Wednesday 6 April 2011

How much tax is paid by the Workers and how much by Business?

There has been much talk lately of a fairer tax system.

Thanks to organisations like UK Uncut and 38 Degrees and those behind the Robin Hood Tax, tax avoidance and tax evasion are now high up the agenda and offer a real "alternative" to cuts and austerity.

How much of an alternative though, that's the question? Is there enough inequality in the system to carry out an economic "re-balancing" of an entirely different kind? Not one from public sector to private sector but from Business to worker?

We hear endless tales of woe from business. They are the wealth creators, the drivers of our economy. They are over taxed and over regulated, all of which, they claim, leads to inefficiency and a drag on wealth creation.

Osborne's plan is to cut red tape, give tax breaks to business and encourage businesses to invest, to employ and to grow. But will they? Without influence from legislation, will business leap to our rescue?

This astonishing chart compiled by my good friend Eoin Clarke over on The Green Benches seems to give the starkest evidence of why this approach is flawed.

Whilst workers account for 45% of all tax that comes into the treasury (through Income Tax and National Insurance), Corporation tax accounts for just 8%

Put another way, workers pay nearly 6 times more than business towards the economic effectiveness or our country.

Business sits on a £600 Billion surplus already - is there any evidence that leaving even more money under their control will lead to growth and investment? If the wealthiest business owners and so called "wealth creators" increased their personal wealth by 300% during the credit crunch, are we really going to stand by and watch it increase further while families are plunged into debt simply to pay for food and rent?

If anything illustrates how things have gone wrong and why they need to change, then surely this chart does just that?


  1. The main reason why govt wants to encourage business is not so that businesses can pay more tax but so that businesses can employ more people, who will pay tax and receive less in benefits. The thinking is that potential increase in tax income from increased employment should outweigh the cost of reduced business taxation - and there would be reduction in benefits bill as well. I agree that businesses don't always behave well - they sit on cash rather than investing in people. But that's the principle behind corporation tax reductions.

  2. Frances, when the principle has been shown to be thoroughly broken why do we persist with it? Sue points out, and you yourself acknowledge, that businesses don't "behave" and that the benefits of reduced corporate taxation don't automatically "trickle down" to workers in the form of increased employment and remuneration.

    So maybe it's time for businesses to pay their way through increased taxation rather than through imagined ideals of what they might do for the economy, if we give them more money.

  3. Hmm not sure I agree wholeheartedly with you. As someone who is a business owner, I can assure you that although a new Company I fully intend to not avoid tax, not rape the Company for my own personal wealth and to support the environment which supports me through charitable and employment programmes. I appreciate that my view is not shared by every business owner. If you want to look at a fairer taxation system, then abolish income tax altogether, lower corporation tax rates to a point where avoiding it isn't worthwhile (this should bring in more money) and the main taxation focus should be on consumption, rather than income. Tax luxuries at a much higher rate!

  4. To the last commentor.

    I think it's probably more accurate of me to say that medium and large companies are the ones getting all the breaks.

    I don't know how big your business is, but smaller businesses are often tapped as hard as workers. It's just the big boys getting away with murder.

    Corporation tax is supposedly 24%. I imagine it can't possibly be being collected at anywhere close to that to give an overall figure to the treasury of just 8%. Making them pay the full sum would be a start - I'm sure they'll make sure you do.

  5. I'm not sure what the point of this is. Yes, most revenue does not come from Corporation Tax. But that's just because Individuals are the proper targets of taxation, not companies, which are solely legal fictions designed for legal and economic convenience.

    Corporations don't have welfare in of their own right that can be improved or reduced or even taxed. Taxes on businesses are really taxes on people who work for businesses, who buy things from businesses and who own businesses. A vast amount of income tax and NI comes from the very rich. A vast percentage of Corporation Tax is effectively paid (due to tax incidence), not by company executives or rich investors, but by general pension funds, by employees and by consumers.

  6. Sue, you're comparing apples and oranges. 24% is the proportion of an individual company's profits that it is supposed to pay in tax - i.e. about a quarter. It has nothing to do with the proportion of the UK's income that is made up of corporation tax receipts. I would agree that due to tax avoidance measures by many big cos this proportion is probably quite a bit lower than it should be. But you really can't equate this proportion with the corporation tax rate. The actual proportion of UK income made up of corporation tax receipts depends on the balance of the economy and is likely to vary over time.

  7. The corporation tax rate is somewhat arbitrary and difficult to justify in terms of benefits received, which is why various people (not me) argue against it. Lisa Ansell suggested setting corp tax rates in relation to the value of infrastructure benefits received (e.g. use of road and rail networks). This could easily result in a complex and impenetrable taxation structure but at least gives some realistic basis for setting corp tax rates rather than the "finger-in-the-air" (and be very nice to HMRC) approach we seem to have at the moment

  8. I think you have missed something - VAT is also paid by us, not corporations, so the income the government gets from individuals is even higher.
    The problem is, that if the government increases corporation tax, you and me will be paying for it in higher end-product prices. They will not cut their profits. Rail companies were fined and rail tickets went up in price (and will do for the forseeable future). The government sits between a rock and a hard place here. I have more faith in reducing tax and red-tape on businesses to create jobs which helps everyone. It may take some time until consumer confidence returns, but when it does, jobs will follow. That will help a person come off benefit and essentially you get the "big nasty corporation" paying for that person's rent and food.

  9. The issue with the economy seems to me (as a layperson and amateur in many fields) that the UK as a whole is the Land of Great Importers; we've managed to sell off most of the corporations or businesses which were originally held on UK soil. Gone the car manufacturing, gone the planes, gone most submarines and most medical technology hasn't even made it here yet as it requires the UK to buy it rather than create it.

    To "create jobs" we need to do more than create more chippies. I think the UK needs to get on the ball with technology development and research into same. There are technological advances occurring in many countries at the moment, a dizzying amount of tech which would make life easier for people worldwide, but it's being held in a death-grip by the corporates who created it and they either won't part with it because the discoveries are so revolutionary it would destroy whole industries, or they charge bundles of cash.

    Granted, if the UK is going to cut its scientific and arts research (weird as it sounds, this goes hand in hand - many a scientist reads or watches sci-fi and thinks 'What if...?') then we're going to be stuck borrowing from other countries for a long time. The UK needs to get with the times and kick its techno-industry up a gear or ten. The world needs the technological equivalent of Switzerland.

  10. What really needs to happen is that the tax burden needs to be shifted off income and onto wealth; a Land Value Tax and an FTT would do it. Either that or capital gains and inheritance get taxed the same as income, with much higher marginal rates.

  11. The relationship between corporate tax cuts and business growth is not automatic. The extra funds gained from tax reductions are more likely to be remitted to shareholders than provide funding for new staff.

    Camerons announced support for new business start ups is a joke, unless one has an insatiable appetite for vouchers.

    The previous announced program to make London the UK's Silicon Valley is an insult to the many small technology and innovative companies in the M4 and M11 corridors, and elsewhere. Cameron's invitation to foreign new Technology companies, who already have secured their funding to relocate to London, raises more questions regarding his sanity than indications of the Tory coalition's business acumen.

  12. In trying to move on from the Uncut slogan towards a specific of what change in taxation would be fair, I think we have to go back to some basics. Yes many large corporations are not contributing fairly, but they are being rational in a globalized economy where "cheating" is rampant. Similarly the government is being rational in not being too ambitious about taxing corporations that can easily move their profits (and jobs) to lower tax regimes. Since this makes for an unfair advantage in business, there is an argument for not taxing companies at all, but if shareholders are not taxed on their dividends (because they are not UK residents) or companies remain free to invest UK profits overseas, it would mean that companies would not be contributing to the common benefits the government provides them in the UK (infrastructure, law, educated workforce etc). Rather it means that for some, business becomes a means of stealing the value of those common benefits and sending the proceeds overseas. And it is this that lies behind Uncut. Taxing consumption does not deal with this issue.