A radical socialist idea: abolish corporation tax?

I wrote a couple of days ago about how taxation should properly be seen as a rent that is paid for the privilege of living in a well-structured, orderly society, and that companies and the wealthy should be happy to pay a higher tax-rate as they get to enjoy a higher level of benefit from that social structure than less well-off people.

I also had some interesting discussions, both online and off, with some people who hold right-wing views about taxation, though obviously I disagreed with them on a lot of things.

On top of all that, I’ve written recently about the need for the Left, if it wants to have a chance of effecting change: to engage people, break the mould of the prevalent thinking these days that ‘all politicians are alike’ and the perception that Labour is simply a slightly redder, perhaps slightly kinder, version of the Tories because we’re all fighting for the same ‘middle ground’ – and to equip the next Labour Prime Minister to resist the inevitable attempts of ‘the markets’ to force him to bow to neoliberal ‘policies’, to conceive and present some radical thinking. To show some truly different visions of how the world might and should be.

The combination of these things has had me mulling over things. I’m convinced that the status quo is not the only option – that we don’t have to simply put a new coat of paint on the existing structures while doing nothing to change their substance; that we can have a more just world that works better than it does now. It takes some bold thinking to jar most people into seeing beyond the current reality to that better one – but that thinking has to be practical and workable.

So I’ve been thinking about tax. Specifically corporation tax. One thing I’ve agreed with my conservative interlocutors about is that the tax system needs to be simplified. Too much complexity means too many loopholes for clever people (and rich people and big corporations can afford to hire a lot of clever people) to exploit and avoid taxes.

Of course, my conservative friends would regard that as justifying a ‘flat tax’, where we all pay the same rate of tax no matter how much or how little we have (though even they would generally agree that very low earners shouldn’t pay tax at all), rather than a sliding scale ‘progressive taxation’ where you pay a higher percentage of earnings above certain thresholds, such as we have now.

But flat taxes still disadvantage the poorer, because their essential spending leaves them with much less disposable income, so their flat tax of, say, 30% would represent a much greater burden on them than the same rate would on a rich person with a lot of disposable income.

We need taxation that is simple, hard to avoid, easy to calculate, and fair – and which covers our national costs for things like the NHS, pensions, welfare for the vulnerable and so on. So – at least for companies – how about abolishing it altogether?

Sounds crazy? Possibly. But the idea I’ve been mulling over for the last few days is this: replace income tax with a ‘national rent’ concept based on share of GDP rather than a tax on profits.

In my allegory of taxation, I pictured the UK as a big apartment building, where rich and poor share the same building but in vastly different conditions. The landlord/govt charges the rent that he needs to, in order to maintain the building, pay for security, for the building’s free clinic, for cleaning, fire services etc. When his costs increase, he’s perfectly rational in weighting the increase in rent to the richer tenants – they get to enjoy a different level of benefit from living in the building, and they can afford to pay better than the poor tenants.

But in reality, corporations (and people) can, and do, use clever accounting to end up staying almost rent-free. For corporations, who do pay a flat tax on profits (which the Conservatives plan to bring down next April and again the year after), this is generally done by moving profits around between companies and locations to minimise the tax bill, notional write-offs and by the ways in which capital expenditures are treated (though there are lots of ways, and too many to list here).

By making profit the measure of what a company pays, leeway is automatically created for profit to be creatively accounted to avoid tax.

But if we abolish corporation tax and replace it with a ‘rent’, all that leeway disappears. In the rent allegory, the greater floor-space enjoyed by the rich represented their share of the national GDP – they enjoyed a higher share, so should pay a higher ‘rent’. So the replacement for a profit-tax would be based on calculating their turnover the previous tax-year as a percentage of that year’s GDP, and charging them a fee based on that turnover. The total fees the government would charge would be enough to cover our necessary expenditure to maintain the social structure (which is why I consider this a perfectly socialist idea) – health, welfare, policing, fire services, army etc – minus what it expects to gather in terms of personal taxation.

While I’m fully expecting squeals of outrage and derision from the Right for the idea, I think it should actually appeal to them in some ways, as well as to the Left. Here are some of the advantages:

A balanced budget

Because the rent is based on covering expenditure, the UK would not run at a deficit. The rent level could even be set in such a way as to gradually eliminate the national debt, just as a landlord with a mortgage covers his mortgage repayment costs from the rent he charges to his tenants.

Clear, simple, difficult to avoid

Because companies’ turnover is much more visible than their profit, and is stated as a bald figure, the level of ‘rent’ would be much easier to calculate and much harder to avoid.

Proper democracy

Rather than governments having their hands tied by the corporate desire to avoid tax, the government would set the spending levels and the required corporate rents would ‘trickle down’ from that (I don’t mind that kind of trickle-down effect!). The country would be run by the government elected by the people, with a much greater freedom to actually do it, rather than the current corporatist situation where large companies have undue influence on government decisions, especially on social spending and taxation.

Incentivised efficiency and competition

Because profits would not be taxed, companies would be free to maximise their profit by working efficiently. Escalation of costs would be controlled via competition. To prevent the short-sighted from minimising cost and maximising profit by simply driving down wages, a ‘living wage’ minimum wage would need to be set and enforced – but if the corporate ‘rent’ was set so that the minimum threshold for personal taxation could be raised significantly, the rate required to be a living wage wouldn’t need to be as high as it does now.

Companies would be tempted to simply pass on the cost of their rent to consumers, but this would be like increasing VAT and would unfairly penalise consumers. The need to offer competitive pricing should prevent this, but to ensure that companies didn’t collaborate on pricing to force consumers to pay their rent for them, the UK should emulate the US (one thing about their system I do admire!) and legislate for draconian penalties for participating in a cartel or for any kind of illegal price-fixing.

Small companies near-exempt

One of the favourite right-wing arguments against taxation and ‘red-tape’ is that they dis-incentivise the formation of small businesses. A small business’ share of GDP would be negligible, therefore so would their national ‘rent’. Costs would only become significant as they grow – and within that growth, competitiveness, innovation and efficiency would be rewarded by better profits without . Surely a Tory’s dream!

Anyway, we’re about to go out so I’ll leave it there for now. It may be I’ll think of (or someone else will point out) a reason why this system would be unworkable, or worse than what we have now. But hopefully, this is an example of the ‘out of the box’ thinking that we need – and demonstrates in some small way that there can be alternatives to the status quo, not just in the tax arena but everywhere.

Get thinking and come up with your own contribution!🙂

20 responses to “A radical socialist idea: abolish corporation tax?

    • A very interesting idea – although I guess you mean some kind of income code rather than the tax code, which just says how much you’re entitled to earn before paying tax?

      The weakness I’d foresee is the same as you’d have with VAT – if you don’t spend, you’re not taxed, and wealthy people could buy abroad and avoid it. I think the two ideas are good illustrations of how there ARE alternatives, though – it just needs imagination and then to find the right one!

      • Yep. Lots of downsides I’m sure. As far as the tax code was concerned, I was thinking of the process behind its individualised issuing more than anything else. The idea as described above wouldn’t avoid having to make calculations – but it would remove the need to make as many. In a world where they tell us the security services can track the movement of criminal money, and so in theory anyone’s personal wealth, why not turn it to our advantage to ensure the public sector we would like can be reliably funded to the benefit of all? Rich people buying abroad? Easier to deal with when the world becomes entirely electronic – and everyone, for better or worse, can only pay by a card … or digital signature.

  1. Only a quick comment as I’m hungover and sat using only a blackberry!

    I like the idea and the thought process but its totally unworkable, companies make vastly different gross (not net) profit margins and could afford to pay vastly different ‘rents’. Simple example you own a fish and chip shop, you make roughly 60% gross (ish), out of this you pay staff, rent and other expenses. You own a newsagency you make 20% gross profit thus to pay your staff and rent etc you need a much much higher turnover to make the same amount of money.

    In big business terms banks have giant turnovers and huge asset bases but with a relatively small profit margin yet companies like Mulberry would have much lower turnover levels with percentage wise vastly bigger profits. Once again leaving you taxing on profit. Of course the problem with taxing on gross profit is equally problematic as different businesses have much different expense structures and you can’t apply an even yardstick to say this is what we can tax.

    I do entirely agree we need a new system though so let’s all keep thinking!

    • It’s true that profit margins vary, but that would drive companies to be more efficient, according to market theory, wouldn’t it? Turnover-based ‘rent’ doesn’t give companies the option of disguising profits. The details might need working out carefully, but I don’t think the idea is unworkable. Just different.

      This is just an idea, though – a process-starter, if you like. If someone comes up with a better one, great!

      • It makes the assumption all companies could have through efficiency a similar profit margin so we can look at an overall turnover to make a tax. Certain things will always be far more profitable than others, petrol for instance or newspapers have tiny profit margins for the retailer, single digits at best where as food or luxury goods can have enormous profit margins. Basing a tax on turnover is as pointless as valuing a business on turnover, as someone famously said turnover is simply vanity, if you don’t make money from it what’s the point?

        I’m not arguing against a new solution just that it can never be based off turnover as its not indicative of anything.

      • But surely that’s no different to the current situation – some companies are more profitable than others, some industries more profitable than others, but companies find their niche in each of them.

        If it becomes less desirable to be huge, because of the increased ‘rent’ cost, that’s no bad thing – it will leave room for other companies to rise up/be formed to exploit the gaps that others are leaving.

      • Besides, private income tax doesn’t differentiate between people with a high income and low living cost and those with high income and high living cost. So you could see this as an income tax for companies, perhaps.

  2. I also ought to defend my flat rate tax I guess, I was arguing for a much higher tax free threshold of say £20k followed by a 30% rate. I don’t see how this would disadvantage the poor, if you’re earning less than threshold you’d pay no tax at all so far better off. At the lower end of the tax scale if you earned £30k you’d pay £3k tax and take home £27k, far more than now and I’m not sure anyone could call £27k after tax income poor?

    Also id argue the tax clearly is progressive, for example if you earn £40k you’d be paying £6k tax or roughly 15%. If you earn £100k you’d be paying £24k tax or 24%. The more you earn the higher percentage of your income you pay ’til near as damnit you’re paying 30%. That seems pretty progressive to me.

    • It’s not because as you near 30% the difference between massively different incomes diminishes to almost zero. And I didn’t say ‘the poor’, but ‘the poorer’ – that remains true.

      • I can’t see any salary banding that would be worse off than now because of the higher starting rate of tax, across the board people would have more money. So I’m not sure how the poorer or anyone else would be worse off?

        I don’t disagree that above a few hundred thousand it starts to flatten but the point is the super rich are far more likely to pay it. I don’t know anyone earning more than £150k that doesn’t try to minimise tax in some way, a simpler flatter rate would stop that. Plus 30% of something is better than the very little we collect now. If this system collects as much if not more tax as we collect now the only arguments I can see to further up the tax rate at the top end are idealogical ones.

      • We already have an ‘approaching zero’ situation with the top band at its current 50%. I’d be in favour of a sliding scale not just for ideological reasons but as a disincentive to the limitless accumulation of wealth. Assuming the right is correct that rich people will stop working when the percentage of what they keep reaches a certain minimum, it would help distribute income across a wider base.

  3. Hmm for some reason I can’t reply below…

    I see what you’re saying but companies and people are totally different, let’s use a small company example to keep this fair. Let’s say you own a fish and chip shop, you turnover 4k per week and gross 60%. Out of your 2400 gross you spend 800 a week on wages 400 a week on rent etc and have 1200 left. So let’s say you pay a ‘rent’ of 500 a week from what you have left, you’re then left with 800 a week, certainly livable on.

    Second example you own a newsagent turning over 4000 a week, a very small business. You make 800 a week gross profit but have no staff and very small overheads, you might take home 400 a week if you’re very lucky. Your proposal would wipe out the business altogether, it’s a not a big business and just keeps one person in employment but it does ruin that business.

    No matter how you scale each business it simply can’t work, there is simply no efficiency changes or business changes you can make that will bridge such a large gap in profitability.

    The comparison to income tax doesn’t work because people choose to have a set of outgoings, a company doesn’t. It has set costs associated with its products and it can’t change these to the extent where it could triple its gross profits, if it could we’d all do it!

    On the income tax point, the problem is with the top rate of tax (about to be 45%) is so few people pay it. I’m not sure how stopping people pursuing any wealth, limitless or otherwise isn’t ideological though?

  4. Seems to me to be a good idea, clearly put too. As has been noted though, no two companies are alike, even those in the same business sector. It even varies a lot over the country too. And of course over time. Perhaps if companies were only taxed on what they bought?

    • Same problem I’m afraid, if your company buys something at £1 and sells it on for £1.10 you’re at a massive disadvantage to a company buying something at £1 and selling for £3.50.

      Also not all companies sell products, service industries for instance would pay very little tax.

    • That wouldn’t be a very reliable source of revenue, especially in a time of low confidence like now – companies are sitting on vast revenues and not spending them.

      No two companies are alike, but the same goes for any two people – and those are still subject to the same tax/rent depending on their income.

  5. skwalker1964 06/08/2012 at 11:58 am · ·
    That’s why a tariff on turnover would work better 🙂

    I think you’re equating income with turnover which doesn’t really work, what might actually work was if you linked this idea with Gross profit margins. That figure would be a far more accurate reflection of a businesses ‘income’ than turnover and much harder to manipulate than net profit is.

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