Let's change the way we do tax.

Well, the story of Google and its tax arrangements seems to be dimming from our newspapers, for the moment.  But it will be back. 

One of the issues that people perceive is the unfairness of what Google, (and others), are doing.  But as we are constantly reminded, what they are doing is perfectly legal.  And if a business trades across the globe, why can’t it chose, as the rules allow, for them to domicile their profits wherever they choose for tax purposes.  Who can blame them for doing so.

These businesses have played by the rules.  So perhaps it’s the rules that need to be looked at again. 

So how does it all work?  Businesses trade, they make a profit, then the export the profits to limit tax liability.  So let’s say a business selling goods and services in the UK and on a turnover of £1m makes a profit of 10%.  Tax is levied on that profit.   So in the UK let’s say tax is 20%.  It means the government will raise £20,000 from that business to help fund nurses, doctors, policemen, firemen, and so on.  But if the company off-shores that profit, the UK receives next to nothing as the taxation is done elsewhere.  Like offshore tax havens.

So, how can we do things differently?

Well, why not change the basis of taxation.  Let’s not tax them on the basis of profits which can be off-shored.  Let’s tax them on the basis of economic activity in the county where the trading actually takes place.   And as we know, there is already a mechanism for taxing economic activity; it’s called VAT. So why not scrap corporation tax altogether, and transfer the tax burden on to VAT?

So what would the impact be of such a radical change in taxation policy?

Wouldn’t prices go up? Well, no, they wouldn’t.  For UK businesses it will be fiscally neutral.  And it would be fiscally neutral for you and I the consumer too.

What about prices of imports? Yes, they may rise.

And the overall outcome?   It would improve the competitiveness of British companies, simplify the tax structure, mean there was only one easily understood level, and ensure that international corporations could not escape a fair level of taxation.

There, that was easy.  Next question?