Corporation Tax and Payroll Tax: the stealthiest taxes of them all

Imagine, if you will, a society made up of two types of citizen: the taxpayers and the voters. Taxpayers cannot vote, and voters do not pay tax. What will the result be? It seems fairly obvious that voters will vote for high taxes to pay for public services from which they will benefit at the expense of the taxpayers. Such a society would quickly fall apart, as the taxpayers agitated for more representation and refused to pay “taxation without representation”

Such a society would seem anathema to us, nowadays. Which is surprising, because we live in such a society. In one respect, devolution has created such a situation: Scottish voters choose representatives that will implement policies – say, free care for the elderly – that will be paid for in part by non-Scottish British taxpayers who have no control over the decision. This is a dangerous situation that is undoubtedly contributing to the loss of faith in the Union among English voters.

However, there is an older and more fundamental form of this: the taxation of companies. Companies do not have a vote, and yet they are taxed on their income, and required to pay additional taxes when employing staff. This seems a rather clear example of “taxation without representation” – it is true that the owners have votes, but they only have as many votes (one each) as non-owners, and consequently are being taxed in a manner additional to that of their non-company-owning fellow voters. If there was a tax on people over 2m in height, we would consider this arbitrary and unfair. A tax on business-ownership is ignored.

To be clear, it is not as if the income that owners derive from their investments is not taxed. Share dividends are subject to income tax at the same rate as salaries. However, when companies turn a profit they have to pay Corporation Tax before paying dividends, which are then subject to Income Tax. This double taxation can only be justified by treating the company as a legal entity distinct from its owners – it is taxed in its own right. But this legal status does not stretch to being permitted to vote.

Socialist economists and policy makers would probably argue that it is only reasonable to tax businesses, as they are the products of capital and that to exempt capital from taxation when the other “factors of production” (land and labour)
are taxed would represent an unfair tax exemption for rich investors (and poor investors, but socialists tend to ignore them!). This is certainly true, and it is not my intention here to suggest that capital should not be taxed. However, there is no justification for taxing it twice: if capital or profits are taxed when earned, they should not be re-taxed when they are paid out. This “double taxation” (distinct from the double taxation that arises when people and capital operate in different jurisdictions) is unfair and ultimately should be ended.

Ironically, those who support business taxes (and here I add in payroll taxes, such as employers’ National Insurance contributions) are actually harming UK consumers more than UK business. After all, the inevitable consequence of business taxes is that they will drive up prices. If tomorrow a Chancellor of the Exchequer announced a 5 per cent rise in corporation taxes, it is not going to result in Tesco generating commensurately less profits next year. The board may take the decision to absorb part of the cost of the additional taxes as a public relations stunt, but ultimately they are going to hand the extra costs down to customers. The same is true of payroll taxes.

The real danger in this is that the tax is therefore invisible. Consumers are aware of the 17.5 per cent VAT they pay on most goods, and most receipts even explicitly state the amount of VAT paid – next time you are looking at you wage slip in despair and your eye flicks enviously over the part that says how much tax you’ve paid, remember also to get those old receipts out of your wallet and factor in the bit at the bottom. This is only (or rather, less than) half the story, however, as the 82.5 per cent of your bill that isn’t VAT includes other business taxes, without which your supplier would be able to (and due to competition would be obliged to) charge lower prices.

Thus Corporation and Payroll Taxes are the ultimate stealth tax: the Chancellor sells them to us on the grounds that they are levied on businesses, and so we are led to believe that they are free money – taken from “someone else”, a faceless organisation with no vote; in fact, they are taken from us every time we open our wallets and purses. Our Income Tax bill confronts us regularly; our VAT bill every time we spend; but taxes on business slip in under the radar, taking money for the state disguised as money for the supplier.

This is ultimately damaging, as visible taxes have more obvious impact and so teach us to exercise more fiscal discipline. If our receipts also told us how much Corporation Tax we were paying, and if we received larger gross salaries but paid higher National Insurance (i.e. the employer contribution was instead factored into our salaries and personal contribution) we would have a more honest view of how much tax we paid. While we were at it, it would be nice if there were a means of quantifying the number of jobs foregone because payroll taxes made marginal employment (i.e. jobs which are only barely going to generate more revenue than they cost – usually the lowest paid jobs) unviable, thus driving up unemployment for the poorest and least skilled. Only then would we have an honest idea of the costs and effects of the policies our leaders are perusing, and for which many of us have voted.