Ron Webb wrote:(With apologies for the lengthy reply. I am trying to edit myself, but it's a struggle.)
No apology necessary, Ron. It makes a change to discuss any economics at all!
Nick wrote:In what parallel universe is it a good thing for the government to lay down the tax law, but for companies not to comply with it, but to have someone else somehow concoct their own idea of what the tax should be? Who, in a democracy, should have the power to decide that money is taken off you other than the government?
And who, in a democracy, is the government? We all are, Nick. That's the whole idea. It's people like you and me, having discussions just like this one, who decide what is fair, and what the tax laws should be to best capture that sense of fairness.
Er, no. In our democracy, we the people, elect MPs to represent us. We are a representative democracy, not a universal democracy. It is Parliament who decides what is fair. I'm not saying that people can't express and promote their views (that's what I am doing, after all) but we wouldn't get very far if we consulted the people on everything. They couldn't be arsed. It's difficult enough getting them to go t the pub, let alone getting them to study and understand political and economic matters at hand. So yes, taxation is rightly decided in parliament, not on self-selecting fora like this one.
In which case, it would not be making a loss on the investment would it? It would be making a profit!
I'm not suggesting that Starbucks would make a bad
investment merely in order to avoid tax on it. I'm suggesting that the tax implications would be one factor influencing whether the investment is ultimately good or bad. I have no doubt Starbucks takes that into account.
Agreed. So Starbucks, just like any other company or individual, are more likely to make a growth-producing investment, if profit is higher, rather than lower. So any extra tax will depress the level of investment, and hence its associated benefits, such as employment and rising living standards. And given the arbitrary nature of the tax you are implying, possibly kill it off altogether.
I doubt that very much of Starbucks' investment decisions are based on tax breaks. Rather it is based on the most basic of principles, that profits are assessed by taking sales figures and subtracting costs. How would you like to change that? Without damaging the economy?
The more we discuss this, the more I am becoming of the opinion that changes in net worth should be considered "income" for tax purposes. But I'm not sure of the details. Maybe with your accountancy background you can help me think this through.
Indeed I can.
If I cut your grass a few times, and you pay me $200 (sorry, I'm Canadian
), then that is taxable "income", right?
It is gross income. There may or may not be allowable expenses to deduct before calculating taxable income. Whose mower is it? Who is paying for the petrol to power it? If it is me, then it is (keeping it simple) taxable income. If it is you, then you are entitled, in law, to deduct the cost of the petrol and a proportion of the asset value of the mower, in order to arrive at taxable profit.
If instead you give me a lawnmower that is worth $200, does that still count as income?
Okay, how about if you pay me the $200 and I use that money to buy a new lawnmower? Income, or not?
Yes, it is taxable.
But in both these cases, if you use the mower in your business as a grass cutter, you are entitled to capital allowances (the fiscal approximation for depreciation in the value of the mower over its useful life) which would reduce your taxable income accordingly.
Why should any of these three scenarios be treated differently for tax purposes?
Are you really saying that Starbucks should be singled out for this malicious treatment? If so, then you have definitely been taken in by the loons. If not, and it applies to every company, then investment in every sector would be crippled, and with it the economy. And tax receipts will fall too.
I'm not singling out Starbucks. I'm saying that the tax laws should be adjusted in some way to ensure that successful corporations cannot avoid paying corporate tax.
But they don't avoid tax. They pay what is due. When it is due.
Including investments or changes in net worth would be one way to do that. There may be other ways, but I don't want to complicate the discussion.
We already have Capital Gains Tax which traps the conversion of income into capital growth. And it would be ridiculous to tax companies based on their size. The company could be owned by a whole variety of people, from billionaires to small holdings owned by people of modest means. There is no consistency (or fairness) in taxing them (for they will bear the cost, not the company) for the value of their shares. Nor does it have anything to do with Starbucks or any of their alleged tax avoidance. As you say, this is something of a diversion.
I'm not sure that tax receipts would fall. As I said, the lost revenue from those 100 additional Starbucks locations would probably be picked up by Costa and other coffee shops. Perhaps they would open new locations themselves. I don't think Brits would stop drinking coffee.
I was referring to tax in the economy overall. All over the world, governments are trying to get companies to invest and grow, in order to increase the tax base. And here you are, advocating the precise opposite. And what is the difference between Starbucks opening a coffee shop and paying no tax, and a small independent coffee shop, paying no tax? If the costs are the same, and the revenue is the same, then the tax (or lack of it) will be the same. It just looks like pure spite.
Is it written somewhere in holy scripture that profit, and specifically profit as defined in the current tax laws, is the only fair scale by which tax should be assessed? As you pointed out (and I'll take your word for it), there are already more than 1000 exemptions to the basic formula already. Perhaps net worth, or changes in net worth, should be a part of the equation too.
Just have another look at that sentence! Net worth, you say? So the way to reduce your net worth would be to increase your liabilities by borrowing and investing, just like Starbucks!
Sorry, I'm not following you. Who wants to reduce their net worth? Starbuck increases
their net worth (and reduces their taxable income) by investing their profits, not by borrowing.
OK, slight misunderstanding. Though borrowing is probably involved (I don't know for certain), it is the investment which would decrease net worth, at least to start with.
Example: Starbucks acquires a property in a high street for £500,000. Add to that purchase costs, stamp duty, refurbishment costs, maybe some alterations. Result: decrease in cash, but no certainty of an increase in value. A decrease in net worth. If the site proves unprofitable as a coffee shop (and don't forget, Starbucks has closed dozens in recent years) then it might even decrease its value. Staff training and upfront employment costs. A further possible decrease. And don't forget that any sale would cost several percent of the value. And a forced sale would cost even more. Any tax at this stage would be entirely arbitrary, and completely unworkable.
In any case we already do tax changes in the worth of assets via capital gains tax when the asset is realised. Are you really suggesting that growing but loss-making companies should be forced to divest themselves of assets? How could that be a good thing?
I'm saying that maybe it should be taxed when profits are invested, rather than when the assets are "realized" (an odd word, don't you think?). That way companies cannot use investments as a means of deferring taxes. They would have to pay for the public infrastructure that supports those new locations before
(or at least while) the new locations are built. That seems a good thing to me.
Governments have been falling over themselves to get companies to invest. Especially profitable ones. So a company makes a profit. The government wants them to invest. But you want to take that money away from them, making the investment, the jobs, the future tax, less likely. Hmmm... that would work. Not. And all you have done is to shift the tax by a few years. That tax taken today would just mean that that tax could not be collected later, as the costs of the investment would have been raised by the amount of the tax. Bonkers, if you want companies to invest.
As a self-employed person, who has invested his own money in his own business, that is exactly what I have done, and to which HMRC agreed. Because that is what the law says, and what the law intends. Just how much tax should be paid if a loss is made by a self-employed person?
Interesting. Maybe the law is different in Canada; or more likely, business tax is different from personal tax. I can tell you that the Canada Revenue Agency expects payment of any balance that I owe by May 1 of the following year, and imposes penalties on those who fail to meet the deadline. And that is as it should be, IMHO. CRA is not a lending institution.
No, no, no! You have completely misunderstood! The CRA expects the payment of tax when payment of tax is due, (in the case of a self-employed person, when s/he has net taxable income). CRA does not issue tax demands before profits have been made. CRA is not lending anyone any money!
If you are an employed person, as far as you are concerned, your "profit" arises as the income is earned, even if your employer is making a loss. So you are taxed at the time. Just like the UK. And just about anywhere else.
No, no, no! Costa got there first, and had just the same benefits as Starbucks. What you are asking for is that any company trying to compete with one that has established itself already has to trade at a disadvantage, by having some completely arbitrary sum of money taken off its hands, just because it is in business! There is no disadvantage to Costa as a result of its paying tax. It is only doing so, because it has already covered the costs, and received the off-set against tax, which Starbucks is now claiming.
It is in the nature of things that new start-ups have an uphill battle. They incur many costs and expenses up front, before they even start earning revenue. Among those costs is the purchase or construction of a building, and the public infrastructure that supports the building
. I see no reason in principle why they shouldn't have to pay for the latter on the same terms as the former, i.e. payment is due when goods and services are delivered.
Oh dear. This is getting surreal! You are already making the creation of jobs and taxable incomes more difficult, and here you are, saying that people should contribute before they have earned any money from it!! So children should pay tax, then, eh? Because they are receiving medical care, education, protection, etc., etc. Seriously? And my investment in my business: where did that money come from? Answer: from income I had earned in a previous job, on which I had already paid tax. Should I be taxed on the capital, as if it were income?
You may be right that Costa had a similar advantage when it first started, by being able to defer those public costs for several years. And I'll grant you that there may be legitimate reasons to provide public assistance to start-ups.
We already give some financial assistance. Are you saying that is a good thing? In which case, it goes against everything you have been saying, or a bad thing? In which case we should scrap every measure which is supposed to encourage investment. Hmmm... I don't see that as being popular with the Left, who think that government action is the right way to go to get the economy moving.
I'm just not sure that the tax system (which I think we both agree is already too arcane and complex) is the right way to provide that assistance;
So what is this "assistance"? Tax-payers money? Hmmm... that's not increasing the tax-take in any way, is it?
and I don't know if an international giant like Starbucks ought to qualify as a "start-up" for public assistance anyway.
It doesn't now, nor is it asking for it.
The long run? we are talking about investments making a return within a reasonable period. A more common complaint against these entrepreneurial, risk-bearing, job creating, tax-paying capitalist bastards, is that they don't invest for the long term. A new outlet for a Starbucks or Costa is likely to require investment (including, ahem! liquid assets) of many thousands of pounds. And it would be odd (and would make coffee totally unaffordable) if all that outlay needed to be recovered in a year or so. Hence the low tax liability for expanding companies.
They don't need to recover it all in a year or so. That's what loans are for.
That's my point! They don't
recover it in a year or so! And loans would further decrease their taxable income!
But as I said, HMRC is not a lending institution.
which is why it has never lent anyone a penny, or even a cent.