At the end of last week, I was trying to piece together what concerns me about unitary taxation. I was thinking about specifics and the detailed proposals that I’ve read in passing, mainly from Richard Murphy.
Now, whilst I would say that my criticisms applied to the formula I’ve seen used as an example, they don’t necessarily apply to all forms of unitary taxation. If you change the formula or fix the problems with each variable in the equation, unitary taxation remains viable.
But I knew there was something more fundamental about the approach that I didn’t like. And this is where reading other people’s responses and thoughts, as well as putting down my own, really helps. Having said that, I had written a lot of this post prior to reading Andrew Jackson’s excellent post on unitary taxation and I’ve tried to maintain my original line of thought whilst editing. I’ve approached this from a different angle, I think, but I might be meandering in his footsteps.
This may seem totally obvious to others but I started thinking about what is necessarily true about corporation tax. The main thing is that corporation tax is a tax on profits and this continues to apply under the proposed unitary taxation.
Our current system tries to do the most obviously equitable thing with regards to allocating taxing rights on those profits: it tries to levy the tax on profits where those profits actually arise.
Now, whether our current system does this successfully or not, the principle seems appropriate. A tax on x is charged on the quantum of x occurring in any jurisdiction. Which is the basis of many forms of taxation.
But this isn’t what unitary taxation does. A tax on x is charged according to the proportions of a, b and c in a jurisdiction. So the direct causality is severed between profits and the tax arising on it.
Unitary tax relies on there being indirect causality between the variables of the equation and profit. So, the idea is that x is directly caused by a combination of a, b and c.
Of course, unitary taxation doesn’t need to be restricted to three variables. It can be any number of variables you choose. But the more variables you introduce, the less simple unitary taxation becomes. And simplicity appears to have been one of the USPs in unitary tax’s favour.
But the fundamental point is that the relationship between x and a will be prescribed for everybody. And a is not necessarily a principle cause of x for all businesses. The same logic applies for each variable. It is not necessarily a cause of profit.
If you look at any variable, it is possible to consider an extreme case of a business where profit is not caused at all by it. Including sales. Including employees. Including tangible assets.
Purely as a thought experiment, this suggests that there is no necessary link between profit and any other variable for all businesses. Even if you don’t accept the extreme position, you are likely to accept the lesser position that the relationship between any one variable and profit may be very different from business to business.
Looking at it from another angle, an independent company that has exactly the same variables a, b and c, and even the same amount of profit x, will most likely not pay the same amount of tax as a company that is part of a group because it is the proportions of the variables, rather than their quantum. If we’re not careful, we may be selecting for the business that is part of a group.
Ultimately, that means that if unitary taxation is a “good” system, it is only incidentally so, not necessarily so.
Unitary taxation is no longer trying to establish the right amount of profit in each jurisdiction and basing tax on that. It is giving up on that altogether. Instead the approach it adopts appears primarily aimed at creating a system that will fairly allocate profit amongst jurisdictions for an “average” business.
Given that many of the problems we are trying to address relate to the taxation of exceptional businesses (as suggested by media coverage), businesses that deviate from the “average”, there is a risk unitary taxation will adopt a skewed view of what an “average” business.
Failing that, businesses that deviate from the “average” most will probably be taxed least appropriately by unitary taxation.
Essentially, my previous post’s criticisms relate to symptoms of severing the link between the tax on profits and the profits themselves. The tax is alienated from its subject partially, if not completely.
For me, I would say that alienation is the defining feature of unitary taxation.