You don’t need to look far to feel bad about late-stage capitalism in 2021.
The sky-high executive salaries.
The crazy valuations on certain product-less, profit-less, SPAC-enabled stock market listings.
However we citizens also need to shoulder some of the blame for the ruinous reputation of the system that sustains us.
In particular, well-off middle-class people in the West need to stop drifting through life on the gilded conveyor belt of the market economy, while simultaneously ranting that corporations are evil and cheering when company taxes go up but their income tax doesn’t.
Such hypocrisy extends in every direction, of course.
I could moan about Guardian readers shopping in the departure malls of Heathrow Terminal 5 telling each other ‘capitalism’ is cooking the planet until the cows come home (or more specifically, until the cow comes to their destination mini-break hotel, in the shape of a formerly CH₄ -spewing chateaubriand…) but never wondering if they really needed a third holiday overseas this year, let alone one that lies directly beyond the slowly submerging Maldives.
But I won’t. Let’s just stick with taxes.
Because we’re all taxed more when corporation tax rises.
Just in a more boneheaded way.
Communism versus capitalism
Communism believes that people who struggled to remember their gym kit at school on a Wednesday are best-equipped to determine what society needs. Aided and abetted by a one-party system that soon becomes entirely preoccupied with its own survival.
In contrast, capitalism hands the power – and much of the rewards – to the savviest and greediest members of society. That doesn’t sound too promising (and it isn’t) except their self-interest means they’ll typically try to sell something that consumers actually desire, as opposed to putting in an order for another 100,000 tractors for the Volgograd oblast because they owe their brother-in-law a favour.
In other words, at its best capitalism figures out what we need and how to get it to us.
We the people outsource planning, production, and fulfilment to profit-seeking companies.
And – notwithstanding a huge amount of waste, noise, red herrings, and the occasional fraud – those companies deliver, as best they can.
Which is why you’re reading this on an Apple Mac and not a Sovietski 1992 teletype prompter with a pedal-powered CPU.
Who pays corporation tax?
The point is, capitalism mostly makes things we want.
I’m not saying it makes what we should want. That’s a discussion for another day.
But it’s a fair generalisation to say that the successful firms are those that supply the most popular goods and services at the keenest price.
Given this, isn’t it obvious how absurd it is to tax companies at all?
Company A produces a vacuum cleaner that everyone wants to own. It’s sexy, collects dirt like a third-term Tory administration, and lasts longer, too. The company makes as many as it can, as fast as it (prudently and profitably) can.
As a result it gets thwacked with a tax on its profits, reducing the cash it has left at the end of the year.
Company B produces a terrible vacuum cleaner that people have to be tricked into buying. It’s expensive, and it leaves your carpets dirtier than it found them. The company makes no money.
As a result it’s rewarded by our system, by being charged no tax penalty at all.
Why would we tax the company making the things we want – and so directly shrinking it – while giving the loser a break?
If anything we should tax loss-making companies!
You win, you lose
If its profits weren’t taxed, Company A would have more money left to redeploy at the end of the year. Like this, its shareholders and executives would be rightly rewarded for their success.
Instead, the State docks it hard for producing what we want.
Now, there are ways for smart companies to get around this – if their aim is genuinely to grow as much as possible to meet demand.
Amazon is a good example.
Amazon was decried for years as a money-burning chimera, by so-called analysts who somehow missed it was taking over the world on the back of its supposedly dismal business performance.
What Amazon was really doing, of course, was reinvesting everything into expansion and efficiency. By the time the £9.84 you spent on weird soap bombs for gran for Christmas reached the bottom line, there was not a penny of profit to be seen. Yet Amazon kept on growing. You could even track its escalating scale and success in its soaring cash generation figures.
This solution – pre-spend what would be taxable profits before you’re taxed on them anyway – is fine, in so far as it goes.
But we don’t really want capital allocation decisions to be distorted by tax policy.
There are loads of reasons why not, but to give just one – a profitless company can’t pay dividends. Pension fund managers and others who lean on income to meet their obligations must instead sell shares to generate cash. Which is in theory no problem, but in practice for many a problem. It introduces friction and cost, too.
Far better to let every company show its true profitability without fearing it’ll be taxed, and to let it do with the cash what it wants.
In most cases that will include reinvesting to produce more of what we want, which is how it’s making those profits in the first place.
Tax the rich
None of this is to say we don’t need taxes.
Nor that the profits created by companies are somehow ring-fenced from taxation.
No, there’s a very simple way to tax them, which is at the point they leave the company.
That’s typically via wages, dividends, and stock options.
By all means tax salaries, dividends, and capital gains (we do). Increase the rates if you deem it best for the wider good.
I’m not a neoliberal zealot who thinks all taxation is unjustifiable theft.
I’m just saying we should do our justifiable thieving at the point where the money has left the corporation to which we’ve outsourced the meeting of our needs and wants.
At that point it definitely won’t be spent on new factories or superior analytics or employee-enhancing office plants.
It will instead be going on hot tubs and handbags for its owners.
Fine, tax it.
The withdrawal method
Indeed I suspect company profits are taxed mostly because they sit there looking so taxable.
Or rather, they were sitting there. This isn’t even true any more, in the era of multinational tax arbitrage.
Probably better today to tax overseas companies operating on your shores via sales and income taxes (on salaries), and to tax shareholders when they extract profits.
Beats trying to fight a pan-global hydra.
Of course, there are also problems with a 0% corporation tax rate.
When personal tax rates were very high in corporatist Britain, all kinds of middling managers drove around in expensive company cars.
Various personal expenses were put through the company’s books, rather than paid out of a fat cat’s post-tax salary.
It’s an issue.
Nevertheless I stand by the principle.
Taxing company profits in a capitalist society is like paying a cash bung to get a job done in a communist one.
Which of course happened.