The Guardian has given attention to a letter John Christensen and I wrote to that paper last week in which we said the following in response to a claim made by the CBI that companies are planning to leave the UK because of increasing tax burdens:
[N]ational statistics show that corporate profits as a share of GDP have increased on average from 21.5% to 22.5% since 1999, while the proportion paid in corporation tax has fallen from 15% to 14.1%. As a result, corporation tax paid as a proportion of GDP has been almost exactly fixed at 3.2% over this period. Companies moving to places such as Jersey (soon to have 0% corporation tax) and Dublin (with its 12.5% rate) want all the benefits of a moderately taxed economy like the UK, but they and the CBI want to contribute nothing for it.
This 3.2% figure was repeated in a report by Philip Inman yesterday, but its provenance has not been published, so I thought I should do so.
The data used to calculate this sum was UK GDP by year in current prices from the Office for National Statistics, the operating surplus of companies by year as a component of GDP from the same source, and corporation tax receipts by year as published by HM Revenue & Customs and the ONS. The latter were matched with profits for the preceding year as it remains the case that corporation tax is substantially paid a year after the profit is earned. In addition I would stress that the actual paid figures from the monthly receipts were used for 2005 and 2006 (declared therefore as for 2004 and 2005 in the data analysis as they relate to profits in those years). For 2006 extrapolation was made to the year end. The resulting data is lower than the forecasts made in the budget at £44 billion rather than the £48 billion forecast as at present this target looks exceptionally unlikely to be achieved.
The result is a valid piece of economic analysis. I have expressed operating surplus as a percentage of GDP, and tax receipts as a percentage of operating surplus and have then, finally, compared tax receipts to GDP. In each case trends were plotted based on this data from 1999 to 2005 (over which period there were stable tax rates, so avoiding confusion in the data for this reason). The result is the following graph. It emphatically supports our conclusions.
And the real economic lesson of this? Companies are contributing less, not more to the UK economy. And this is a cause for concern, not a matter for complaint.
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It really does annoy me when big companies threaten to leave the UK because they ‘feel’ they pay too much tax.
Try being an ordinary guy in the street who has to pay the over inflated prices that these corporations charge.
If these big companies feel that aggrieved at what they perceive as ‘paying too much tax’ then I am sure they would understand if the government of the day looked at redrafting UK tax law to ensure they as overseas based operations pay a much higher rate of tax than they currently do, a sort of ‘overseas duty tax of say 37.50%’, after all they seem to think ‘Joe Public’ is fair game for their pricing structures, why shouldn’t they be?
Okay, I know the above will not/can not happen, but, tax has to be paid. I know no one likes it, but it is what keeps the infrastructure going here in the UK. These corporations are in my view saying we are happy to ‘rip off’ the average guy in the UK, but hey, we don’t want to contribute towards the upkeep and ongoing running costs of the country, that’s not on guys!
It does, in my opinion, come back to perception, perception of how the tax take is being spent, and I think that is the real issue. It’s not so much that tax is at such a high level (unless you are an employee paying 40% on a wage that only just covers the mortgage etc), it is the fact the infrastructure this money is used to keep going is getting worse, we are therefore seeing a lot less for our tax £’s.
Jason – I agree with you on quite a few things but I would like to focus “above will not/can not happen”.
Treasuery knows this, and hence the introduction of VAT since many years ago (But then of course they now have carousel problem with it).
But then, chinese and Indian companies exploitation of their own ‘joe public’ in order to produce cheap goods etc also impose significant unfair advantages to a joe public’s wages as well as SME in UK.
But then, UK infrastructure and capital was built up by plundering the rest of the world during the days gone by. Think about it, the advantage that UK has could have came from a pretty unfair origina as well.
What are we going to do about it ? Apply trade barriers ?
This is just part and parcel of globalisation – you win sometimes (get cheap DVD playerm cheap cloth) and lose in many other times. The advancement of internet etc just makes this worse.
In an ideal world, I would say it would be nice if we can ensure that all corp pays 30%. I would also like to see our leaders to be totally honest and enjoy no extravagance perks.
But in reality – the only way out for Joe Public is to either invest is these very powerful Multinational or start your own ICT business that can take advange of these loopholes (Dubai Cyber City etc).
License based taxing (e.g. tax on banking license, mobile phone license (already done) based on turnover) etc may provide a partial solution.
Hate to say this, but anti multinational campaign will only go so far.
Thanks for the comments
2 things: Jason is right, infrastructure is getting worse. that is of course becasue much of it has been privatised, and the rest denied resource by governments determined to cut tax or (in the case of the NHS) because it was persuaded that markets are efficient. This can never be the acse in the NHS because there is no spare capacity so vast amounts are being spent to prove market theory does not work. But i stress, that’s a market failure, not a fault of the public sector per se
And will this fail re multinationals? No it won’t. They can run for while, but this is a finite world and ultimately they follow the money – which is where the customer is. So they can be taxed. We just need to refine the ways to do so.
Richard
[…] The difference though is simple. I happen to think the current market rises are also unsustainable. This time though I doubt that profits can be kept at this level. They’ve risen as a proportion of GDP, as I’ve shown here. The difficulty is I can think of nothing that justifies this apart from financial engineering. And that can’t be leveraged forever. […]