By Julian Pratt
After a six year inquiry, Google has agreed with HMRC that it will pay £130 million in tax to cover the 10 years from 2005 – an amount that critics have rightly described as derisory. HMRC’s says that it has collected ‘the full tax due in law’. Both the critics and HMRC are completely right, as there is a problem but it does not lie with tax avoidance measures. These are entirely within the law and, for example, used by anybody with an ISA. Rather the problem is a badly designed tax system.
Lord Lawson has responded by attacking Corporation Tax, which invites large businesses to shift profits between tax jurisdictions to avoid paying tax in the UK – a privilege that, as he points out, is not available to small business. Lord Lawson proposes replacing this tax on profits, in whole or in part, with a tax on sales. This might be a bit more difficult to avoid, but it would surely not take long for the accountants to find ways of doing so – particularly as the location where a sale takes place is increasingly difficult to identify as more and more sales move to the internet. And like any conventional tax it would discourage whatever is being taxed – why would we want to discourage sales (or indeed profits)?
The solution to tax avoidance is to move towards a tax system in which whatever is being taxed is impossible to hide or to move abroad. After two hundred years of dysfunctional tax policy the answer is clear. Orthodox economists now agree that the source of revenue for a government should be the rent of the land that it defends, protects and services – which they describe as a Land Value Tax (Economist 29/6/13 Levying the land). A Land Value Tax even has the advantage that not only does it not discourage profit-making or sales but it does discourage holding land out of productive use – derelict or underused. If this land were brought back into productive use it would provide space for business and for decent housing that people can afford.