Taxes aren't that big a deal

There's been a lot of debate around the internet over the past week after Warren Buffett wrote an op-ed in the New York Times saying squillionaires like him should pay more taxes. Needless to say I agree with him, but rather than deliver the whole rant now I want to focus on one thing I only realised after becoming a financial journalist: corporate taxes just aren't that big a deal to most companies.

You'd never know it from the volume of bleating that most of the media feels duty-bound to print, but the total corporate tax bill of the average company comes to just a few percent of their revenues. Look down an income statement and this becomes obvious: before paying corporation tax, a company must first pay wages; materials; rent and energy costs; administration bills; depreciation and amortisation; and interest on loans.

By way of illustration, these are the profit margins of American industry sectors in the first three months of this year. The numbers in the first column are the percentages of revenues on which corporate taxes are charged. Given that the top rate of US corporate tax is 35%, it's fairly simple maths to show that the healthcare sector is the only one where corporate taxes come to more than 5% of revenues.

Companies are duty-bound to raise the returns to their shareholders, and clearly cutting corporate taxes lifts the level of net profits which accrue to shareholders as equity and dividends. So I can understand why companies harp on about this, and why it's a major theme for business lobby groups.

But I can't understand why everyone else, from media to government, takes it so seriously. Look at the raw numbers: even in the case of the healthcare sector, cutting US corporate taxes by a massive 10 percentage points would add just 1.5% of revenues to shareholders' funds. Such a tax cut would be seen as a huge win for "business" and a huge defeat for "big government", but a company that grew its revenues by just 1.5% in a given year (or that failed to turn those higher revenues into net profits) would likely be seen as performing pretty poorly.

Keeping costs down is hard, but the things that managers can do on improving productivity, or marketing, or purchasing and supply chain management, or financing, or jobs and wages are much more important to shareholders' returns than the rate of corporate tax.

Obviously there's a separate argument that's made about payroll taxes, such as National Insurance and Superannuation. These are basically part of the wage bill and as such do make up a bigger part of business costs.

But I assume that even business lobbies realise that a dystopia where the old, infirm and unemployed must depend on their own savings or charity rather than receiving some measure of support from the state isn't a viable or attractive vision of the future.

So it's basically a question of whether the tax costs to support social spending are going to be added to personal income taxes or payroll taxes. Move them to personal income tax, and companies will save on payroll tax but have to sharply increase salaries to make up for the fact that their employees are suddenly having to directly pay for this stuff. What you give with one hand, you have to take away with the other.

Either way, wage bills would wind up pretty similar unless you're planning to hide a sharp deterioration in public services inside some slightly arcane issues of accounting and fiscal budgeting.