king_pellinor (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
king_pellinor) wrote2012-11-14 01:48 pm
king_pellinor) wrote2012-11-14 01:48 pm
Tax ranting #1 - ignore sales figures
I thought I'd do some ranting here about the current media circus about Starbucks, Facebook and so on. If I can flag up some myths and misconceptions about tax here - and complain about things which irritate me - it may save some harangues in person :-)
OK, first thing which irritates me: Satrbuck has had £3bn in sales but paid hardly any corporation tax. It must therefore be avoiding tax unfairly.
What's wrong with this? Well, you get taxed on profit, not sales. Why? Because sales are what you put into the system, not what you get out, and tax (or at least income tax) is based on what you get out of things.
People seem to think that sales is a good number to use, probably because it's an obvious and simple one. And, to be honest, because it's a bigger number than profit so if you're a journalist and want to get a small percentage for effective tax rate then you want as big a number as possible. But it's a stupid number to use as any sort of measure of someone's income, because you have to pay your costs out of it and different businesses have different costs.
If you take two businesses. One sells grommets, which you can buy cheap and sell dear, and it makes £100k profit on £1 million of sales - 10% net margin. The other sells widgets, which you buy cheap but sell cheaply too: it needs £2 million of sales to make £100k of profit, because it only gets 5% margin. The latter's business is twice as big, and according to the Starbucks argument, the bigger your business the more tax you should pay.
Follow the logic through: if we charge tax based on sales, we're basically taxing the thing which allows us to earn the take-home profit. The grommet-seller is selling £10 per £1 of profit, and the widget-seller £20 per £1 of profit - he has to sell twice as much, which suggests he has to work twice as hard for every £1 he takes home. So if he should pay twice the tax because his business is twice as large, the corollary must be that the amount of tax you pay should relate to the amount of work you're putting in (for a given reward).
Can we apply that logic to employment tax? I'm on average earnings, getting £24k a year, so it takes me 2 weeks to earn £1,000. The office cleaner gets £12k a year, so has to work for a month to earn £1,000. If he's putting in twice the effort, surely he should be paying twice the tax?
Only if you tax effort instead of reward. Which we don't. Which is why sales figures are nothing to do with income tax.
OK, first thing which irritates me: Satrbuck has had £3bn in sales but paid hardly any corporation tax. It must therefore be avoiding tax unfairly.
What's wrong with this? Well, you get taxed on profit, not sales. Why? Because sales are what you put into the system, not what you get out, and tax (or at least income tax) is based on what you get out of things.
People seem to think that sales is a good number to use, probably because it's an obvious and simple one. And, to be honest, because it's a bigger number than profit so if you're a journalist and want to get a small percentage for effective tax rate then you want as big a number as possible. But it's a stupid number to use as any sort of measure of someone's income, because you have to pay your costs out of it and different businesses have different costs.
If you take two businesses. One sells grommets, which you can buy cheap and sell dear, and it makes £100k profit on £1 million of sales - 10% net margin. The other sells widgets, which you buy cheap but sell cheaply too: it needs £2 million of sales to make £100k of profit, because it only gets 5% margin. The latter's business is twice as big, and according to the Starbucks argument, the bigger your business the more tax you should pay.
Follow the logic through: if we charge tax based on sales, we're basically taxing the thing which allows us to earn the take-home profit. The grommet-seller is selling £10 per £1 of profit, and the widget-seller £20 per £1 of profit - he has to sell twice as much, which suggests he has to work twice as hard for every £1 he takes home. So if he should pay twice the tax because his business is twice as large, the corollary must be that the amount of tax you pay should relate to the amount of work you're putting in (for a given reward).
Can we apply that logic to employment tax? I'm on average earnings, getting £24k a year, so it takes me 2 weeks to earn £1,000. The office cleaner gets £12k a year, so has to work for a month to earn £1,000. If he's putting in twice the effort, surely he should be paying twice the tax?
Only if you tax effort instead of reward. Which we don't. Which is why sales figures are nothing to do with income tax.