Get house sellers to pay stamp duty instead of first time buyers? It may sound good but there’s a catch…

Who pays tax? We all do of course (or at least most of us). But who really bears the financial burden of an individual tax? That’s a rather more complex question – and one that isn’t asked enough.

Andrew McPhillips, economist at Yorkshire Building Society, last week called on the Chancellor to change the law so that stamp duty is paid by sellers of homes rather than buyers.“[This] would reduce costs for first-time buyers, helping more people to get on the property ladder,” he said.

To first-time buyers this might sound a good idea. Indeed, why not give this beleaguered group a break by lightening their tax load? But McPhillips’s logic is the sort that causes economics professors and public finance experts to weep tears of frustration.

For it ignores the fact that other things in a market are very likely to change in response to shifting the nominal target of a tax, in this case the asking price. Those selling a home will surely respond to a large new stamp duty bill with a commensurate rise in the asking price.

So first-time buyers would be no better off in substantive economic terms – it is buyers who will end up paying the tax even if it’s nominally levied on to the seller.

The same logic applies to Value Added Tax. This is paid to HM Revenue & Customs by retailers and companies. But most of us realise that it’s really we consumers who pay the VAT because when the rate increases, prices rise. We had vivid proof of this when George Osborne raised the rate from 17.5 per cent to 20 per cent in 2011 and most prices immediately rose in response.

But the story of who ultimately pays tax or fees, known as “incidence”, is not always so obvious. When the Government said last year that it would ban lettings agents levying fees on tenants, some said this would merely push the fees on to landlords, who would put up rents in response, leaving tenants no better off. 

Yet the price of shares in estate agents dropped sharply in the wake of the decision. This suggests that those fees have been a major source of profit for the estate agent rather than an unavoidable transaction cost and that landlords will be better placed than tenants to resist being gouged. The incidence of that regulatory change would seem to fall on estate agents, despite the objections raised.

Business rates are a tax payable by firms based on the rentable value of the property they occupy. But a firm will generally want to secure a certain rate of return on their invested money and efforts regardless of such tax changes. So if business rates rise (as they are set to do in many swanky districts of London) then businesses should, in theory, seek to renegotiate their rent downwards to reflect that shift. Thus the tax should, according to the textbooks, be ultimately borne by landlords rather than firms.

Some evidence suggests this shift in rental prices does happen in the end. Yet it plainly doesn’t happen instantaneously for the simple reason that firms do not tend to renegotiate their rents with their landlords every year. Thus much of the initial cost of any increase does fall on firms, or rather the people who are involved in those firms.

Corporation tax is nominally a tax on corporate profits, prompting many people to assume that companies pay it. But companies don’t pay tax, only people do. The question is: which people? Many are convinced that the shareholders of the company pay the tax in the form of lower profits and dividends than they would otherwise enjoy. Others insist that workers pay the tax because the company responds to the tax by hiring fewer workers than it otherwise would, or by paying its workforce less.

There is no consensus view among researchers over who bears the burden of corporation tax. Empirical research points in different directions. The answer is likely a mixture of the two and the relative share will probably depend on the company in question, the structure of the local economy and the institutions of the society in which the tax is levied.

Yet the fundamental point is that all taxes will ultimately be paid by someone – and it may well not be who you’re invited to believe.

Republicans are doing the right thing on tax reform, albeit accidently

"The greatest treason", suggested TS Eliot in Murder in the Cathedral, is to "do the right deed for the wrong reason". That feels like a description of the corporate tax reform plan being pushed by Republicans in the US Congress, as they hope to win the backing of the freshly-installed President Donald Trump. For the plan's main Republican sponsor, Kevin Brady, the objective seems to be kicking the ass of the rest of the world.

Brady wants to create a system "that doesn't favour foreign products over American products" and has described the reform as a way of levelling the playing field for US exporters who are, he claims, currently being subject to outrageous discrimination through the Value Added Tax systems of foreign countries, including Britain.

Talk about the "wrong reasons". The idea that there is foreign discrimination against American exporters through VAT - something also believed by Trump's economic advisers - is nonsense. This charge is based on a fundamental misunderstanding of how a VAT works. Furthermore, there is also zero reason to expect this particular corporate tax reform to give American firms any kind of lasting advantage when it comes to exports.

Indeed, we find ourselves in the paradoxical situation where a reform being presented by deluded rightwing American politicians as a way of sticking it to cheating foreigners actually represents the world's best chance for lancing the boil of rampant tax evasion by multinational companies.

It is the right thing being pushed for the wrong reasons. To understand why, we need to look at the plan in more detail.

The Republican plan would replace the US corporation tax, an annual levy on a firm's reported profits, with a new levy on a company's domestic cash flow. It means taxing a company's domestic sales at a certain rate, probably 20 per cent, after it has subtracted its domestic costs such as workers' wages and the amount the firm has spent on investment in new factories and equipment.

The objective would be to tax a company's economic activity in America, which means that it would be able to reduce its tax bill by the value of its exports, while imports would be part of its taxable liability via a "border adjustment tax". That probably sounds mind-numbingly complicated, but the principle is actually quite simple: it means taxing the firm's value-adding and substantive economic activity in the country where that activity actually takes place. This is most people's idea of what a tax on corporate income is supposed to do.

Many have objected that US firms that import heavily will be placed at a major tax disadvantage. Yet this impact would be entirely offset by a rise in value of the US dollar, which would follow the implementation of the reform, and which would increase the purchasing power of importers proportionately. And for all Brady's rhetoric and the protectionist-sounding border tax, the effect of the reform would actually be neutral on America's terms of trade with the rest of the world.

But the great advantage of this reform is that it would eliminate the incentive for multinational firms to dodge their US corporate taxes through accounting tricks, such as registering profits at subsidiaries abroad and relocating their corporate headquarters to tax havens. No matter where they based their headquarters, multinationals would be liable for a hefty US tax bill if they sold plenty of products and services in America.

And if America, the world's largest economy, were to institute this reform, there would be a powerful incentive for other countries - including Britain - to implement a similar reform. Everyone who complains about multinationals making massive local sales but paying negligible local corporation tax - everyone from Theresa May to UK Uncut - should be hoping that Congress adopts this legislation, and that our own Parliament emulates it.

There are, it is true, potential transitional snags. Some believe that the unilateral reform of US corporation tax in this way would open America to a potential legal challenge for breaking the rules of the World Trade Organisation. The impact on income inequality is unclear, although there is no compelling reason to believe that it would be any more socially regressive than the existing corporation tax.

This reform would certainly present some risks, some potentially hazardous financial side effects. Yet there are also risks in trying, in vain, to patch up the current loophole-ridden "source-based" corporate tax system, which Mike Devereux, the UK tax expert whose proposals have heavily influenced the Republican plan, and who first proposed the reform back in 2001, describes as "fundamentally broken". There are political risks in failing to respond effectively to widespread and justified public anger over flagrant multinational tax dodging by the likes of Apple, Google and Amazon.

Back to the paradox. Republicans care little about the iniquities of tax havens. They want firms to pay more in corporation tax in the same way that Donald Trump wants judges in Washington to influence immigration policy. And they seem terribly confused about the reform they are championing and about what it would entail, not least the progressive outcomes. Yet, for all that, what they have ended up pushing is the right thing, not just for the US but the world. Treason or not, we should wish them good speed on this one."