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You can't blame big firms for avoiding tax

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You can't blame big firms for avoiding tax

Post  Panda on Tue 28 May - 7:39

You can’t blame big firms for avoiding tax

Britain’s tax system is a complicated and unfair mess – a simpler, fairer
system would benefit all

Since 2010, Margaret Hodge has
been chairman of the House of Commons Public Accounts Committee Photo: DAN

By Matthew Sinclair

9:19PM BST 27 May 2013


Barely a day seems to go by without another corporate executive being dragged
before a select committee in Parliament to be accused of dodging their taxes.
Yesterday, Margaret Hodge, chairman of the Commons Public Accounts Committee,
suggested firms could be forced to make a full disclosure of their affairs to
MPs, albeit in private.

But if they really want to know who is responsible for corporate tax
avoidance, the MPs should look in the mirror. They put in place the endless
loopholes, special rates and exceptions in our tax system, which big companies
are much better placed to exploit than the rest of us. And they are the ones who
set the high tax rates which mean firms want to keep their money and make their
profits outside the UK.

Our politicians can either keep grandstanding, or they can get down to the
serious work of building a tax system where everyone gets the competitive rates
that are now only available to those with expensive lawyers and crafty
accountants. Britain desperately needs more competitive rates of tax on saving
and investment.

The Government is rightly proud of encouraging investment by cutting the rate
of corporation tax. Ministers have shouted it from the rooftops so often that
you might even think that we are leaving the rest of the world behind in the
global race for competitive tax rates.

Sadly, all they have really been doing is keeping up with the rest of the
pack. The UK still charges a much higher corporate tax rate than the dynamic
emerging economies with which we are increasingly going to have to compete. Even
within the European Union we have been losing ground. Our corporate tax rate (30
per cent) was two percentage points lower than the EU average in 2000 (31.9 per
cent) but this year is the same as the EU average: 23 per cent.

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It might not be a problem if the corporation tax rate were all that mattered.
Unfortunately it is just one of the taxes that can affect the return on
investments, alongside capital gains tax, stamp taxes on shares and income tax
on dividends and interest. If you earn some money, save it, invest it in a
company and then pass it on to your children, the Chancellor will take a bite at
every opportunity. Add it all up and the real top rate of tax isn’t 40, 45 or 50
per cent. It is 95 per cent.

That punitive tax rate means you only get to keep one pound out of every 20
that would have been yours if the politicians had kept their sticky fingers out
of your pockets.

Of course, most people don’t pay that much. There are numerous exceptions
that give certain investments – ISAs and pensions, for example – a better deal.
Anyone who has saved more than token amounts will have gone through their
options with a financial adviser and done their best to minimise their tax
liabilities. Big business is doing the same thing. They just have better

But there are limits. Economists at the European statistical agency Eurostat
have worked out the “implicit” rate of tax on labour, consumption and capital by
calculating the amount of tax paid on earnings, spending and savings as a
proportion of the total amount earned, saved and spent. They estimate that in
the UK, capital is hit hardest, with an implicit tax rate of 34.9 per cent,
against 25.9 per cent for labour and 19 per cent for consumption. That is a
heavy tax on saving.

Of the European economies for which they were able to work out the figures,
only anti-capitalist France charged a higher rate than the UK. Germany’s
implicit tax rate on capital was just 22 per cent.

This means that, while those corporation tax cuts might make the difference
for some investments, we still aren’t keeping up in the global race to compete
for investment and jobs that the Prime Minister says he wants us to win.

That’s not to say that no one will ever invest in Britain with our
uncompetitive tax rates. We still have many advantages, not least a respected
legal system, a great location and the English language. In some cases those
advantages will outweigh the burden imposed by our tax system. But it does mean
that there are investments that are never made and jobs that are never created
because politicians have not put in place a genuinely competitive tax system.

We desperately need to end the costly farce of taxing the same money twice or
even three times and instead impose a single tax on capital or labour income –
and at the same proportionate rate, whatever the source. But until they are
ready for that kind of strategic reform, politicians should cut not just
corporation tax but also capital gains tax (the “gains” are usually after-tax
already and often just a result of inflation).

Much simpler, fairer and more competitive capital taxes would change our
economic fortunes and end the grim slog of trying to make do year after year
when your earnings rise more slowly than prices. The abolition of clever legal
structures would also make it much harder to avoid taxes and start to restore
people’s trust that everyone is paying their fair share.

Too many politicians and academics like to describe the return on savings as
“unearned income”. That old Marxist lie is used to disguise the truth that
people working hard and doing the right thing by putting some money aside are
being taken apart by the tax system. They deserve fairer treatment. But they
won’t be the only ones to benefit if Britain gets competitive tax rates that
bring investment, growth and jobs to our shores.

Matthew Sinclair is chief executive of The Taxpayers’
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