Debate Magazine
... expose their rank ignorance yet again in today's City AM: The government has done some good work to encourage new growing businesses. One measure that stands out is the abolition of stamp taxes on Aim-listed shares. This will make it easier for firms to raise equity finance.(1) ... If you build a business, you will pay a series of different taxes on your earnings: corporation tax when you first make a profit; income tax when those profits are paid out as dividends;(2) and capital gains tax on any attempt to realize the value of future profits.(3) The same income is effectively taxed three times.(4) Taxing the same income repeatedly is always an unfair and inefficient way to raise revenue, but it is insane when we are talking about the engine of economic growth, the process that creates jobs. ... The 2020 Tax Commission – organised by the TaxPayers' Alliance and the Institute of Directors and released in 2011 – recommended going further and establishing a single tax on income when it is distributed, however it is distributed.(5) Remove the extra taxes like capital gains tax, and you can make Britain a more competitive location for international investment (6) and create the right environment for more of the high growth businesses that create opportunities for everyone. ... There are many who will never want the worries and risks of starting their own business. Not everyone wants the bigger mortgages that government guarantees under the Help to Buy scheme make possible. They want the opportunity for a job that is better paid and more fulfilling. A job that will allow them to save up the money they need for a mortgage they can afford on their own terms.(7) 1) Stamp Duty on purchases of shares is of course a stupid tax, and Stamp Duty Reserve Tax is not just stupid but unfathomable, but there simply is no Stamp Duty when shares are issued. There is no tax on fund raising, end of. Stamp Duty is only paid when an existing shareholder sells his shares to somebody else, so the amount that today's investor receives in future will be reduced slightly, but that money goes into the shareholder's bank account and not the company's. 2) Companies pay corporation tax at the basic rate, so if a basic rate taxpayer receives a dividend there is no further liability. It is only when a higher rate taxpayer receives a dividend that income tax is payable, which is broadly speaking the difference between higher rate and basic rate tax. For a given total tax take, surely it is better for the actual business (the company) to pay a lower basic rate and the higher rate to be applied only on cash dividends paid out? You could abolish the higher rate and have a flat tax for individuals and companies, but of necessity that flat rate would be higher than the current basic rate. 3) Capital Gains Tax is another stupid tax, but companies/businesses are sold on the basis of their future profits, so those profits have not been earned yet and it is the next purchaser who will pay corporation tax on them. So CGT is to a large extent a tax on unearned income (or a monopoly position) and if you don't sell your company/business, you never have to pay it. 4) Why oh why do these Faux Lib's never mention VAT or National Insurance (the worst taxes of all), which between them raise/cost several times as much as higher rate income tax, corporation tax or capital gains tax? Or to put it in his terms, "the same income is effectively taxed five times". The cumulative effect of all these taxes is difficult to calculate, but it comes to around half a business' income (taking employer and employees together), meaning that even so-called basic rate taxpayers have an effective marginal tax rate of about 50%, which is "too high" by any reasonable person's standards. 5) One of these ideas which sounds great in principle but if you think about it for a few minutes, you will realize it is totally unworkable/unenforceable. Further, companies do not pay corporation tax on reinvested profits (subject to timing differences), they only pay it on profits not required to expand the business (i.e. cash piled up in the bank or paid out as dividends). This is not a peculiarity of the UK corporation tax system, it is a general observation. So corporation tax is, by and large, a tax on the profits which are (or could or should be) paid out as dividends. 6) He's talking complete shit now. Foreigners who invest in the UK pay no UK tax on capital gains from selling a UK company - never have done, never will - because they are not UK tax resident. If foreign companies invest here, they will probably pay no tax in their home country either. And corporates don't pay "capital gains tax" anyway, they pay corporation tax on the capital gains they make. 7) That last bit is actually very sensible, I'd go along with that sentiment entirely.
