One of the challenges of becoming an economist concerns developing a broad focus. This is particularly important as politicians and the media love to slip the blinkers on when it comes to debating economic issues. This has been highlighted recently by the lively debate caused by the revelations of the corporation tax certain organisations haven’t been paying!
While on the face of it not paying much corporation tax might seem like bad behaviour, corporation tax is just one of the many taxes that exist to alter economic incentives, redistribute income and fund the cost of merit and public goods. VAT on sales and income tax on salaries, bonuses and dividends to name a few. As economists (provided we do not allow our own politics to cloud our judgment) we should be more interested in the overall tax paid rather than on the amount of individual tax components.
We should also keep thinking about the circular flow of income and how tax changes alter the balance between injections and leakages. After all we should be focussed on increasing investment so that the productive capacity of the economy continues to rise leading to sustainable real growth in the economy. Even if companies don't pay any corporation tax at all (the Government could decide to abolish it!) and use the money instead to invest or create jobs, would that be such a bad thing?
Taking a holistic economic view of the position, the issue is not about whether the taxes should be higher, it should be about whether economic activity can be improved by adjusting the taxes. This will only happen if the government can spend the tax revenue more wisely than the corporations would if they retained the value of the taxes within the business. Who would you back?
This week’s edition of EzyEconomics News, Jack Matthews takes a thought provoking look at this debate to try and present a more balanced and multi faceted analysis of this hot subject.