Tuesday, 29 July 2014

Move Away From The Economic Right & You Move Towards The Economic Wrong

Paul Krugman has one of the most prestigious column spaces in the world - he writes the principal economics pieces in the New York Times. But although in an esteemed role, and with a Nobel-winning status, he does write quite a bit of guff, including this whopper from this New York Times article a couple of days ago:

 “There is, however, one big difference between corporate persons and the likes of you and me: On current trends, we’re heading toward a world in which only the human people pay taxes.”

It’s hard to see how someone who understands economics as well as Krugman could make such a misjudged statement. We already live in a world in which only humans pay tax, and we always have done. It doesn’t matter that a corporation bears some legal resemblance to a person: tax always means that some humans have less and some have more, whether that tax is corporation tax, income tax, value added tax, road tax or whatever kind. It’s true that corporation tax hits the pockets of humans in a more indirect way, but it doesn’t change the fact that all tax is paid for by humans (see my blog post The Best Way To Get More Tax From Corporations Is To Stop Taxing Them for a fuller analysis of this)
The only thing to which I can ascribe Krugman’s ill-conceieved comment is his gradual gravitation over the years further and further to the left – he’s falling for the leftist rhetoric about the ‘evils’ of success in business. This next little gem gives further indication of this:
“The federal government still gets a tenth of its revenue from corporate profits taxation. But it used to get a lot more — a third of revenue came from profits taxes in the early 1950s, a quarter or more well into the 1960s. Part of the decline since then reflects a fall in the tax rate, but mainly it reflects ever-more-aggressive corporate tax avoidance — avoidance that politicians have done little to prevent.”
Hang on – Krugman starts by lamenting the shift from corporate person tax to individual person tax but then goes on to lament the increase in corporate tax avoidance. As I argued in my Blog link above, the exact same solution to corporate tax avoidance is the very thing that Krugman is lamenting – a shift from corporate tax to individual tax.
Besides, a mere shift from corporation tax to individual tax doesn’t, by itself, amount to a loss in government revenue. If 20 years ago Bob as a company shareholder receives a £50 dividend but pays 25% tax, the government gets £12.50 in revenue. If in the present day Bob’s corporation (and thus dividend) is taxed less but Bob’s personal income more, he gets an increased dividend but pays more income tax. Suppose he now earns £75 dividend, but the government taxes him more to get their £12.50 (adjusting for inflation) – government revenue is no worse off.
Lastly, it is presumptuous to assume that this shift in tax “reflects ever-more-aggressive corporate tax avoidance”. It may do, but it doesn’t necessarily – and as Krugman didn’t see fit to elaborate on how he knows this, he must stand accused of making a hasty presumption. It is quite possible that the decrease in corporation tax revenue is actually down to that tax being sought by other routes. Corporation tax may have shrunk as a percentage of net tax collected, but been offset by various increases in percentage of net tax collected in other areas (say for example, in income tax, in National Insurance, in VAT, and in pensions).
* Photo courtesy of jsonline.com