Mark Wadsworth

This is a spare 'blog in case my main 'blog at isn't working

One-sided economics (post script)

Further to my earlier post

Of course, while corporation tax is the most reviled tax among authoritarian right-wingers, authoritarians on left, right or middle go along with the myths that VAT is a ‘tax on consumption’ or that Employer’s NIC is a ‘contribution towards employees’ welfare’.

If you sit down with a pencil and paper you will realise that VAT or Employer’s NIC are far, far, worse than corporation tax in terms of discouraging re-investment, employment or economic growth:

Company A has found a nice niche market and coasts along with turnover of £1.2 million and a wage bill of £600,000. It has to hand over £200,000 in VAT (being the sum total of its own VAT bill which it pays to HMRC and the additional input VAT it pays to suppliers, which they in turn hand over to HMRC) and £82,800 Employer’s NIC (13.8% x £600,000, ignoring the amounts which fall below primary threshold). That leaves it will profits chargeable to corporation tax of £317,200, liable at 21% plus a bit, call it £67,000 corporation tax, total tax bill £350,000, post-tax profits £250,000.

Company B is very similar, but management decide to re-invest £280,000 of its profits in the business by taking on a load of new employees to do market research, product development, marketing etc.

Its VAT bill of £200,000 remains unchanged.

its Employer’s NIC payments go up to £121,440.

Its corporation tax bill goes down to +/- nothing (taxable profits are £317,200 minus £280,000 extra wages, minus £39,000 extra Employer’s NIC = +/- nothing, 21% x +/- nothing = +/- nothing).

And the company/its shareholder have spent £250,000 but their employees are only £190,000 better off (because while corporation tax is only 21% for most companies, the marginal rate of basic rate income tax + Employees’ NIC is 32%). So that’s another £60,000 down the tax toilet as a result of the decision to take on more employees and try to expand the business.
So tell me, of the three taxes, VAT, Employer’s NIC and corporation tax, which discourage re-investment the most?

in absolute terms, it’s VAT, in relative terms its Employer’s NIC and in behavioural terms, corporation tax actually encourages re-investment. And the fact that corporation tax is at a lower rate than basic rate income tax + Employees’ NIC doesn’t exactly help matters – far better to have a flat rate on tax on everything.


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