Richard Murphy: Companies have forgotten how to make money

“Make the money, then worry about paying the tax,” says the tax researcher, arguing that with businesses sitting on cash piles with no investment plans, there’s no point cutting corporation tax

January 28, 2015

Zero corporation tax – a concept put into practice in many of the world’s top tax havens: the United Arab Emirates, Cayman Islands, and the British Virgin Islands. Places that have been less affected by the global financial downturn. Is there a correlation? World Finance discusses with Richard Murphy, tax researcher and political economist.

World Finance: Richard, you’re a supporter of the progressive tax regime, so exactly what is your case for punishing more successful companies with more tax?
Richard Murphy: For heaven’s sake, I’m not asking to punish anyone! Tax is the contribution that anybody makes to society for the benefit they get from it. And successful companies do not exist in isolation: they actually live on the back of the society that gives them their permission to trade: let’s be clear about it.

World Finance: Would we lose out if the UK abolished corporation tax?
Richard Murphy: Well, if you call losing out on £40bn of revenue losing out, then yes we clearly would. What would you like to do: close the NHS on Monday and Tuesday? Shut down half of the UK’s schools? Cut the state pension enormously?

Look: all of those things are inconceivable politically. As a matter of fact, the UK requires corporation tax as part of its tax system. There is no viable alternative at the moment; the big problem we have at the present point of time is that we simply don’t charge enough of it.

For heaven’s sake, I’m not asking to punish anyone!

World Finance: You wrote that companies would make no contribution at all to society, but surely there is the argument that if their tax burden was gone, then they would have more money to invest in human capital?
Richard Murphy: But most large companies – where most investment takes place – are actually cash rich at present. And they can of course borrow money at extraordinarily low interest rates. But they’re not. They’re choosing not to. Because actually, most large companies are pretty clueless about what to do with money right now. They simply do not know what to invest in. And this is a constant theme of, for example, the pages of the Financial Times and its commentators: that big business simply can’t use money.

Why, if we gave them more money, would they invest any better than they do already – when they’re already sitting on a cash pile? They wouldn’t. What we would actually be doing is benefitting their owners, who would remove that money out of the UK and into tax havens. Or would instead use it for speculation in housing, in stock markets, in commodity markets – none of which actually create a single extra pound of worth for the UK economy.

World Finance: But a number of studies conducted in recent years suggest that corporation tax penalise workers ahead of companies and shareholders. A study by the American Enterprise Institute found that there is a strong correlation between high corporate tax rates and low wages: so what’s your take on that?
Richard Murphy: Well, I would actually answer straight away that the American Enterprise Institute is of course funded by big business, and so they would say that, wouldn’t they.

But I’ve looked at a number of these studies; one for example done by Professor Mike Devereaux at Oxford University, who came to that conclusion. And it was an extraordinary piece of work, because it only looked at the consequence of corporation tax increases. And it was said that if there was a corporation tax increase, then there was a cut in real wages: so the correlation was proved.

Well first of all, we have remarkably few corporation tax increases in Europe over the last 20 years. We’ve had almost universally tax cuts. And there is absolutely no evidence that corporation tax cuts do give rise to an increase in real wages.

If that was true, then in the UK over the last few years we should have seen substantial increases in real wages, because corporation tax has been cut. That hasn’t happened.

The claim is completely bogus; there’s no evidential support for it at all.

World Finance: So you think no tax also translates into less monitoring of accounts, and therefore more fraud: so is this the case in places like the United Arab Emirates?
Richard Murphy: Look, I think the UAE is slightly different from some other locations. And I have to be honest, I’m not an expert in the UAE.

But I am very familiar with a great many of the world’s tax havens. I’ve written one of the leading books that is taught in the world’s universities on tax havens, or ‘secrecy jurisdictions’, as I would prefer to call them.

There is – candidly – almost no regulation of companies in those places at all. It was a few years ago, for example, that I pointed out to the British Virgin Islands that they were claiming there were 800,000 companies in the BVI. Then they rather embarrassedly said, ‘Well actually, there probably aren’t, but we’ve lost control of our company registry.’

Overnight they cut the claim to 400,000 companies. Is that effective administration of companies? Or is that somebody simply out of control, and hoping to collect some fees by licensing companies to operate, but without any proper regulation in place? I’d suggest it’s the latter.

Quite simply: companies where there is no tax system, where they aren’t required to payment, do not have to prepare proper accounts, do not have to account, and are subject to no effective regulation at all.

World Finance: Well back to the UK now, and from one government to the next, we constantly change progressive tax rates. Surely this is worse than the certainty that a zero-tax regime would afford the economic planners?
Richard Murphy: What is this ‘certainty’? I mean, the one thing that all business should be able to handle in uncertainty.

Actually the tax system is remarkably consistent. We have a tax rate in the UK which is pretty predictable. If it goes up after the next election, how much will it go up by? A few percentage points. I doubt if anybody is going to do more than that.

I think business ought to go out there, start to learn how to make money, start to learn how to invest, start to learn how to train people, and stop making a fuss about something which is frankly of little consequence to them.

Make the money, then worry about paying the tax. But at the moment they worry about the tax, and have forgotten how to make money. And that’s why we’re in such an economic conundrum in the UK.

World Finance: Well finally, considering David Cameron has suggested cutting trade ties with the EU: if we lower corporation tax we’ll make the UK more competitive, surely?
Richard Murphy: Competition in taxation is a misnomer. Competition presumes that there can be failure. The failed state looks something like Somalia, or South Sudan. That really is uncertainty, because it’s government at the end of a gun.

So that is not what people want. Actually what we want are strong, successful states. Businesses thrive when they have strong law in place. Actually that’s one reason why the UK’s tax havens are so successful, because they can rely on British law to back them up.

So in that case what they actually want is all the benefit of the state, but not pay for it.

Tax competition is not competition at all, then: it is tax war.

It is one state declaring war on another state, by trying to steal the profits that truly belong in another place, to have them relocated to their country, to be taxed at a lower rate. That is wholly unproductive. What is more, it shifts the entire burden of tax from companies and from wealth, onto ordinary people who are least able to pay it – because quite simply they don’t have as much money.

If we are talking about redistributing the tax burden to people, then fine: let’s have tax competition. But let’s be quite clear what it’s about. It is about making the poorest in society pay, so the richest can pay as little as possible.

I don’t believe in that. I believe that those with the capacity to pay should make payment; and that’s why I oppose all ideas of tax competition.