If corporation tax didn’t already exist it would be madness to introduce it

Paul Ormerod
Follow Paul
CORPORATION tax is back in the news. Starbucks is the latest company to be in the spotlight, having allegedly paid £8m corporation tax in 14 years, despite sales of more than £1bn. This became noteworthy when the Prime Minister waded into the debate, expressing his concern with the levels of tax some companies are paying.

But if corporation tax did not exist, it would be madness to introduce it. The tax perpetuates the fantasy that there is a free lunch, and that someone else will pick up the bill for the welfare state and bloated bureaucracy.

Mainstream economic theory has many faults, but it is not an empty box. The key point is that, ultimately, the tax burden falls on individuals. Companies are simply legal entities: if a company pays more corporation tax, someone, somewhere, pays the bill.
There are many nuances to corporate tax law. But in order to illustrate the basic economic principles, we need to set these nuances aside. For example, one way for a company to respond to an increase in corporation tax is to reduce dividends, hitting the income of shareholders – including pension funds. Higher corporation tax might lead to smaller pensions.

Another response is for firms to offset the tax by holding down wage increases. This way, the company’s workforce gets less money. Or an overall wage bill might be reduced by simply employing fewer people. So, somewhere, some people pay the price of the tax by not being offered jobs.

Alternatively, the company could be tougher with its suppliers by screwing prices down. In this case, the supplying companies and their workforces pay the cost of the tax. Capital expenditure plans could be cut back when the burden falls on the specific group of firms who supply such equipment.

In all these examples, the cost of the increase in corporation tax is eventually borne by individuals. The specific ways in which these actions might be implemented will depend upon the subtleties of the tax system. But there is no escape from the fundamental fact that only people can pay tax.

There is a further cost to the massive complications of current tax law. Highly skilled professionals are employed by HM Revenue & Customs, by big companies and by the major accounting firms solely to do battle over the interpretation of legislation. Simplifying and significantly lowering corporation tax would free up these resources for productive uses, rather than the complete waste which the current system demands.

Of course, it would be a bold, not to say foolhardy politician who would make this argument in the current climate. But eventually Western electorates will have to face up to many realities, including the one that heavy corporation taxes do them no good.

Paul Ormerod is an economist at Volterra Partners, a director of the think-tank Synthesis and author of Positive Linking: How Networks Can Revolutionise the World (Faber & Faber).