Careful how you tax — it could backfire
US treasury secretary Janet Yellen wants to collect more tax from US corporations. She is lobbying for the same minimum rate of corporate tax to be applied everywhere, to prevent competition between different tax regimes.
Just as unsurprisingly, SA Revenue Service commissioner Edward Kieswetter also wishes to collect more tax from companies that do international business from SA.
But he knows better than to believe that standardising tax rates would mean more tax collected. He points out that the amount of taxable income these companies report is far more important than the rate at which they are taxed. He intends to employ more skilled tax collectors, armed with more powerful algorithms, to examine company spreadsheets closely and ensure all income is reported. This is to make sure that local costs are not inflated by offshore head office levies or overstated imports — or indeed overstated exports that are not included in value added.
Eliminating tax competition would require an internationally agreed standard to measure taxable income. But more important for any economy is how well taxable income, as defined for tax purposes, will accord with the after-tax income that drives income and wealth-producing actions.
How does it treat investment allowances, which can exceed or fall well short of the decline in the market value of any asset employed and can make a large difference to true economic income? And how will incentives, tax concessions made to employ more workers, employment in special zones, and differences in the tax treatment of research & development expenditure, be managed? It all calls for standardisation of fiscal policy that seems unlikely.
Furthermore, will the calculation of business income under a new standard include an allowance for the opportunity cost of employing equity capital in a business, as it does for interest paid on debt? This is an unlikely but essential treatment of business costs, if business income is to be measured consistently.
Such irrationality about the treatment of economic, as opposed to cash, costs is meat and bread — taxable income —
to the legion of analysts and investors who know better.
Only by providing true economic returns that cover all costs, including opportunity costs of own capital employed, is a business likely to gain market value and provide capital gains — including unrealised gains — as a useful form of income as any other.
But it is taxed only when realised, and so best postponed or used, as collateral, and then taxed only when realised by the private investor or company, not by the pension funds and other investment collectives who own the large, listed companies.
If we are to reform our tax system sensibly the truth to be recognised is that taxes of all kinds are ill suited for redistributing income. They end up influencing pretax incomes, and therefore the prices of goods and services, including wages and salaries.
It is the distribution of government expenditure that should be used to help the poor and deserving.
To tax the corporation as well as its beneficiaries, some more than others, is unnecessary, inconsistent and harmful to the economy.
The corporation can be treated as a limited liability partnership and be required to act as an efficient tax collector — by withholding tax from all the dividend, interest and rental payments it makes to all parties, without exception, as it does now from its employees and its suppliers.
The lesson to be learned from the tax havens, and how best to compete with them, is to adopt the same zero rate of corporate tax. It then becomes simple for the tax authority to measure what is paid out, and not have to police the tax legitimacy of revenue or costs. The tough measurements of economic returns and what should be done with them are then well left to business, with very helpful consequences for the economy.