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15 March 2007 Blog Home : March 2007 : Permalink

Don't Cut Taxes I Need a Job

Tim W links to this distinctly odd post by one Richard Murphy, a gentleman who seems to think that simplification and reduction of corporation tax would be bad for the UK. He is replying to the Torygraph report of something accountants Grant Thornton and after summing up the arguments in 5 points attempts to reply to each point. Regretfully I think all his replies are bunk.

1) A cut in the corporation tax rate, and they have suggested Ireland’s 12.5% rate as an alternative
Ireland is a micro-state that steals other countries tax revenues. It is not capable of being compared to the UK. It can only survive under the shadow of the UK (and I say this as an Irish citizen). To take a simple example, half its law is ‘borrowed’ from the UK because it does not have the resources to develop its own, and that’s the most basic function of government. The Eastern European states that offer low tax rates are also, and obviously, not comparable. Their state of economic development is fundamentally different from the UK’s. These tiny states, smaller than south London in most cases, cannot be the basis for comparing tax rates. Grant Thornton should know that so the request they are making has nothing to do with comparison, or even treating cost (as they believe tax to be) comparably, because the benefits afforded in the UK to companies that work here are obviously much higher than in these other places. What they’re actually saying is simple. It’s ‘please shift this tax burden onto other people but give us everything we demand as businesses’. That’s wholly inequitable.

I don't want to be rude here but "stealing other countries tax revenue" is a bit rich. I assume that Mr Murphy, given a choice between two sellers offering the same goods at different prices always buys the most expensive. His claims about Irish viability are a joke: "half its law is 'borrowed' from the UK not because it doesn't have the resources to develop its own but because it was ruled by the UK until 1921, as a result it inherits English common law as do many other parts of the British Empire. Of coruse since both Ireland and the UK are part of the EU another significant chunk of Irish law is also "borrowed" from Brussels just as it is in the UK. Oddly enough that portion of law does not seem to have been funded by corporation tax. Secondly it is unclear to me why the size of a nation should have any bearing on tax rates. I should remind Mr Murphy that 100 years ago the mighty British Empire ruled 20-25% of the planet (depending on how you count things) with far lower tax rates than any major state today. Thirdly, as Mr Murphy should be well aware, businesses are run by people for the benefit of (other) people. Taxing the profits on the business simply means the business pays lower dividends, reduces investment or pays its workers less (or all three). There have been numerous economic studies showing this.

2) Simplified tax legislation
Simplified tax legislation would be a great idea in a simple world. We live in a complex one. Business can handle complexity. So can accountants. That’s because it’s needed to allow for all the options that business needs to undertake trade effectively and competitively. Take away the complexity in tax and you’ll restrict commercial flexibility in many cases. What do you want, Grant Thornton? And if Grant Thornton were really keen on simplifying things they would also support abolition of the domicile laws. They don’t. Mike Warburton, head of tax at Grant Thornton has said so on BBC radio in debate with me, recently. He actually said ‘they’re great fun’. That’s because he makes money out of them. So this call is hypocritical. It’s really a request to cut out rules that increase the tax take and leave those that reduce it.

Allow me to paraphrase. Businesses can afford the fees of accountants such as myself so that we can give them advice on how to reduce their taxes. If you make it too simple then they'll be able to do it themselves and I'll be out of a job. The fact that he knows someone at Grant Thornton who apparently thinks the same way is irrelevant. And how the heck does a simpler tax system "restrict commercial flexiblity". The ultimate flexibility occurs when there are no taxes because then yu don't have to worry about the tax implications of otherwise rational commercial decisions. As you add taxes and allowances and loopholes you end up warping commercial logic more and more because what makes sense commercially may end up being stupid after yuo've paid all your taxes.

3) Fewer restrictions on controlled foreign companies
The call for fewer restrictions on controlled foreign companies is simply a request for more support for tax haven operations. Tax havens cost the governments of the world more than five times the cost of meeting the Millennium Development Goals. Whose side are you on Grant Thornton?

Apparently Mr Murphy's next gig will be with the record companies as he defines theft the same way they do. Has it occured to Mr Murphy that the low(er) tax rates may be what makes the difference between a company's viability and its failure. In other words if these companies ended up paying the taxes Mr Murphy thinks they should then I suspect that many of them would go bust and thereby stop paying not just corporate taxes but also VAT, sales taxes, salaries and dividends. In other words the sums bear as much reality as the RIAAs claims of losing millions through "piracy". As for the last sentence, it seems clear that Grant Thrnton is doing what a responsible professional does and merely making the case for its clients. The fact that such a case would probably also benefit others who are not clients is mere serendipity.

4) Streamlined regulations
Streamlined regulations. I agree. They can help, on occasion. But most regulation has a purpose. They are also the biggest stimulant to innovation there is in the economy. So cut regulation at your peril.

This was got Mr Worstall's goat. I spy in Mr Murphy a man who can't see the forest for the trees. Let me remind him that not all innovation occurs in the field of tax law and that very few (if any) successful innovations in other fields have been created because of specific regulations except as a way to avoid the damn things. Mind you escaping the revenuers has resulted in a number of innovations such as power boats (cigarette smuggling), Nascar (alcohol prohibition) and the like.

5) A less combative approach from HM Revenue and Customs to tax avoidance.
I’m amused by the call for a less combative approach from HM Revenue and Customs to tax avoidance. My answer is simple. Grant Thornton can turn the temperature down by becoming tax compliant.

Mr Murphy actually has a sort of point here. If GT really say this then that is indeed silly. However one suspects that what GT are actually saying is that a simplification and lowering of the corporate tax rates and regulations will make it easier for companies to remain within the law while still making profits. It could also be that the problem GT have noticed is that the current complexity can make it such that it is easy to make an honest error which leads one to be out of compliance. We have seen cases where the government has insisted that people pay fines even when they followed the advice of civil servants that subsequently turns out to be wrong. This level of combativeness does indeed seem wrong.

I'm glad to say that Mr Murphy's biography makes it clear why he is against all ideas of lowering and simplifying taxes.

Since 2000 Richard has been increasingly involved in taxation policy issues. He is a founder of the Tax Justice Network and director of Tax Research LLP which undertakes work on taxation policy for a wide range of clients including governments, government agencies, commercial organisations, aid agencies and pressure groups in the UK and abroad.

Finally I suggest Mr Murphy read this. Many times.

I despise l'Escroc and Vile Pin