Cooking the Books: Income Tax or Sales Tax? (2013)

The Cooking the Books Column from the July 2013 issue of the Socialist Standard

Different capitalist firms operating in Britain have reacted differently to the criticism that some of them have not been paying their fair share of taxes to the British state. Some multinational corporations have defiantly replied that in choosing to pay tax on their profits in countries where the rate is lower they have broken no laws and are just pursuing the best interests of their shareholders. Others, mainly firms operating only in Britain and so not having this option, are complaining that this amounts to unfair competition against them.

Centrica, the conglomerate which owns British Gas, commissioned a consultancy to work out how much they contribute to the British economy:

  ‘The report, by Oxford Economics … claims that Centrica provides £4.2bn in “total tax payments” including its own payments to HM Revenue and Customs of £1.1bn, national insurance and PAYE contributions from its staff and tax paid by consumers on their bills’ (Sunday Telegraph, 24 February).

What is interesting here is the matter-of-fact way in which the report accepts that deductions from their staff’s wages of NI and PAYE are tax payments made by Centrica to HM Revenue and Customs, just as much as the corporation tax it pays on its profits. This goes against the carefully-cultivated mystification that wage and salary earners form a part of “the taxpayers”, but economic analysis confirms that it is correct to treat taxes on wages as a charge on employers.

Tax theorists distinguish between ‘direct’ taxes, as taxes drawn on a person’s income (income from rent, interest, dividends, wages, fees, pensions), and ‘indirect’ taxes, levied on items on which people spend their income (such as VAT, sales tax, excise duties as on tobacco and alcohol). To the extent that the market for the item can bear it (as it will in the long run), the seller passes on the tax to the buyer by charging a higher price than otherwise. In this sense shops are acting as tax collectors for the state, with the burden of the tax falling on those who buy what they are selling.

Although an income tax on wages is classified as a direct tax it has more in common with an indirect tax. Wages are a price, the price of the wage-earner’s ability to work which they are selling to their employer. The principle is no different here from any tax on something that is sold: it falls on the buyer not the seller. In other words, an income tax on wages is a sales tax on labour-power that is passed on to the buyer as higher wages than otherwise. It is the employer who is the “taxpayer” and Centrica is right to include this as part of the taxes they pay.

But aren’t workers consumers too and so have to pay indirect taxes such as VAT? On the surface, yes, but what workers buy is not a final consumption; it is raw material needed to reproduce what they are selling, i.e. their ability to work. Any increase in the cost of producing this, such as taxes on what they buy, will increase the price employers have to pay for it. So here too, in the end these taxes paid by employees are passed on to the employer.

This is why we in Socialist Party have always insisted that taxation is not a working-class issue. Let the various sections of the capitalist class argue amongst themselves over which of them should pay and how much to finance their state. As wage and salary workers we should concentrate on organising to end our status as mere bearers of a commodity used up in production.