The news that large companies are enjoying a steady decline in their real rates of tax, revealed by the FT, comes as no great surprise. As I have commented this morning:
The fact is that despite all the efforts to end international tax abuse by multinational corporations a Faustian pact has been made between these entities and governments, including that of the UK. As a result whilst measures have supposedly been taken to tackle abuse, tax rates have come down rapidly.
In this context the Labour Party promise to increase corporation tax from its current 19% for all companies to 21% for small companies and 26% for larger companies if Labour wins the election makes sense. Let's leave probabilities aside and discuss the merits of this idea.
The logic of both proposals is sound. For small companies the case is that it makes no sense at all to have a corporation tax rate below the basic rate of income tax: all that becomes is a blatant invitation to avoid tax. This abuse is already costing up to £4 billion a year according to the Office for Budget Responsibility: I suspect it may be more when the full national insurance impact is taken into account. In that case the 21% rate is almost certainly too low: I would have gone higher to beat abuse and win back more of the lost billions, which is exactly what is required.
Dealing with larger companies (of which there are vastly fewer) the situation is more complex. First, 26% is not high: it is close to the EU and OECD averages when adjusted for our current low rate.
Second, it's not that long ago we had these rates.
Third, there is no evidence at all that cutting the rate has brought jobs, growth or new corporation tax revenues to the UK (the rise in revenues is very largely because of the rise in the number of small companies and broad based recovery in profits from banking and elsewhere and not because of new inward investment driven by tax).
Fourth, we know that business itself did not lobby for the low corporation tax rates now on offer.
Fifth, we know business says tax is low in its considerations when real business is being relocated as opposed to profits being relocated - which is the type of abusive activity Ireland attracts and which has rendered its national accounting meaningless because so much of its GDP is profits simply flowing through the place leaving almost not a trace bar some fees for bankers, lawyers and accountants on the way.
Sixth, and most important, I argue low tax rates and low capital allowance rates are counter productive and rarely help anyone but banks. This needs explaining.
Right now, and I summarise, with a corporation tax rate of 19% and a 20% allowance on capital spending a year a large company in the year that spends £100 on capital equipment gets a cash rebate of £100 x 19% x 20% = £3.80 in the year it spends the money. Tory plans to reduce the corporation tax rate to 17% reduce this to £3.40. That, to be candid, provides no incentive for investing at all. This is a tax system for rentiers and bankers. It does nothing at all to encourage any activity in the real economy where people work and value is created.
Now change the tax rate to 26% and offer 100% first year allowances and the allowance is worth £26, or near enough seven times more.
This will encourage investment.
That will create growth.
The investment will increase productivity.
That increases wages.
And growth, again.
And so future tax revenues as a result.
In other words, increasing the corporation tax rate kickstarts the economy in a way that a corporation tax cut can't. And it pays for itself.
It's time for the debate on corporation tax to move to rates.
And it's time to talk about using an Alternative Minimum Corporation Tax to support that rate.
The game playing has to end.
NB: I am aware some do not agree with the suggestions on 100% capital allowances: behaviourally the evidence is that they work for the businesses that are likely to invest, which are the ones that matter.
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Am I right in thinking capital allowances are spread across several or more years and are calculated to allow for depreciation in the value of the capital asset ?
Am I on the right page of the tax return form here?
In effect capital allowances replace accounting depreciation with a set formula, not all of which make much sense
“……a set formula, not all of which make much sense…..”
No surprise there then. 🙂
Isn’t it true that the burden of taxation has moved decisively from business to individuals, when you take all forms of tax into account? And particularly onto the lower deciles of the income distribution, i.e. the poor pay a larger proportion of of their income as tax: “The poorest fifth of households pay taxes in the UK that equate to 38% of their income while the richest fifth pay only 35% of theirs.” Dorling, Danny. Do We Need Economic Inequality?
We need to do more than argue for greater corporation tax; we need a rebalancing of taxation, including flat taxes like VAT which do so much damage to the poor, and shift the burden onto those who can afford to pay, such as corporations, high earners, rentiers and avoiders in all their disguises.
Taxation as redistribution is certainly working, only it’s going the wrong way and is creating social injustice.
(incidentally, Dorling’s book is a salutary read – some of the figures he quotes on inequality are appalling and should be an embarrassment to every politician and all those who have helped create the current economic orthodoxy – though I suspect they don’t read this kind of stuff)
I agree re Danny’s book
Re. this: “26% is not high: it is close to the EU and OECD averages”
Given the logic of consistency between nations that are in a single market and customs union the EU rate should be uniform, surely? As for the UK, Brexit should not be a problem for Labour on that question as they are now proposing to be in a customs union anyway.
I suggest a minimum….
We will all be able to watch the USA implode soon and sadly at this rate Australia too as the Liberals are set to follow through with a similar policy to reduce corporate tax rates.
It already seems like the race to the bottom is well under way.
Though the mainstream press are complicit in spreading fear and the falsehood that investors will leave without lower rates of corporation tax and continuing to repeat ad nauseum the ‘balanced books’ myth that perpetuates the cutting in public services that go hand in hand with reduced revenue.
It is pretty sickening to see the grip this ideology has when any rational investigation illustrates how harmful it is to society as a whole.
But then we know they don’t care about the little people because it doesn’t effect their peers or their investments and their goal is to reduce govt. to the bare bones by starving it to death of revenue anyway.
All tax increases are doomed to fail – or worse, exert a net contractionary effect on the economy – when revenue enforcement agencies are unable or unwilling to ensure that the wealthy and the powerfull pay a similar or greater proportion of their profits to that paid by smaller taxpayers.
The system becomes an inverted pyramid, in which every small business competes against larger enterprises who can use their tax-free revenues to squeeze out or buy out all the small competitors.
Further, the incentives become perverse, as all the rewards accrue to businesses with ‘better’ tax advisers, not to businesses with better services and products.