More tax hilarity over at John Redwood's:
JimF:
Mark,
I think you are confusing cashflow and profit. The point is that VAT will never affect the level of retained profit or loss in your business. VAT is not a part of your P/L, and never belongs to your business. Your customers are paying the VAT which you then have to pass on...
Mark Wadsworth:
JimF
1. I am the world’s second best accountant and know perfectly well the difference between cashflow and profit, in the long run they are the same thing anyway.
2. But I also know the difference between the legal and economic incidence of a tax …
3. VAT is only not part of your P&L because accounting standards say so. Let’s take a simple example and you are a one-man limited company with very low costs and are making VAT-able to end-consumers. For every extra £1 you earn from a customer, you have to hand over 15p in VAT within three months and then out of the remaining 85p hand over 19p within nine months.
4. Business Rates is part of the rent, the Tories experimented with BR-free zones in the 1980s and all that happened was that landlords put up the rent. It did not stimulate or encourage business activity in the slightest.
5. Therefore your two statements “If you can’t pay the VAT you aren’t making a profit in the first place and frankly shouldn’t be in business” and “Business Rates are equally as insidious as Corp Tax as you feel you get nothing for it and pay it regardless of your P/L” are not only incorrect but self-contradictory…
6. A business gets a heck of a lot for its total rent (rent plus BR), it gets the base, access to public transport, employees, customers etc etc. So the real truth of the matter is that a business that can’t afford the total rent (which by definition other businesses would be happy to pay to trade from that location) shouldn’t be in business.
7. Conversely, if and when we get out of the EU and VAT is phased out, businesses that might otherwise not have been profitable will become profitable, prices go down, more employment etc etc. Hurray!
A grim document
11 hours ago
12 comments:
" I am the world’s second best accountant "
Obvious question- who is the world's best accountant? Richard Murphy perhaps...... sorry that was uncalled for.
R, some bloke over in Hong Kong is.
VAT is not a curse but a gift to the accountant of ingenuity.
I agree with you on VAT. I guess you also could have added that VAT makes us all poorer because of the high costs, both to businesses and the government, of administering such a complicated tax.
Not sure I agree on Business Rates though. You say "the Tories experimented with BR-free zones in the 1980s and all that happened was that landlords put up the rent". That may be so, but presumably that made the landlords more profitable and hence encouraged the provision of rented premises. Also, BR-free zones would not necessarily have the same economic effect as the complete elimination of BR everywhere.
Sadly, although Business Rates may be the least worst tax, it's not a "good" tax. As with all taxes without exception, it does have some economically distorting effects.
AC:
"presumably [scrapping Business Rates] made the landlords more profitable and hence encouraged the provision of rented premises. "
Well, no, exactly not. Whoever owned all those buildings on whatever day BR was scrapped had locked in the higher profits, there was no need to build any more. Even if there were empty sites in BR-free zones, and you wanted to build new commercial buildings you'd have to pay a lot extra for land in the BR-free zone, so your future profits were no higher in than in the other areas that still had BR.
i.e. unlike scrapping VAT or Employer's NI, scrapping BR had no particular positive effect on economic activity.
"Even if there were empty sites in BR-free zones, and you wanted to build new commercial buildings you'd have to pay a lot extra for land in the BR-free zone"
That would only be true if demand for land in the BR-free zone had risen. The price of land is not determined by rents minus business rates. The price of land is determined by supply and demand. The price of land would rise if more people were building premises for rent.
Also, of course, land can be used for other uses apart from business premises. An increase in land values (cancelled out for businesses ultimately by not having to pay BR, but not cancelled out for other land uses) will encourage land to be used for business.
AC, you've basically just contradicted your previous comment.
We could argue this on the basis of theories, or simply observe observable and measurable facts.
If you know of a single real life example where a reduction in property taxes actually led to an increase in wealth creation, and did not simply flow straight through into higher rents or land prices, then please tell me :)
The arguments usually get bogged down into general debates about the effects of high versus low taxes. However, you could try www.shenangoinstitute.org/articles/realxpropertyxtaxxreport.doc
which quotes a study by Professor Donna Kish-Goodling of Muhlenberg College in Pennsylvania http://www.muhlenberg.edu/depts/abe/kish.html as follows:
"The poor economic trends may result from relatively less firms locating to Pennsylvania partly due to relatively high effective property taxes. From Kish-Goodling’s 1995 research, where she investigates the effect of property tax rate differentials on the birth of firms in Pennsylvania’s jurisdictions from 1976-1980, she finds statistically significant relationships where:
a one per cent increase in the average school tax rate will lead to a 1.57% decrease in the number of manufacturing firms births and a 3.22% decrease in the number of nonmanufacturing firm births. The state average number of manufacturing firm births is 87.46. Therefore, on average, a one per cent increase in the average school property tax rate would lead to 1.37 less manufacturing firm births per county."
MW
Surely any reduction in taxes will lead to an increase in wealth creation unless it is directly absorbed by another tax. Are you talking about a relative incidence here?
wv: mingbeer- because 'you need to relax a lot in a job like mine'
Mark you are wrong about business rates. Before the unified business rates came in I think it was Croydon that had the lowest business rate and there was a huge move by companies to that area. They had the lowest unemployment rate and various other pluses which my old memory can no longer remember.
AC, nice try. You missed out the important bit here:
"A number of Pennsylvania business associations, including the Pennsylvania Manufacturers’ Association, argue that high commercial and industrial property taxes on top of Pennsylvania’s already high business costs have led to poor economic performance. Some of the high business costs are the following:
In 2000, Pennsylvania’s business taxes per employee ($613.17) were 158% of the U.S. average ($388.18). In addition, Pennsylvania ranks 5th out of 50 states in total business tax collections per employee...
Pennsylvania’s business tax burden is high for following key reasons:
a) Pennsylvania’s Corporate Net Income Tax (CNIT) rate of 9.99% is the third highest statutory rate in the nation and about 50% higher than the average of all states’ CNIT rates of 6.64% as of January 1, 2002.
b) Furthermore, Pennsylvania’s Capital Stock and Franchise Tax (CSFT) is 6.99 mills as of November 2003, virtually tied as the highest rate in the nation and significantly above the U.S. average of 0.75 mills for 2002.
In 2001, Pennsylvania’s Unemployment Compensation taxes were 3.6% of taxable wages, the highest in the nation and above the U.S. average of 1.9% or 0.9% of total wages, the 7th highest in the nation and above the U.S. average of 0.5% of total wages (State Policy Reports, Vol. 19, Issue 22, 2003).
CI, nope. You have to realise that ground rents are just privatised taxes - it does not make any difference whether private individuals collect it or the state collects the ground rents (via land or property value taxes). It's six of one and half a dozen of the other - if the state doesn't collect it, then private individuals will. And as wasteful as the state is, it is more likely to spend it on things like street-lighting or roads etc.
(Or, consider Crown Estates, which acts as a perfectly ordinary commercial landlord. The tenants pay rent to Crown Estates and Business Rates to the local council, but all the money ends up in the same big government pot. Why would it make any difference to businesses if the local council scrapped the Business Rates and Crown Estate put their rent up by 40%?)
On the other hand, taxes like VAT, national insurance, corporation/income tax. These very clearly have huge deadweight costs, every £1 collected reduces the size of the economy by 50p (or whatever the figure is).
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