Today some companies do not pay their fair share of tax, depriving our public services of much needed money and forcing up taxes on the rest of us. Multinational companies manage to exploit the system using: the manipulation of transfer prices, offshore intellectual property sale and leaseback and finally offshore interest loan manipulation. These actions, do not just reduce their taxes, they also make companies take on excessive debt, offshore jobs and asset strip their British operations. However, it is possible to remove the incentive for this economic vandalism through a few elegant changes.
A brilliant Oxford based economist, Michael Devereux, came up with an elegantly simple replacement to the current corporation tax system to achieve just this. The Destination-Based Cash Flow Tax (DBCFT), otherwise known as the Border Adjustment Tax. Instead of taxing companies on the basis of where their production resources were, companies would be taxed based on where the revenues were earned. The tax collected on profits earned by German Audi sales in the UK, would be collected in the UK not in Germany. Under such a system any imports into the UK could not be expensed for corporation tax purposes, while exports by UK companies would not count towards revenue. Effectively we would start taxing importers and stop taxing exporters. In addition, interest on debt would no longer be tax deductible for corporation tax purposes. In one fell swoop, transfer pricing manipulation, debt fiddles and dodgy lease arrangements would be pointless and have no effect on corporate tax revenues! That is the magic of leaving our source based taxation to a destination based system.
Actually, the advantages don't just end there. The DBCFT may be the best option for making UK manufacturing competitive again. By switching the burden of corporation tax from UK exporters to imports from foreign firms, we make it cheaper to manufacture and export from the UK. Companies looking where to locate their new manufacturing plants in Europe will trade off between the UK and other European bases and see that the UK offers them 0% taxation on their exports. As the UK is a country with a net trade deficit, such a change would have the added benefit of boosting tax revenues, by collecting more in taxation on foreign imports than would be lost on stopping taxes on UK exporters. In fact, this simple change while holding the tax rate at 19% would raise around £7.2bn of additional revenues, ignoring the increased economic growth from the increased competitiveness of UK exporters. These revenue gains could be even more dramatic if we removed the tax deductibility of interest for corporate profits. Removing debt interest deductions, could overnight eliminate the ability for companies to evade tax by loading UK firms with debt, owned by an offshore subsidiary, such as Google Cayman. Companies have genuine reasons for taking on debt, to finance new investments in plants & machinery and to finance their everyday business, but too often companies take on debt just to lower their tax bill. And tax avoidance is never the right reason for a business decision. Removing this would not only remove the incentive for firms to overleverage and put their workers at risk, but also bring in much needed tax revenue to the government in these times of austerity. In fact, scrapping the corporate interest deduction would raise £15.2bn of additional revenue and lose £5.1bn other tax receipts from the growth deduction.
There is little doubt that such a radical change would struggle to gain adherents in the vested interests of existing national or EU tax authorities, but the noise for change is growing and political pressure may demand action is taken to ensure that corporations pay their fair share of tax!
These tax raising reforms, alongside the extra revenues from planning reforms, immigration reforms and the Carbon Added Tax would enable us to fund much needed tax cuts, such as:
- Scrapping Stamp Duty Land Tax, which is estimated by the Adam Smith Institute to be 8 times as damaging to economic activity as VAT, causing £10bn of economic damage, on top of the £12bn that it takes away from taxpayers every year.
- Scrap Stamp Duty Reserve Tax, the next most economically damaging tax. Lowering the cost of capital for British firms and entrepreneurs.
- Reduce the limit for VAT registration to £26,000, raising £2bn for additional tax cuts/public spending increases.
- Cut VAT to 15%, delivering spending power back into the hands of British tax payers, at a cost of £30.6bn.
- Cut the top rate of income tax to 20%, transforming the UK into the most attractive place to work in Europe, at a cost of £32.7bn.
These policies are designed with 2 simple goals: to restore Britain's economic competitiveness and to put money back in the pockets of ordinary working Brits.