Attention dunderheads: Taxpayers are NOT giving businesses £93bn

A look in the ledgers of Trotter & Worstall Independent Traders

Taxpayers paying for an investment?

Well, yes, that's going to be interesting, isn't it, a sociologist telling us about the implications of tax breaks. And after contacting him, being shown his main paper and discussing it with him, it is interesting, if mindgargling nonsense is an allowable meaning of “interesting”.

Here is that main paper and here's just one (but a major one) part of the problem:

The most valuable form of tax benefit in cash terms is delivered in the form of capital allowances, which allow companies to write off investment in machinery and other forms of capital against taxation.

They were originally provided in recognition of the fact that the current ‘assets’ of companies – in the form of existing plant and machinery – inevitably depreciate over time.

In their contemporary usage, capital allowances do not simply provide an allowance for depreciation, they are used in order to encourage, and ‘socialise’ the costs of, new investment.

The relative generosity of such schemes has tended to increase over time so that taxpayers bear an increasingly greater share of such costs. Companies can often claim close to, or even in excess of, 100 per cent of the costs of depreciation and they can do so upfront. The current UK scheme allows companies to write off 110 per cent of the costs of investment within the first year of the investment.

Thus, taxpayers not only effectively pay the costs of the entire investment, the government provides an additional ‘bonus’ equivalent to 10 per cent of the total cost of the outlay. The cost to the taxpayer of such support was £21bn in 2011-12 (1).

No, really, just no. Capital allowances really just do not mean that the public bears the cost of corporate investment. Taxpayers really, really, don't “effectively pay” the costs of the entire investment. This is not one of those two-plus-two-equals-five nonsenses, this is akin to two-plus-two-equals-splurt! Entirely meaningless.

Now, OK, we need to do a bit of tax geekery here to see what he's getting wrong. And I have indeed done this with him, but he still doesn't get it.

So, to start, corporations are taxed on their profits: corporation tax (and the corporate income tax for the US, where this same idiot idea floats around) is not charged to sales, or revenue, but to the excess of such revenue after all the costs of doing business are taken into account.

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