Why I'd Scrap Corporation Tax and Inheritance Tax

In the budget, George Osborne has reduced Corporation Tax, and increased the Inheritance Tax allowance for property to £1 million. As Marx describes, no form of taxation can change the distribution of income, which is itself a function of the productive relations. However, Marx preferred direct taxation to indirect taxation, because, he said, the former was more transparent, and so encouraged workers to limit the expansion of the state, financed by taxation. Marx was in favour of a small state (indeed he thought that it would wither away under communism), because he recognised its class nature, and recognised that the more it expanded, the more it limited workers' own potential for self-government, and self-activity.

Marx's emphasis was on strengthening the actual social position of workers, by encouraging capital accumulation, which increases the demand for labour-power, and by encouraging the workers themselves to develop their own socialised capital in the form of the worker owned co-operatives. On this basis, I think there is a good argument for Marxists to support the scrapping of both Corporation Tax and Inheritance Tax.

The argument for scrapping Corporation Tax is quite straightforward. Firstly, it is opaque, and so fails Marx's criteria that taxes, financing the state, should be transparent. It encourages the development of an entire industry that creates no value, just to enable businesses to escape the payment of the tax. Those are resources that could be used to create real value, and thereby expand social wealth. But, even allowing for all those large corporations that avoid tax by these means, the capitalist state is able to raise large amounts from it, which thereby enables it to expand its activities, and so limit the development of workers' self-government.

Corporation Tax is levied on the profits of socialised capital, be it the profits of the joint stock company or the worker owned co-operative. This is undesirable for several reasons from a Marxist perspective. Firstly, it is this socialised capital that Marx describes as the transitional form between capitalist property and socialist property. In that case, why would we be in favour of limiting the potential for this capital to accumulate, by allowing the capitalist state to tax its profits? Secondly, it creates distortions, because some of these very large corporations are better able to avoid tax than others. Thirdly, it places resources in the hands of the capitalist state. That is particularly, objectionable, when that state then uses those resources to subsidise the least efficient forms of capital, as happens with various forms of welfare payments.

The Corporation Tax deducted could otherwise be used for capital accumulation, which would increase employment, and thereby help to raise wages, or else it could be used to increase wages directly. With higher levels of employment, workers social position is strengthened, and with higher wages, they are better able to organise their own forms of co-operative provision, and self-government independent of the control of the capitalist state.

Social Democrats have tended to see excessively high profits as something to be opposed, and so taxing those profits is something to be welcomed. But, that is because social democracy is concerned with trying to maintain harmonious relations between capital and labour. It seeks to extend the role of the social democratic state for that purpose. Workers are left in the position of workers exploited by capital, whilst the needs of capital for such an exploitable workforce are met by the development of the welfare state.

But, Marx never saw anything objectionable in high profits. High profits are the means by which capital is able to accumulate more rapidly, and as I set out in my post yesterday, for Marx, this ability to create a high net product, with a smaller number of productive workers, is also the basis for a future communist society to enable workers to devote increasing amounts of time to non-productive activities, activities that enable them to develop as human beings.

At the moment, in order to encourage such capital accumulation out of profits, a whole panoply of inducements, allowances and so on are established to enable firms to reduce their tax, by setting such investment off against their profits. Once again, this not only creates an industry of tax accountants and lawyers able to utilise these regulations to avoid tax, but it creates a series of distortions. It is simpler to just scrap the tax, so that the profits can then be used for capital accumulation.

Of course, the objection would be that the tax savings would not necessarily be used for investment. True, but competition, would tend to lead to firms having to increase their investment in line with their competitors. More importantly, if firms used the tax savings on Corporation Tax, to increase their dividends then this is more appropriately dealt with by a tax on earnings than on profits. A higher level of tax on dividend income than on wages is easily justified, transparent and easily administered. Moreover, higher levels of tax on higher levels of wages (including wages paid in the form of share options etc.) reduce the potential to simply use the tax savings to pay higher executive salaries. In fact, scrapping Corporation Tax, whilst sharply increasing taxes on dividends, and other forms of unearned income, as well as on very high earnings would be a significant incentive for socialised capital to maximise profits, and use them for investment.

The argument for scrapping Inheritance Tax is not so straightforward, but follows similar lines. Inheritance Tax can act to discourage the accumulation of capital, because this capital then becomes subject to taxation when passed on. What should be discouraged is not the accumulation of capital, but the inheritance of large amounts of wealth, including fictitious wealth in the form of shares, property and so on. What is required, therefore, is a tax system which does not discourage capital accumulation, but which encourages the distribution of that capital on as wide a basis as possible.

Instead of Inheritance Tax, therefore, it is better to tax the recipients of any such inheritance. In fact, any such inheritance is simply a capital gain. All capital gains should be heavily taxed beyond a minimum allowance, because they are entirely speculative in nature. Feudal property persisted, because of laws of primogeniture, whereby large landed estates were passed down only to the first born male descendants. By this means, the property was not dissipated into a series of small property owners. The aim of taxation should be the opposite.

If someone, builds up capital of £1 million, this should not be taxed on their death as Inheritance Tax, but if it is passed on to a single heir, then it should face Capital Gains tax at a fairly high level of say 40%. With an annual Capital Gains Tax Allowance of £10,000, anyone receiving a small bequest would, thereby not be affected. That would encourage the owners of large estates to divide up their estate amongst a large number of beneficiaries, so as to minimise the tax.

On this basis all of the various allowances and caveats, and methods of tax avoidance built up around Inheritance Tax could also be done away with.