By putting large American losses through British banks Merrill Lynch can set these losses against their profits. The losses are so huge that no Corporation Tax may be liable for about 60 years in the UK.
I am no lawyer, so I assume that the UK ruling allows losses to be set against profits is, or was, in some part benign. That is it allows struggling firms to reduce their tax bill, and so remain in business. This can be benign in a number of ways.
Firstly, it keeps employees in a job. Secondly, it assumes that the product/service is, or is believed to be, of some real benefit to consumers. If the product/service remains in existence this may be a benign outcome.Thirdly, some firms kept alive in this way will pay some Corporation Tax. Further, if they recover, they will pay full Corporation Tax. And there may be other benign outcomes.
How far does this scenario fit the current banking crisis?
Firstly, keeping workers in a job may, or may not, be benign. It depends on a large number of things including: does the employer pay the minimum wage, is health and safety respected at work, are there similar jobs available in the local area. This list could be extended.
Secondly, how products/services benefit consumers is very unclear. A simple belief in the positive benefits of a product/service is no guarantee that such benefit exists. Also, what does benefit one may well be a cost to another. For example, low flying aircraft over houses near airports is a cost to families in houses, but a benefit to business travellers and holiday makers. Lastly, are we the best judge of what is to our benefit; or are we too easily persuaded by advertising, product placement, or just a felt need for the latest version of something that we already possess.
Thirdly, firms kept alive by putting losses against profits may not pay much, or any, Corporation Tax. This is especially true of banks, and other financial institutions currently. Indeed there is now some speculation that large banks, like Merrill Lynch, are recovering but paying little tax. This is because their losses are so large.
The government’s loss of income from Corporation Taxes raises a number of problems. Will the government have enough income to maintain a decent welfare state? How will a reduction in wefare state spending affect those on low incomes, and their voting habits?