A tax based on turnover penalises companies that hang on to their profits ro reinvest in the business
imagine two companies. One has huge sales, but invests relatively little, and instead shifts much of the money offshore to minimise its tax payments. A turnover tax is certainly going to hit that business, dramatically increasing its effective tax rates, assuming it can’t find any smart way to disguise where its revenues are coming from. So far, so good. The turnover tax is achieving its purpose.
Now, imagine a second company. It too has built up huge sales. But unlike the first one, it is determined to keep growing, and conquering new markets, so it reinvests the bulk of that money in its operations and, as a result, makes very little profit. Maybe it funnels profits through Luxembourg or Ireland; maybe it doesn’t. It doesn’t make much difference because it will pay very little. Corporation tax is levied on profits; if you don’t make any you don’t owe anything. Yet with a turnover tax, its payments would go up very sharply.
A turnover-based tax would punish both equally. But surely that is the last thing we want to do? Reinvesting profits is the best source of new investment, and the innovation and growth that creates.
