result.
Yet besides adding to the expenses of those who wish to buy, SDLT also harms those who rent. Rents tend to increase whenever stamp duty is hiked, with new landlords simply passing the charge on to tenants. The government’s most recent reform, which removed stamp duty for most first-time buyers, is a step in the right direction, but does not go far enough. What we need is wholesale abolition.