My blog is available at http://niclasvirin.blogspot.com/.
Most entries, however, are in Swedish.

For those of you who read Estonian there is a presentation of me in the Estonian tax magazine MAKSUMAKSJA 2006 NR 5 http://www.maksumaksjad.ee/modules/smartsection/item.php?itemid=302/"

The picture below, The Economic Circuit, is commented in the the speech under the heading The Economic Approach

Speeches were also given by professor Göran Normann and the counsellor to the Estonian government Erki Uustalu. The seminar was chaired by professor Leif Mutén.

H = Household sector, B = Business sector, S = State, L + C = Labour and Capital, W + D = Wages and Dividends, G + S = Goods and Services, P =Prices, I + G = Inheritance and Gifts, W + RE = Wealth and Real Estate, CG = Capital Gains

There is a flow of labour and capital from the household sector (H) to the business sector (B). In the opposite direction there is a flow of payments for labour (wages) and capital (dividends). The result of the production flows from the business sector to the household sector as goods and services, and the payment for it flows in the opposite direction. The purchasing power emanates from the wage and dividend payments. The flows of payments and the flows of capital and labour and goods and services are all dependent on each other.

There is a flow of semi-manufactures round and round in the business sector and a flow of payments in the opposite direction. Values are created successively in this circulation and definitely when the products leave the business sector. This implies that resources have been consumed at market value and in a process been transformed to consumers' products. If the transformation has been successful and the market evaluates the products higher than the consumed resources, profit has been created. Part of the profit remains with the companies as net investment, part of it is distributed as dividends to the shareholders. That means that part of the value of household wealth from ownership of business (shareholdings) has increased and part of it has been exchanged for cash. The payment of dividends generally triggers taxation.

The part of the value-added consisting of labour remuneration is a sustainable and normally used tax base. Frequently it is used twice: as income tax for the employee as well as wage cost (pay roll) tax and social security contributions for the employer. A flow of about the same size is also used as a tax base if there is a general consumption tax (VAT), so the income base can be used three times.

Consumption can also be taxed by way of special goods' taxes and excise duties paid by the household sector or the business sector depending on the technique of collection, e.g. tobacco, alcohol, gambling and other vices, petrol, energy, environment pollution etc. Whether the taxes are sustainable or not depends on the tax rate; with a very high tax rate consumption expires - in other cases the tax can be seen as an extra consumption tax. The rationale for it is often to reduce or regulate undesirable consumption. A cynic would say that the reason for the taxation of tobacco, alcohol and gambling is not restriction of consumption; peoples' devotion to vices makes them perfect tax bases. Such consumption is price inelastic.

Taxes are also collected from the household sector as a consequence of actions or events there: inheritance and gift, possession of wealth and real estate. The bases for these taxes are theoretically - unlike all other mentioned tax bases - not inexhaustible. Realization of capital gains can also be taxed. Whether that tax base is exhaustible or not depends on the growth of the value of the asset.

Finally, profit in the business sector is also used as a tax base. In many countries a tax is levied on the profit, although distributed profit is also taxed as dividend income with the shareholders, creating double taxation problems very difficult to master.

In the diagram it is easy to see that business profit tax is only a surtax on household income tax or rather a prepayment of household income tax. The tax reduces what otherwise would have been paid to employees or shareholders and reduces the tax bases for salary and payroll taxes, consumption taxes and dividend tax. You could say that company tax cannibalizes on other tax bases. Unlike other business taxes (e.g. taxes on energy, emissions, labour etc.), company tax has no effect on business behaviour other than making investments more expensive. The tax will unconditionally be rolled over on other economic actors. How, on whom and when this tax incidence will work, will depend on current elasticities on the markets of goods and services, labour and capital and it will be impossible to measure, not to mention predict or regulate.

Business tax is not indispensable. From the diagram you can see that tax on business profit not charged is not lost. Money and resources do not disappear in a black hole if the profits are not taxed.

In every respect the burthen is hard on those who attack an almost universal opinion. They must be very fortunate well as unusually capable if they obtain a hearing at all. They have more difficulty in obtaining a trial, than any other litigants have in getting a verdict. If they do extort a hearing, they are subjected to a set of logical requirements totally different from those exacted from other people.
John Stuart Mill

• Former Head of Department,
   National Tax Board

• Former Senior Vice President,
   Svenska Handelsbanken

• Former Member of Tax Law Committee
   for Advance Rulings

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