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companies operate is becoming ever more difficult. It is known where they are located and registered since this relates to a legal requirement. Identifying the location of a specific transaction is much more difficult. Even if the purchaser believes the purchase is made in the UK it could easily prove to be with, for example, an Irish affiliate. To a considerable degree companies can choose where to pay taxes by suitable locational choices. If the UK wishes to collect corporation tax as it currently operates it does need to ensure that there is an incentive for corporations to declare profit in the UK. Setting the UK corporation tax significantly above competitor countries will see profits relocated elsewhere. The difficulty with this argument is that if all countries follow this advice then tax rates will be driven down as each seeks to gain advantage. This is the ‘race-to-the-bottom’ that EU rules against harmful tax competition are designed to avoid.
Could corporate tax ‘avoidance’ have a knock-on effect on individual taxpayers’ morale and ethics (ie, ‘why should I pay tax in full when companies don’t bother’)? There is no formal evidence on this issue.
The concept of tax morale has been found to be important in empirical studies and the social norms of tax compliance provide a convincing explanation of observed behaviour. The link that is missing is how the reporting of corporate behaviour affects tax morale. It is clear, though, that countries can become trapped in a position where the prevalent ethic is the non-payment of taxation. Corporate failure to pay the ‘fair’ amount of tax cannot but push an economy in this direction. Is there confusion about tax and what it goes towards? A recent example was a car driver who knocked a cyclist off
his bike, afterwards stating that ‘he doesn’t pay road tax, I do’ – whereas there is no such thing as road tax. There are many misunderstandings about tax in all parts of society. The recent press coverage of major corporations has reported the very high sales revenues of firms and the surprisingly small tax payments. Where this is mistaken is that corporations pay tax on profits not on sales, and a high value of sales does not necessarily imply profitability. Amazon, for example, made losses for many years before moving into profit. Going further back in time, a large media fuss was made over a hedge fund manager who ‘paid less tax than his cleaner’. The issue in this case was that the hedge fund manager paid a marginal tax rate of ten per cent whereas the cleaner paid a marginal rate of 25 per cent. This does not imply the manager paid less tax: for example, ten per cent of £2 million is forty times 25 per cent of £20,000. This confusion between the average rate, the marginal rate, and the amount of tax paid is commonplace and hinders discussion. The idea that the road tax (or car tax as it is now called) is collected to pay for roads reveals the time it can take for incorrect beliefs to be revised. The revenue from the tax was hypothecated to pay for roads between 1925 and 1936, but still surfaces 77 years later. Has any research gone into whether there is a theoretical threshold of where tax levels are likely to become unsustainable (ie, would trigger widespread tax refusal)? The response to a tax can take several forms.
Take, for example, an increase in the income tax. People can respond to this by working less hard, or moving to a less demanding occupation where pay is lower. Or they can engage in tax planning to reduce the tax liability. At the extreme, they can
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