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.