This must be what they mean in this new report of theirs, the IPPR is insisting that we’ve got to abolish corporation tax in order to create a fairer Britain. Yes, this must be so – for surely they’ve not produced a 300 page report on how the economy should be without understanding the most basic points of that economy, have they? And as it happens this particular change is a reasonable enough one. However ludicrous some of their other points might be. We’ll get to the idiocy of their stance on public goods in a moment.
Here’s the point they make:
Taxing work and wealth on the same basis, with a single income tax for all types of income (meaning the abolition of capital gains tax and dividend tax),
Well, OK, not all that bad an idea. We do in general think that income from capital should be taxed at a lower rate than that from labour but that’s an argument off there about efficiency and optimal tax structures and all that. Let’s ignore that.
So, think about what it would be like if we had equal taxation of the two types of income. Labour income, sure, PAYE. But capital income? A bit more tricky. Dividends say – we could tax profits in companies and then distribute the dividends, already taxed, tax free. Or we could not tax at the company level and treat the dividends just like any other bit of income.
Either way we could end up taxing dividends just like any other income. Depends upon what the tax rate at the company level is but that’s fine, we can shift rates around a bit.
So, what system do we actually have? A bit of both. Companies make profit, pay corporation tax on it. Then they send some portion of post-tax profits out as dividends. Great, so how do we tax those dividends when they reach people? We impute – largely enough still that is – the tax already paid to those dividends. Thus if you get only a little the tax is already paid. If you get a lot, like you’re a higher rate taxpayer, then you pay an intermediate tax rate to get you from the tax already paid up to that higher rate of tax upon your income.
We currently take some of the tax at the company level, some at the individual recipient level.
OK, great, so the recommendation is that we abolish all of those special dividend arrangements at the individual level. Fine, not a problem. But that then does mean that we’ve got to stop taxing that same income at the corporate level. Because if we won’t then we’ll not be treating the dividends the same as labour income, will we?
That is, if we put dividends into the same class as plain old labour income for tax purposes then to ensure equal taxation we’ve got to abolish the corporation tax.
Which is great, just fine by me of course. And of course this really must be what IPPR is recommending as well. Because even they’re not blitheringly stupid enough to not know and understand this, are they? They cannot possibly be arguing, when they say that dividends should be taxed like labour income, that they really mean dividends should be taxed more. No, they can’t, can they?
Well, actually, the IPPR? Take this also from their report.
The dominance of a handful of internet companies means their products, such as Facebook, should be considered a “public good” and licensed in the UK by a regulator.
This is to dribble over the definition of what a public good is. They’re things which are non-rivalrous and non-excludable. Social media is neither of course. But let’s pretend they are. The point being made about public goods is that their specific nature makes it difficult to profit from. If there’s an unlimited amount, non-rivalry, and we can’t stop anyone having some, non-excludability, then how in buggery do you make a profit? So, no profit, private sector economic actors won’t make them. Or enough of them at least.
At which point as the private sector won’t then the public sector should. Provide them, or jigger the system so the private does – which is how we get patents, trademarks, copyright and so on. Artificial exclusions so people can profit so they make them.
What are the IPPR saying? That private companies have made lots and lots of these lovely things therefore they’re public goods. With this sort of understanding of basic economics we could prove that socialism works Comrades!
So, sadly, it’s not obvious that the IPPR really are calling for the abolition of corporation tax despite that being what they are actually calling for. All of which makes the rest of the report more than a tad suspect really. If they don’t know what they’re saying then why should the rest of us pay attention?