Tax paid by UK companies

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The Guardian has given attention to a letter John Christensen and I wrote to that paper last week in which we said the following in response to a claim made by the CBI that companies are planning to leave the UK because of increasing tax burdens:

[N]ational statistics show that corporate profits as a share of GDP have increased on average from 21.5% to 22.5% since 1999, while the proportion paid in corporation tax has fallen from 15% to 14.1%. As a result, corporation tax paid as a proportion of GDP has been almost exactly fixed at 3.2% over this period. Companies moving to places such as Jersey (soon to have 0% corporation tax) and Dublin (with its 12.5% rate) want all the benefits of a moderately taxed economy like the UK, but they and the CBI want to contribute nothing for it.

This 3.2% figure was repeated in a report by Philip Inman yesterday, but its provenance has not been published, so I thought I should do so.

The data used to calculate this sum was UK GDP by year in current prices from the Office for National Statistics, the operating surplus of companies by year as a component of GDP from the same source, and corporation tax receipts by year as published by HM Revenue & Customs and the ONS. The latter were matched with profits for the preceding year as it remains the case that corporation tax is substantially paid a year after the profit is earned. In addition I would stress that the actual paid figures from the monthly receipts were used for 2005 and 2006 (declared therefore as for 2004 and 2005 in the data analysis as they relate to profits in those years). For 2006 extrapolation was made to the year end. The resulting data is lower than the forecasts made in the budget at £44 billion rather than the £48 billion forecast as at present this target looks exceptionally unlikely to be achieved.

The result is a valid piece of economic analysis. I have expressed operating surplus as a percentage of GDP, and tax receipts as a percentage of operating surplus and have then, finally, compared tax receipts to GDP. In each case trends were plotted based on this data from 1999 to 2005 (over which period there were stable tax rates, so avoiding confusion in the data for this reason). The result is the following graph. It emphatically supports our conclusions.

And the real economic lesson of this? Companies are contributing less, not more to the UK economy. And this is a cause for concern, not a matter for complaint.