Tax and Fiscal Policy

Debate: Which tax would you axe? (Part 2)

Continued from Part 1…

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.

1 thought on “Debate: Which tax would you axe? (Part 2)”

  1. Posted 30/09/2018 at 12:52 | Permalink

    Axing sounds exciting but trimming is better. I would reduce employee’s national insurance, initially by 1-2%, with the aim of trimming the same amount each year as the economy adjusts, so that employee’s NI could disappear over two parliaments. National insurance is a tax on work, so reducing it will boost jobs, increase prosperity and reduce welfare dependency, paying for itself. National Insurance is a regressive tax, falling harder on low paid workers than high paid executives, so reducing it will make our system fairer. Finally, National Insurance is a dishonest tax, because its name pretends the benefits of insurance and supports the idea that income tax is 20% – 45%, when it is actually 45% – 60% including employee’s and employer’s NI. Supporting more jobs, enabling working people to keep more of the money they earn to spend how they choose, improving fairness and the honesty of our public debate make this a proposal that everyone can support.

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