Until the pips squeak: why business taxes are always a bad idea

This article is part of our series where we take a look at bad ideas motivating recent political decisions and explain what lies behind them – and what the Government should be doing instead.

It is the duty of a good shepherd to shear his sheep, not to skin them.
Tiberius Caesar

Squeeze the rich until the pips squeak!
Denis Healey

The inhabitants were so poor the only way they could make ends meet was by taking in each other’s laundry.
Mark Twain

Our socialist-paternalist establishment have a dirty secret, one they are doing a fantastic job at hiding and which very few people spend any time explaining.

It is this: most of the sources of tax revenue they pin so much hope on do not exist – and when they do, they are not what everyone thinks they are.

Any breed of socialist – Labour, Lib Dem, Green, SNP, BBC, ITV or HMT will tell you that their massive and costly spending plans can be paid for by imposing further Taxes on “the rich” or “corporations,” cue nods of agreement by the innumerate commentariat.

The first part of this is the category which most often gets questioned. The term “the rich” immediately brings to mind multi-billionaires swanning around on yachts between their holiday homes on desert islands or re-arranging their sports cars on vast country estates.

As should be obvious to anyone who thinks about this for more than five minutes, there are of course vanishingly few of these people and study after study shows how they do in fact already make a massive contribution to the overall tax take.

There is something to be said for the claim that richer people do often find tax loop-holes and legal ways of avoiding tax – but that is entirely the fault of the Government for having developed an insanely complicated tax system which favours those with expensive accountants over the rest of us. The solution of course lies in flat, simple and low taxes as Adam Smith advocated over two centuries ago.

There are of course those who insist that we should be looking to extract more from the wealthiest in our country but this also comes up against a problem – because any significant increases in taxes only ensure that this group do not stay in our country for very long at all. As a rule, the wealthier a person is the easier they find it to be mobile between countries and to simply up sticks and go and live elsewhere – taking their entire tax contribution with them.

There is of course a much wider group than this – those who are reasonably well off but who would find it much harder to employ expensive accountants or to redomicile. This group who end up shouldering a huge proportion of most tax burdens tend to be those filling highly trained or experienced roles having dedicated their lives to their profession or who have built small Businesses by painstaking labour and risk. In other works, those who have accumulated some wealth because they have earned it, who have been taxed a lot already and already pay more than their share and who are most likely to be driven in to early retirement or to close down their businesses altogether when faced with punitive tax rates as witnessed when Denis Healey was Chancellor of the Exchequer and had the opportunity to pursue his plan to squeeze them until the pips squeaked.

So with their being limits on what can be extracted from anyone who can be described as “rich” under even the most elastic definition we find consistently find that socialists in government end up taxing the less well off at ever higher rates– often those poorer than those being subsidised. A great illustration of this was Gordon Brown’s abolition of the 10p tax rate in order to help raise funds for further tax credits, benefits and handouts to preferred client groups.

But what of the second category we mentioned above and the other legendary source of incredible tax revenues – big business. We can all name numerous big businesses and many who are highly profitable. Surely these are a real and vital part of the UK economy?

…Well to an extent. There are of course many big businesses out there – though people consistently overestimate their role as a percentage of the economy. It is nevertheless a good thing to have these businesses operating, creating jobs and investing in our economy and it is possible to form the impression that more money could be extracted from them.

Yet that is to forget that these too can move money around within their companies to different jurisdictions, legally avoid taxes and reduce investments in any country which seems less likely to be a good prospect (eg through higher taxes.)

We have seen the impact of this recently in relation to the much called for “windfall taxes” on energy companies (a call which strangely tends to omit calls for a similar treatment for “green” energy producers despite their higher profits at the moment.) These calls have already wiped huge values off share prices and made investment in UK oil and gas far less likely – a trend which would be intensified massively if the taxes were actually passed, as no company could reasonably have confidence that these taxes were a one-off, especially when higher energy prices are largely a result of the Government’s own policies and sanctions.

But even where more money can be extracted it is important to remember that these big businesses are not cows from which milk and beef can be extracted at will by the Government. They are not shadowy self-owning entities – they are in fact only legal constructs serving as shorthand for assets which are ultimately owned by shareholders, which employ people and which provide goods or services to consumers.

Any taxes or extractions from businesses ultimately mean a combination of three things – higher prices for consumers (that’s us), lower pay for employees (so a form of indirect income tax on a population already shouldering the highest tax burden in our history) or by taking money off shareholders.

And in the UK economy those shareholders are to a great extent the pension funds we are all depending on for our retirement, the banks we have our money in or small shareholdings accumulated by normal people over time.

In other words, much like Governments, businesses don’t really have any of their own money and by raising taxes on businesses we are just imposing a form of dishonest and badly targeted stealth tax on ourselves with unknown but certainly damaging consequences for jobs, consumer prices and our own pensions and savings.

From an economic perspective businesses are really just arrangements of factors of production (land, labour, capital and enterprise) to produce goods and services to meet demand and make us all better off. As we discussed previously, the whole purpose of our economy is to meet domestic demand.

As a result, taxes on businesses are a tax on the productive part of the economy, making it more expensive to supply, specifically to supply those things we want!

Businesses are in fact the very worst thing to tax.

Taxes should be targeted in such a way as to minimise their negative economic impact, and in some narrow cases, to disincentivise negative externalities (the costs to everyone else) resulting from economic activity: there is absolutely no legitimate role or purpose in Business Taxes in a properly functioning economy.

By taxing ourselves secretly through business taxes we are just like Mark Twain’s parody,  taking in each other’s laundry to pretend we are making ourselves richer. We are long past Denis Healey’s ideal world in which the rich (and not so rich) are squeaking and we have strayed so far from sanity that Tiberius Caesar can serve as a cautionary voice, pointing out that we are very close to skinning the sheep we have sheared too closely and too often.

As such, after our recent advice to the candidates to be our next Prime Minister not to follow Brownite economics, not to follow polls or mythical floating voters and certainly not to believe the prophets of doom our latest advice is this: do not impose a single penny further in taxes on business and start to reduce the tax burden as soon as you can – we are only squeezing ourselves in the Treasury’s vicelike grip.