Sunday, June 25, 2006

How much tax do companies pay?

Are companies being hit with onerously high taxes?

Of course, that's a ridiculously broad question. Which companies, in what countries? Narrow it down: how about Britain?

As reported by the Telegraph, The Hundred Group report that they contributed £18 billion to the UK government, and call for greater transparency in just how much company taxes they pay.

Unfortunately, the report doesn't actually mention when they paid that £18 billion, or even whether it was a single year's payment. It is strongly implied, so let's assume that it is the tax paid over one year.

Note also that these aren't offical statistics from the tax department, these are self-reported figures by the companies in question. Have you ever known a company to argue that they aren't paying enough in taxes? So there is a potential bias here.

But for the sake of the argument, let's accept the numbers are accurate. £18 billion sounds like a lot; what percentage of profits is it?

Unfortunately, the Telegraph doesn't report the profits made by The Hundred Group, so we are forced to look elsewhere for that information. (This is ironic, given The Hundred Group's call for greater transparency.)

The Telegraph reports that members of The Hundred Group are the FTSE 100 companies, plus a number of other large organisations such as the BBC and the Institute of Chartered Accountants in England and Wales. Can we find out their profits?

Each year, the Guardian publishes an account of how much money the FTSE 100 companies donate to charity. In 2005, the FTSE 100 companies donated 0.87% of their before-tax profits to charitable, social or environmental projects, for a total of £948.69 million.

So, let's do some calculations:

0.87% of the total before-tax profits of the FTSE 100 companies = £949 million

So the total before-tax profits = £949/0.0087 = £109,080 million, or £109 billion.

Out of that £109 billion, they paid £18 billion in taxes, or a little less than 17%.

That figure is an over-estimate of the percentage, because the numerator (taxes paid) comes from FTSE 100 companies plus others, while the denominator (before-tax profit) only counts the FTSE 100 companies. So, we're over-counting the tax paid and under-counting the total profit.

On average, the FTSE 100 consists of 100 companies making £1 billion in pre-tax profit each. They pay less than 17% tax on that £1 billion. That's not a bad little earner.

Now, companies are supposed to be "people" for the purposes of the law -- not "natural persons", like you or I, but people still. If you or I earned £1 billion in profit, we'd pay significantly more than 17% in tax. The top tax rate for "natural persons" is typically between 40% and 50% in many Western democracies -- and, for the purposes of taxation, corporations get many deductions which natural people don't.

The Telegraph writes:

Philip Broadley, chairman of the group and the finance director of the Prudential, insisted yesterday that the timing of the survey's publication was not dictated by the fact that the 2006 Budget is in less than two weeks' time.

Nevertheless, he said: "There is a need for greater transparency regarding all taxes paid by business, not just corporation tax, to ensure that stakeholders are more aware of these other business taxes and the total amount of tax that companies contribute to society in the form of Government revenues."

Absolutely. More people need to understand that they, as individuals, are being taxed disproportionally more than corporations making billions of pounds of profit.

1 comment:

Ms Liberty said...

Seventeen per cent seems like a perfectly reasonable amount to me for corporate tax - although it also seems like a reasonable amount to me for the top level of personal tax. Show me where the rest of the insanely brutal tax collections go, if you expect to argue otherwise.