Do businesses actually pay any tax at all?

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It looks like a silly question. Look at the accounts of any business, and you’ll certainly see tax payments being recorded. And money actually passes from the business’s accounts into the government’s accounts. But who is really paying those taxes? From a business perspective, tax is just another operating cost and, at its simplest, profit is simply revenue earned by selling goods and services less the cost of production of those goods and services. It follows that (again, at its simplest) price is simply cost of production plus profit, and the financial success of a business depends on the price being sufficiently high to generate an acceptable level of profit. If an extra tax were being paid by the owners/ shareholders of the business, then profits would fall; if profits don’t fall, then it’s because the extra tax is being paid by the customers of the business, through rising prices.

It isn’t always as immediate or obvious as this story about Halfords might suggest. It’s usually more subtle and gradual, but when any business considers its pricing, it inevitably takes account of any increases in its costs. It obviously also considers what its competitors are doing and how much of an increase it thinks it can introduce at a given point in time without losing customers and revenue, but ultimately the dominance of return on capital asserts itself, and increased taxes invariably work through into increased prices. A company threatening an immediate price increase in response to a tax increase looks to be more about politics than accounting, but that’s about presentation.

None of that is to argue that businesses shouldn’t pay taxes. They depend on the infrastructure and services provided by public expenditure, and it is entirely appropriate that those costs should be reflected in the costs of doing business, and thus in the prices of goods and services. We just shouldn’t delude ourselves into believing that ‘taxes on business’ are somehow a free source of money which don’t impact us as individuals. The Chancellor’s mantra that she isn’t increasing taxes on working people is ‘true’ in the sense that they’re not directly paying those taxes – they’re simply facing price increases. Theoretically it’s entirely different; in practice the impact ends up being much the same in aggregate. One of the key differences, though, is that a direct tax on income is related to ability to pay, whilst an increase in the price of everyday goods is not: those on lower incomes are hit hardest.

Why is the return so low?

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The first job I had after leaving university was with an insurance company which specialised in agriculture. During the time I was there, the company introduced a new type of policy for farmers, namely Consequential Loss. The basic idea was that, if a farmer lost stock, a building, or whatever due to storm, fire or some other insured peril, they could claim not only the value of what had been lost, but also for any loss of profit which ensued. A meeting was convened in Cardiff to which the local inspectors from the southern half of Wales were summoned to hear a presentation on the benefits of the policy and to help them sell it. After the presentation, Johnny, ‘our man in Carmarthen’ as he was, quietly asked a question about the information that farmers would have to provide to get the insurance. Specifically, which figure would they have to give about their profit – the one they gave the Inland Revenue or the actual one. After hearing the explanation that both the premium and any payout would be based on the figure that they put on the application form so it needed to be an accurate figure, and that, in any event, providing inaccurate information could invalidate the whole policy, Johnny shook his head briefly before declaring, “Well, I’ll never sell any of that in Carmarthen”. Some might see that as a foul calumny against the honest farmers of Sir Gâr, to which all I can say is that Johnny was astute, was good at a job of which he had decades of experience – and he knew his customers well.

An alternative, and rather more charitable, interpretation of the point that he was making is that the way numbers are presented, and the assumptions used to derive them, can sometimes depend on the purpose for which they are to be used. I wonder, however, if that little anecdote might still help to explain the gulf between the farmers’ understanding of the impact of the changes to inheritance tax (IHT) and that of the Treasury. I don’t recall many farmers ever underestimating the negative impact of any change that they don’t like (which at times seems to cover any proposed change), let alone being optimistic. That’s another way of saying that it’s just possible that they may be ever so slightly overstating their case. On the other hand, the idea that Rachel Reeves and a few allegedly ‘clever’ economists at the Treasury understand agricultural finances better than the average farmer is risible; the probability that the government are significantly underestimating the impact of their proposals is high. But unless we start from a set of commonly agreed and understood assumptions, we will not close that gap in perceptions.

If we assume that the average family farm in Wales really is worth the millions of pounds which would start to attract IHT, and that the average farm income really is as low as some are saying, then in purely financial terms, farmers in that position would be better off selling up, buying a house in the nearest town or village, and putting the rest of the money into a building society from which they would enjoy a much better income. Those are big caveats though. (And the issue isn’t purely financial either. Family farms are the backbone of many rural communities and a major factor in the survival of the Welsh language in the rural north and west of Wales. Few of us would want to see that undermined.)

But if the return on capital from farmland is so poor, why is the price so high? Conventional economics would suggest that low return on an asset should lead to lower asset prices. Part of the reason for the high price of agricultural land is precisely the current exemption from IHT, an exemption which makes it attractive for the very wealthy to put part of their wealth into an asset which, unlike their other assets, will not be taxed on death. And part of the problem with Rachel Reeves’ proposal is that she’s only doing half a job. Not only will her changes not be enough to deter the transfer of non-agricultural wealth into farmland, they will therefore also not do enough to stop the artificial inflation of farm land prices, and will as a result catch many more farmers in the net than the government are claiming.

They also don’t address the real underlying issue – why are the rewards from such an essential enterprise as agriculture so low for those engaged in it? But that’s a whole other question, and not one about which the Chancellor seems particularly bothered.

An easy mistake

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Seen one seaside town, seen them all. OK, Barry might be a little smaller than Blackpool, but for a rare visitor to either, it might be easy to confuse them. Just like confusing Miami with Clacton would be for anyone who is a rare visitor to either. And one grumpy old man is much the same as another grumpy old man, so it’s understandable that someone might have difficulty distinguishing between a grumpy old American billionaire convict and a grumpy old English pensioner. Nigel Farage getting confused as to whether his job in parliament is to represent a billionaire American convict living in Miami or a few poverty-stricken pensioners living in Clacton is therefore perhaps explicable; it’s an easy enough mistake to make. Isn’t it?

Displaying weakness

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The Labour government apparently believe that they are ready for Trump, having gamed a number of different scenarios. That sounds a bit complacent to me: the one thing that is absolutely predictable about Trump is his utter unpredictability. The probability that the UK government can have foreseen all possibilities is remote. It seems increasingly as though the team Trump is assembling around him do indeed have some sort of coherent – albeit deeply unpleasant – programme, but whether they will be able to keep him to it is likely to remain unclear for some time to come. I find myself wondering who exactly the ‘useful idiot’ in all this is. Are his team Trump’s useful idiots, or is he theirs? Him not being the idiot might seem unlikely, but it might still be the better scenario.

Whether he will go ahead with his scheme to impose 10% tariffs on all goods entering the US is yet to be seen. He really does seem to believe that the countries and companies sending those goods will pay the tariff with no impact on the prices paid by American consumers. It’s the stuff of make believe. It is certainly likely to disrupt trade relations and is likely to be counter to World Trade Organisation rules. That latter won’t worry him, not least because he knows that WTO rules and processes mean that it will be years before the WTO can co-ordinate its response, and he will no longer be president by then (assuming that he doesn’t also somehow manage to abolish the two-term limit on presidents – or even abolish elections – in the meantime). There are only two countries or trading blocs big enough and powerful enough to take meaningful retaliatory action, and they are China and the EU.

The UK’s response so far – trying to persuade Trump to exempt the UK from an otherwise universal tariff – assumes that the so-called special relationship is something more than an outdated form of words. But such special pleading is not only not helpful to rebuilding relationships with the EU, it also looks like weakness. Trump might well like to see weakness and supplication before him, but the idea that he will respond otherwise than by taking advantage of any weakness is completely at odds with his nature and history. Starmer’s obsession with not challenging any of the consequences of Brexit, and his willingness to bend the knee to Trump look likely only to compound those consequences.

Vigilantes and gamblers

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The Guardian carried a story the day before the budget, wondering whether ‘bond vigilantes’ would punish Rachel Reeves with a Truss-style market meltdown. Curious word, vigilante, with at least three different connotations that I can think of. The first – showing my age – takes me back to watching Mr Pastry on the TV as a child on a Saturday afternoon. There was one episode where, misunderstanding everything as usual, he wanted to become a village aunty. It has a warm, cosy feel to it – the idea that kindly people are looking out for others. A more dystopian version is where gangs of vigilantes roam the streets imposing their own version of the law, by force if necessary, meting out punishment to those who refuse to comply with their rules. Somewhere in between the two lies the concept of people acting together to assist the enforcement agencies in upholding the law.

The ’bond vigilantes’ referred to by the Guardian don’t fit any of those categories. These are people who are looking to turn a penny by trading bonds, in massive quantities, with the intention of leveraging the odd few pennies here and there – multiplied, of course, by the millions of bonds involved. They are more akin to gamblers and speculators than law enforcement officers. They claim to be using their judgement on financial events, such as the budget, to guess as to whether rates of return will go up or down as a result. In truth, they aren’t really even doing that – they’re actually guessing about whether other traders will guess that rates will go up or down and placing their bets accordingly.

Bond market speculation isn’t like betting on the geegees though. When it comes to horses, the number and size of bets placed may affect the odds that the bookies will give you, but they don’t make the horses run any faster. In the financial markets, the bets placed directly affect the outcome as well. If enough people buy and sell bonds in a way which anticipates a rise in the rate of return, then the rate of return will rise, and vice versa. The sad part is that the neoliberal governments, of whichever party, with which we have been saddled for decades believe that things have to be this way, and they have no choice but to follow the dictats of the markets. Their power is constrained mostly by their own lack of imagination.

"They should be paying us"

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Not to be out-done by Starmer’s display of his imperialist credentials, one of the would-be leaders of the Tories went even further yesterday  by saying that former colonies do not only not deserve any compensation for the exploitation of their resources and the enslavement of their peoples, but they should actually be grateful for having been colonised in the first place. Ever willing to add comedy to arrogance, Sirjake added that “they should be paying us”. Perhaps it isn’t completely surprising that people who believe that taking a substantial economic hit in order to gain the illusory ‘freedoms’ of Brexit should also believe that having their resources and people systematically extracted and exploited is a small price to pay for the delights of an English-based law system and the imposition of Christian values.

The thing is, though, it’s not for ‘us’ to decide whether it was a good bargain or not. The only people who can decide whether what they got outweighs what was taken from them are the peoples who were colonised. It’s possible, of course, that some of them really do believe that they got the best end of the deal – one could argue that the earliest English colony of all, Wales, contains plenty who think that there are net benefits from being ruled from elsewhere. It is, however, clearly not the perception of most of the former colonies, and no amount of criticising their ingratitude is going to change that.

And even if it were to be true that, by some sudden strange Damascene conversion, all the former colonies were to agree with the proposition that colonisation had been a good thing, it doesn’t alter the fact that any benefits from colonisation were more accidental than intentional. Colonisation took place with the express intent of gaining access, by force, to resources, and as a process, it made some of the colonisers very rich indeed. Much of the wealth of the UK’s biggest cities came from the exploitation of colonial possessions. It really doesn’t matter how enlightened some (but certainly not all) of the colonisers were or whether the legacy they left was good or bad: nothing can alter the underlying intention of accumulation of wealth by expropriation of resources. The people seeking to rewrite history here are those who seek to deny that basic truth.

Labour's anti-colonialist delusionists

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A few Labour MPs have criticised their leader in the past few days for his imperialist stance on the question of reparations for slavery. To listen to them speak, one might think that the Labour Party is a bastion of anti-imperialism and anti-colonialism. They’re deluded – the Labour Party is as much an English imperialist-minded party as the Tories. That’s how we are allowed to have elections in the UK: by ensuring that nothing changes very much. If it wasn’t obvious to the ‘rebels’ previously, surely the half-hearted handover of only part of the Chagos Islands whilst retaining the UK’s ‘right’ to Diego García ought to have opened their eyes at least a little.

It isn’t only in relation to reparations that the imperialist mindset operates; it also underlies the nonsense that the UK is a major world power which can threaten (or maybe create) adversaries across the globe. To say nothing, of course, about the continued possession of nuclear weapons. Starmer has been at it again this week, telling Iran that it must not respond to Israel’s ‘retaliation’, and that Iran and the Palestinians must allow Israel to have the last word – or last airstrike, more accurately – in the current tit-for-tat round of violence. Why either should listen to a state which is the former colonial ruler of Palestine and which has a history of using force to secure the economic interests of its capitalists in Iran (and which itself therefore bears no small historical responsibility for the situation in the Middle East) is a question which only a died-in-the-wool imperialist wouldn’t even think to ask. That we need a ceasefire and proper peace talks with the serious intention of seeking a just settlement goes without saying; that the conflict can be ended by the historical school yard bullies telling one side to desist is as delusional as believing Labour to be inherently anti-colonial.

Bankers and fairies

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The headline in yesterday's Business and Money section of the Sunday Times proclaimed that “City tells Reeves: we can lend you £80bn”. It’s an example of the way that the basic facts aren’t always presented in a neutral fashion, because the headline could equally have read, “City tells Reeves: We have £80bn that we want to save with the government”. In the preferred version, the banks and financial institutions are doing us (through the government) a favour by lending us money; in the alternative version, the banks and financial institutions are asking us (through the government) to do them a favour by accepting large deposits of ‘spare’ cash.

They both represent different aspects of the ‘truth’, underlining the way that what looks like a debt to one person will always look like an investment to another. But which is actually the best representation of the underlying truth? Imagine that ‘the City’ is a single corporation here, and that the Chief Financial Officer is talking to the collective board. Is (s)he going to say, “Look chaps, the government has got itself into a bit of difficulty, but I reckon that we can probably divert around £80bn from other places to lend them in order to help them out”, or is (s)he going to say, “Look chaps, there’s something of a dearth of safe and profitable investment opportunities at the moment, and the best thing that we can do would be to deposit £80bn in government funds”? When deciding how best to manage their money financial institutions are always looking for a balance between risk and reward, placing some of their money in high risk, high reward investments and some into lower risk, lower reward investments, such as government bonds. To put the question another way, when they are deciding on that balance, do we believe that they operate on the basis of a community-friendly altruism, or do we believe that they decide on the basis of what’s best for their shareholders?

Those who believe in altruistic bankers might like to come and meet the fairies at the bottom of my garden.

Anti-homeopathy: could it be fatal?

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It could simply be that I haven’t properly comprehended it, but my understanding of homeopathy is that a substance known to be harmful is added to water and then repeatedly diluted until there’s no trace of it left, at which point the water somehow retains a memory of the substance, and that memory, by being drunk, cures the original problem. It would be fair to say that opinions differ as to its efficacy. Science has, to date at least, been unable to explain how water retains a memory of a substance, let alone how that memory can then cure anything. Others swear by it.

The UK Labour government seems to be adopting a form of reverse homeopathy, whereby repeatedly strengthening the dose of the poison is deemed to be a cure. They are committed, for instance, to getting rid of the blight of child poverty, but their approach so far has been to increase the number of children in poverty by retaining the two-child cap on benefits, and now talking about withholding benefits from people deemed able to work, whether work is actually available to them or not. They are also opposed to pensioner poverty, and are tackling it firmly by deliberately reducing pensioner income. The scientific basis for the assumption that increasing poverty is the route to reducing it is even less clear than that for homeopathy, but at least drinking water, with or without a memory, isn’t actively harmful in itself.

The belief in what we might call ‘anti-homeopathy’ isn’t restricted to the governing party. The current main opposition party is suffering from its own version of the same affliction. In their minds, the best way to cure the problem of people not voting for them is to double down on all the reasons why people rejected them. The dose of ideological fervour on offer from Sunak simply wasn’t strong enough, apparently. There were reports yesterday that an opinion poll conducted by Electoral Calculus showed that a Conservative Party led by Robert Jenrick would win rather more seats than one led by Kemi Badenoch. Some foolish commentators have interpreted this as a boost for Jenrick, but they are not taking account of the anti-homeopathy which is currently rife amongst the dwindling number of party members. If what he has to offer might increase the likelihood of people voting for his party, then the dose he’s offering isn’t strong enough. It will surely be Badenoch’s chances which were boosted yesterday.

As to the real cure for this strange affliction currently infecting both parties, it appears there isn’t one. It will just have to work its way through the bodies of both parties until it reaches its conclusion. If we’re lucky, it might even turn out to be fatal.

Chasing savings from benefit payments

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As of today, none of us know what will be in the UK Budget later this month; it’s doubtful if even the Chancellor knows yet, given that work on the detail is continuing. There have been plenty of hints and rumours, though: enough to fuel endless speculation and debate about whether a particular rumoured change does or does not breach a manifesto commitment. One fairly consistent rumour, backed up in a way by today’s suggestion that weight-loss drugs will be prescribed for overweight people who are economically inactive, is that the benefits budget will be one of the targets. It’s not the most lucrative of possible clampdowns – all the evidence suggests that more government expenditure is lost to tax evasion and fraudulent accounting than on paying benefits to those not entitled to them. Choosing to go after benefits is just following an agenda set by the Tories and their media friends. Having said that, it is true to say that there is a saving to be had if benefits can be restricted to those who meet the criteria; the political question is about whether that’s the most productive target.

It raises a question about chickens and eggs. Is the saving being sought a result of a programme to assist people to find suitable employment, or is it intended to use benefit cuts to force people into work, however suitable that work might be for the circumstances of the individual? It was pretty clear under the Tories that it was the latter of the two: cutting benefits would allegedly create an economic incentive which would effectively starve people into taking low-paid (and sometimes multiple) jobs. In relation to those who see living off benefits as a lifestyle choice, there might even be an argument for such an approach, but that group is much smaller in number than anyone reading the tabloids might think, and one of the problems with it is that it can end up causing a lot of collateral damage, especially to children whose life chances are already poor. Those hit aren’t only the tiny number of workshy. There is a huge difference between that approach and an approach which looks at individual circumstances and provides appropriate help and support.

The provision of drugs to help weight loss is potentially a positive step in general terms, although there are some serious questions about potential side-effects, and whether it is merely treating symptoms rather than causes. But even leaving those reservations to one side, directing support to people who are economically inactive is a major corruption of the ethos of the NHS, which is supposed to be about the provision of health care based on assessed medical need. That’s rather a different proposition. It underlines the way in which what used to be the ‘party of the working classes’ increasingly sees people purely in terms of their economic value. There is a political philosophy based on such a belief, but it isn’t the one Labour traditionally promoted. It’s unclear whether the party intends this medication to be mandatory or voluntary, but even voluntary medication of a specific group of people based on criteria other than health needs would be something that ought to worry us. It also plays to, and reinforces, a stereotype of benefit claimants as fat layabouts, encouraging further stigmatisation of a large group whose needs are complex and varied on the basis of a prejudice about a small subset of that group.

It’s not entirely clear which approach Labour favours on either of these issues, although the signs to date are not good. A party which claims it wants to eliminate child poverty hasn’t hesitated to add to that poverty to date, and has been singularly unapologetic about doing so. There is no reason to assume that they won’t continue in the same vein.