Corporate taxation - a broken model?

Thrugelmir

N1AK wrote: »

We might be better off accepting that and going with a system like bringing in a tax on revenue instead of profit; but that has various issues as well.

Turnover has no correlation to profit.

So unworkable.

chewmylegoff

N1AK wrote: »

Corporation tax is a global issue; without a global solution there will always be issues with trying to stop people dodging it in one way or another. Personally I'm not confident it can be fixed any time soon.

We might be better off accepting that and going with a system like bringing in a tax on revenue instead of profit; but that has various issues as well.

It's harder to dodge revenue based taxation but it could increase the price of low margin commodities (meat, clothes etc) while decreasing the cost of luxury items with high margins.

The main issue with that is that you will tax loss making companies thus severely discouraging enterprise. Further it would also destroy high turnover low margin businesses.

MacMickster

Perhaps, if we are unable to tax large corporations effectively, we should look to them for a different contribution to our society.

Whilst leaving the rules for SMEs as they are, maybe we should introduce a higher rate of employer's national insurance for large businesses, to be paid on all wages rather than the current threshold.

Large businesses have advantages over SMEs which are due to economies of scale. These advantages are widened if they can then choose to avoid taxation, making it harder for SMEs to compete and grow. This would go some way to redress the balance.

Thrugelmir

Topic of Corp Tax is on current G20 agenda.

As benefits all countries.

N1AK

Thrugelmir wrote: »

Turnover has no correlation to profit.

So unworkable.

Pithy yet ill considered 3/10

Income tax ignores expenses and living cost. If you can't make a profit selling a service then you probably shouldn't be doing it. Companies have to collect VAT which decidedly is a tax on turnover already. So have you got a more nuanced argument to oppose with?

N1AK

chewmylegoff wrote: »

The main issue with that is that you will tax loss making companies thus severely discouraging enterprise. Further it would also destroy high turnover low margin businesses.

It's a long way from perfect and I would prefer a robust and unavoidable tax on profits but I see no evidence that one can be implemented.

VAT is a tax on revenue for most businesses; theoretically it is paid paid by the buyer but in almost all retail it is de facto paid by the company. Why would saying that companies have to pay 5% of revenue in tax (and decreasing corp tax accordingly) be all that different. At least hiding revenue is harder than profit.

I work in a high turnover, low margin, business and it wouldn't destroy us. Assuming that our effective taxation increased (accounting for less corp tax) then we would need to increase our prices and so would our competition.

Furthermore as our tax dealings don't include aggressive tax avoidance it is quite possible that our tax wouldn't need to increase because the tax intake from companies who minimise profits would increase if they had to pay tax on revenue.

If we were really desperate, or small businesses were particularly at risk then I'd happily accept a compromise where only companies with revenues over say £20 million pa were taxed on revenue. I have my doubts about how many firms below that size are effectively dodging all tax anyway.

grizzly1911

N1AK wrote: »

VAT is a tax on revenue for most businesses; theoretically it is paid paid by the buyer but in almost all retail it is de facto paid by the company. Why would saying that companies have to pay 5% of revenue in tax (and decreasing corp tax accordingly) be all that different. At least hiding revenue is harder than profit.

Why is it paid by the company?

Wouldn't that simply be the same as making VAT 25%?

N1AK

grizzly1911 wrote: »

Why is it paid by the company?

Wouldn't that simply be the same as making VAT 25%?

To take a very general scenario.

I run a business and must spend £1,000,000 to run it regardless of activity. Making my product costs £1 per unit.

If I sell 1,000,000 units at £1.50 including VAT then my costs would be £2,000,000, my income would be £1,250,000 and I would pay £250,000 in VAT on my customers behalf. Thus I would lose £750,000.

The argument against revenue based taxes is that it means a company could be paying tax while losing money. That is already effectively what happens with VAT, it can happen with income tax and I don't see why it shouldn't happen with business taxes.

It's not that I want revenue based taxation; however given the choice of revenue based taxation which can't be dodged and profit based tax which is comparatively easy to dodge the revenue based option would be better.

It would have some similarities to increasing VAT although if it was replacing an equivalent amount of corporation tax prices overall would change very little. Prices at companies aggressively avoiding tax now would increase (or their profits would) and companies not dodging tax now could decrease prices (or increase profit).

grizzly1911

N1AK wrote: »

To take a very general scenario.

I won a business and must spend £1,000,000 to run it regardless of activity. Making my product costs £1 per unit.

If I sell 1,000,000 units at £1.50 including VAT then my costs would be £2,000,000, my income would be £1,250,000 and I would pay £250,000 in VAT on my customers behalf. Thus I would lose £750,000.

The argument against revenue based taxes is that it means a company could be paying tax while losing money. That is already effectively what happens with VAT, it can happen with income tax and I don't see why it shouldn't happen with business taxes.

It's not that I want revenue based taxation; however given the choice of revenue based taxation which can't be dodged and profit based tax which is comparatively easy to dodge the revenue based option would be better.

It would have some similarities to increasing VAT although if it was replacing an equivalent amount of corporation tax prices overall would change very little. Prices at companies aggressively avoiding tax now would increase (or their profits would) and companies not dodging tax now could decrease prices (or increase profit).

I appreciate the point you are making but the VAT shouldn't really touch the company.

So you are effectively selling items at £1.25 giving the company a revenue of £1.25m and a loss of.£0.75m.

The company is operating at a loss irrespective of the VAT element.

I appreciate payment of the VAT is screwing the cash flow, but it isn't affecting the profitability.

If you are in a market where all producers/suppliers are VAT registered then competitiveness will only be affected by the efficiency of the producers model not the VAT.

For a revenue tax wouldn't prices at an aggressive tax avoidance company have to increase, to take account of the extra tax but their profits would remain static (sales flat) which would remove their competitiveness, whereas the non aggressive tax could hold prices (tax neutral)?

N1AK

grizzly1911 wrote: »

I appreciate the point you are making but the VAT shouldn't really touch the company.

So you are effectively selling items at £1.25 giving the company a revenue of £1.25m and a loss of.£0.75m.

Exactly: It can treat a 5% revenue tax in the same manner. It will have to price in such a way that it can pay it. If firms can account for VAT then they can account for a revenue tax. Can you think of any way that managing a 5% revenue tax would be more complex for a company than VAT would be?

grizzly1911 wrote: »

For a revenue tax wouldn't prices at an aggressive tax avoidance company have to increase, to take account of the extra tax but their profits would remain static (sales flat) which would remove their competitiveness, whereas the non aggressive tax could hold prices (tax neutral)?

Assuming total tax intake remains the same then people currently employing aggressive tax avoidance will pay more tax; that would either mean raising prices or decreasing profit. In most markets it is likely to be decreased profits. Take Starbucks for example. They are competing against Costa who appear to pay about the right amount of tax currently. Costa's tax bill would likely fall while Starbuck's bill would increase. Unless Starbucks could increase prices when its competitors don't need to then it would have then their profit would decrease.

Companies that don't aggressively avoid tax should on average see tax fall (if total tax is static and avoiders are paying more) thus they could either increase profits or decrease prices depending on the competitiveness of the market.