Some of the smaller economic brains inside the Brexit camp are suggesting that the UK should cut it's corporation tax rate to 10%. Let me suggest some of the consequences.
First, we would lose over £20 billion of tax revenue a year. That's one third of the total forecast UK deficit. There's not a shred of evidence that we would recover any of this from alternative new taxes: at best such a tax cut might keep some business in the UK that would otherwise leave, but there is almost no chance business will now relocate to the UK for tax purposes for the reasons I note here, and because it is widely known that tax is usually fifth or sixth on any criteria ranking for location decision making. Being outside the EU will always outweigh the value of this cut for multinational corporations.
Second, many of those paying much less tax will be small UK companies. In fact, every self employed person will have a massive incentive to incorporate their business (as happened when Gordon Brown had a 10% small company tax rate early in this century) and tax avoidance will be enormously boosted as a result at no real gain to the economy.
Or, third, massive anti-avoidance rules will have to be put around small business to prevent them getting advantage of this gain, which will be administratively cumbersome, hard to enforce and reinforce the idea that is already prevalent in tax that their is one rule for big companies that favours them enormously and another for small ones which always does them down. This encourages both social and economic division and at the same time encourages tax evasion.
Fourth, if those rules are not put in place inequality in the UK will rise significantly: the wealthy who could record their income in a company and who do not then withdraw it from the company to live off (which is a certain sign of being wealthy) would be able to accumulate their wealth at a vastly lower tax rate than anyone itself: this is the way to ever deeper social divisions.
And, fifth, any hope of fair markets where the ability to serve the customer is the sole criteria for success would be even further undermined by favouring some who could access this rate and denying others the opportunities to do so, in the process killing any chance of fair economic competition and so undermining the essential nature of free markets that suggests that they have a valuable role to play in society.
There is nothing pro-market in using tax as a competitive tool. This policy is a policy that is instead about destroying market capitalism. It's ironic hat it comes from the political right as a result, except for the fact that it reveals their real motives: this policy is about increasing inequality and reinforcing the exploitative monopoly rights of a few in this country and not about the well-being of the UK as a whole. And that's why it has to be opposed.
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Great post. But £20bn not £20m of lost revenue, I take it?
True!
Sorry to all who noticed
20 BILLION.
Short sighted small minded though is what we have got with the three amigo’s.
Just wondering out loud: Might sudden one off falls in corporation tax dis-incentivise investment? The idea would be something like: with lower corporation tax, companies would all things being equal have higher post tax profit margins, so they would have less incentive to take on risk (ie. invest) in order to make profits.
Yes entirely plausible
It also puts up a ‘desperate’ sign over the country
Oh dear oh dear oh dear………..and I had to sit there at work last week listening to how a rather middle class colleague had to put the earnings of her freelance husband into the bank and try to avoid questions about where them money was coming from in order to avoid paying income tax!!
The same colleague frets about BREXIT and is certainly left leaning in her political views. It just shows you what a blind area taxation can be for many people – even those like my colleague whom is desperate to live in a better world.
I nearly lent her my copy of the JoT!
Umm … that sounds like tax evasion
Cutting corporation tax is justified by saying it gives more money to invest.
According to the TUC the UK has not responded to Osbourne’s CT cuts with more investment.
https://www.tuc.org.uk/sites/default/files/TUC%20media%20briefing%20on%20UK%20investment%20gap.pdf
(Apologies if I have repeated myself. I posted this the other day-I think on the Guardian)
It is worth repeating every day
Business is sitting on a massive cash pile over all. They need no incentive to invest that government spending could not supply
There was at least one survey， from KPMG，if memory serves，that said business was quite happy with a 20% CT rate and was not looking for any further cuts.
I recall it
This is also an example the dangerous cognitive blind spot – an elephant in the room, to use a different analogy – in Conservative foreign policy.
They’re entirely unaware of overseas opinion and other governments’ interests, except in terms of their reflection into domestic politics.
This matters, because the 10% proposal is tax competition and an attempt to make the UK even more of a tax haven than it already is.
This has consequences: EU governments now have to look at UK economic interests as worse than competing interests, or even as rivalry – we are pursuing a hostile policy, a kind of economic warfare.
And, as we’re leaving, there’s no protection from a response in kind.
We should be giving our most important trading partner every reason to work to strengthen out mutual interests in tge forthcoming negotiations. Instead, we are making it imperative to isolate our toxic economy and repatriate all EU economic activity that takes place in the UK.
If this blind-spot policy folly is our country’s future direction, the EU exit negotiations will look like the imposition of comprehensive economic sanctions in all but name.
Agreed
Nile
it is very worrying. To me there seems a dark side to English nationalism. I think the Irish do nationalism well: “We are just as good as you and will treat you with total respect and expect you to do the same.” There is a strand of English Nationalism which gives the impression “We are better than you and you had better get used to it and know your place.” A bit crudely put I know but It possibly comes of the English not really being defeated in war since 1066 (the real narrative is more complicated). The Irish are used to defeat! I have met some Americans, Israelis, South Africans (less so recently) who have this God given feeling of superiority. Not all English feel this way; indeed my experience of my 35 years living here has generally been very good (comes from associating with the Liberal Elite). Ironically it is my experience that the people whom feel most superior are those who have the least right to do so. It is very much this stratum of society however that the Tory right is appealing to. And Sabre Rattling and talk of Economic War goes down well as England has always won in the past – what could possibly go wrong!
There are increasing worries in Ireland about the UK fall out. The Irish have kept very close to the UK because their economy is most exposed and NI obviously is a major concern. There seems to be a widening belief in the other EU countries that Brexit will play out disastrously for the UK and being seen to be too close to the UK is not a very smart move. This will be an interesting subplot.
Regarding Ireland’s success as a Tax haven and its low 12.5% corporation tax. I’m sure Richard is correct that this is only one of many factors. To me one very important one is the value put on technical education. Engineering (and I have been involved in teaching Chartered Engineers for most of my adult life) is very much valued in Ireland and Engineers highly respected. In the UK an engineer is someone who wipes a machine down twice daily with an oily rag or repairs your washing machine. I was appalled at how badly technically and numerically educated in general the English were. There even seemed to be a large tranche of supposedly educated people with excellent verbal skills who seemed not only totally innumerate but not at all embarrassed that their mathematical skills were close to non existent.
Also without membership of the EU and to a lesser extent the Euro the 12.5% CT would count for very little.
Sadly I get more depressed about Brexit as time goes on.
I agree with a great deal of that
Including on engineering, even though I always refused to do it: my father should not have been so keen that I did
Dear Mr Murphy, I follow you from many years and as “anti-marxist in the blood” I study forever your model of economic society. I worked in U.K. for 4 years and please, believe me, the only reason for a company to be placed in U.K. are not weather, food or football (perhaps this last one) but the low level of tax and a good administrative system (better in the past) compared to others.
If you reduced the tax you would attract several businesses in UK more than big banks or financial groups as today; and the total income for HMRC would increase….but this a liberal view.
All the best!
We have cut CT rates
We have not got growth
CT revenues have only survived because of the growth in the number of small businesses incorporating: large business revenues have fallen
And the deficit is as large as ever
Politely, there is not a shred of evidence to support what you say
Although 20bn is less than 1% of our GDP.
So if you look at it from a system perspective or accept that fiscal policy should be subservient to economic policy then its not that bad an idea. If the UK “wins” then its good for the economy overall, whether in hands of government, individuals or corporates is a secondary issue.
BTW the solution to corporate/ individual taxation is off course to reduce the differential, and reduce income tax rates also.
So you want to cut tax rates
Tell me, what services will you cut, and why, with what consequences?
I thought you were an MMT-er Richard, in which case you know that this is a false dichotomy, at least, if we had a government that was prepared to make the more enlightened choice.
I’m reading L Randall Wray’s “Modern Money Theory” (2015 edition). In chapter 5, he talks about Beardsley Ruml and Hyman Minsky opposing corporation tax (as well as payroll tax – this is in the USA context of course). One argument is that it is partly passed on to customers in higher prices, and in reverse to employees, in lower wages. Another argument is that it can encourage firms to go offshore.
He quotes Minsky as saying: “When someone then asks “but how will we afford programmes to help the poor?”, I respond, as Ruml, Chairman of the Federal Reserve Bank of New York did, “Taxes for revenue are obsolete” (Ruml 1946a):
‘National states no longer need taxes to get the wherewithal to meet their expenses. Therefore since all taxes have consequences of a social and economic character, the government should look to these consequences in formulating its tax policy. All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue’. (Ruml 1946, p. 268)
(Quoted in “Modern Money Theory”,2nd edition, L Randall Wray, p. 156).
For my own part, I’m not saying corporation tax should necessarily be lowered; 20% seems reasonable given that it’s the same as the starting rate for income tax. On the other hand, I think there is a good case for lowering the starting rate of income tax and for having many more bands (e.g. 0,5,10,15,20, …. etc, rising slowly to a much higher rate than today’s top rate), and there could be similar flexibility (to help
small firms) with corporation tax. Given near-universal computerisation, we can make taxation formulation as flexible and smooth as we like.
The precise values, for income or corporation tax, at any given time obviously depend upon what else is going on with the economy (e.g. employment levels, inflation).
(And now I suppose, I really ought to read your book. 🙂 It’s on my wish-list).
And this is an area where some who support MMT show that they profoundly misunderstand the social role of tax
Sure it’s primary role is to reclaim money spent but unless that is done equitably then deep social harm results
Wray us one who seems to have little understanding of that
He is not alone
That is why I have sympathy with some aspects of MMT but cannot subscribe to it
If we grow the economy by 10% as a consequence of re-shoring lots of businesses and their owners and remove the incentive for corporations to avoid tax, the extra employment taxes, VAT and property taxes will probably recover the “lost” £20bn twice over.
But we won’t
Let’s not be silly
We might as well say let’s assume Brexit will be fine if only we had two extra hours of sunshine a day
Thank for your reply. In my opinion the answer “no growth” cannot be related during these last years to the CT level, because the crisis is lying in many Countries in the World and – always upon my opinion- because of the financial system, completely out of control by the Governments. It is an error – and you are to competent and intelligent to do so – to discuss about CT level affecting the people/companies working and do not see the roots of the crisis (Goldman Sachs, Mc Kinsey and “partners”).
The huge hole in the public system has been created by financial instruments sold happily for many years by all banks (shadow banks too) not by the people/companies everyday present in the office/factory/market.
The issue is not fiscal but political and to outline the cut of CT as a gloomy view for social services is an oldest perspective: if the system can produce more because free of bureocratic charges it will give more to each of us (Keynes and public spending passed away). Thank you again
I know how business works
Cutting CT rates will have no change on productivity
CT is on profit, which is a residual
And just as you can’t profit maximise – you can only change other behaviour which may or may not result in more profit – changing CT rates effectively changes nothing
The fear over this potential move is palpable!…..I think it is an excellent idea to discuss in the press:-
1) It is entirely credible as a threat, the Conservatives have lowered CT from 28% to 20% already and have often discussed Irelands low rate with approval. Everyone including the left and the EU believe the Tories would do this!
2) It will have the effect of stopping / reducing the talk of business leaving which is useful and stops a key remainer attack angle. Also you could get some interesting talk of other businesses relocating, at least there would be a win / loss angle to UK location.
3) Even if the CT receipts dropped you could argue that doing nothing after Brexit would have been worse or just as bad!…….If would provide good cover for the transition to a lower rate over years.
4) It would help with aggressive anti avoidance changes to policy, you have 10% now pay it!…….If yoy got some big wins on change of policy from Apply, Google etc you would have the PR cover for the drop.
5) You could handle small business with a further increase in dividend tax (it has already gone up) or just a higher CT rate of 18% up to £100k in profit. That would stop most from suddenly incorporating overnight.
6) If for whatever reason (Currency moves, Brexit changes, EU chaos, flight from US after Trump victory) the CT receipts went up then you would be talking of the Laffer curve again and the left’s arguments over higher tax would be damaged!
So in all I thin it is a good threat that you could actually follow through!……..And the immediate attack from the left shows just how real you fear it could be!
So let’s be clear
You want to engage in international tax competition when this mis now totally discredited
You want to emulate the Irish economy: really?
You want to favour big business over small (although that is a reason for EU sanctions)
And you want to favour international business over national based one (also heavily criticised, OECD 1998 onwards)
And you would anger the USA
Really?
The only thing I agree on is that the Tories would do it
Yes I want international tax competition, I think tax rates are a great tool for compensating inherent National weakness ( geographical remoteness, poor weather, weak political strength, previous wars and disasters).
And it is not discredited (only in your mind) otherwise why is Ireland keeping its 12.5%, you think all the international business would be in a wet remote island without it?
Yes I favour Big business over small, the same way it is now with research credits, patent protection and economies of scale that all benefit big business. I want a company to move here and create 1,000 jobs or pay £1bn in tax so I favour them in the same way we favour Nissan creating jobs in the North.
And frankly you are the last person to stand up for small business with the dragging out of the cupboard every few years your plan to increase tax on small business through forcing them to pay salaries and other restrictions!….Your so called level playing field with “certainty” is like going into a ward of people with infections in their legs and cutting them off!….At least it wont get worse and you are all the same!
International business has advantages over local companies that means you must offer a favourable deal, they can use cheaper foreign labour, avoid regulations and costly environmental restrictions. That is dealing with reality, your approach seems to be……”come to the UK, we will tax you heavily and cost you more while distrusting you”…..If attracting international business is such a bad idea why is the EU trying to grab the international companies currently based in the UK?
Anger the US…..Pfft!…….Please!…..like you care what the US thinks!…When have you ever said we should not change the tax rules because it might anger the US?…….And we are already way below their 35%……
And yes the Tories would do it, much to howling of the Left, and quite successful it could be, Brexit just keeps giving and giving!
So you are in favour of undermining markets, increasing inequality, promoting economic failure (did you notice Ireland in 2008?) and giving us pariah status
I get all that
Clearer
– Tax competitiveness: competitiveness is the salt of the life. The Tax Competitiveness can’t be done without an efficient Government System (as UK have at the moment). If you have a bad, inefficient system you can’t afford the Tax Competitiveness
– Irish economy: it is an helped economy, therefore doesn’t count in a systemic analisys
– I want to support the most the SME and less the big companies. No support at all to the banks and financial system(the bankgsters)
– International business is a fact not an idea: UK will remain at the pole position by staying far from bureocratic, expensive,odd EEC system (by saving a lot of money). Relocation of the companies outside UK? Do you speak German? Or tu aime la France? Preferisci l’Italia? BREXIT= pack of lies. No one will give up UK where the power is managed from the WW2
– USA: they have many other problems for focusing on EEC (please see the candidates for the White House). I suppose a more important and effective role of UK in the World now (outside EEC)
So you think tax competition a good idea
Competition requires embracing failure
You think failed states – the inevitable consequence of tax competition – a good idea?
Why?
The idea to avoid the failure is like do not live to avoid to die. The failure is the consequence of the human being. Without failure the kid doesn’t become a man.
The Systems governed by the State as in the Communist World – where the failure is a non sense since nothing can fail – failed heavily and this is not an opinion but the History.
The step onward is to punish the “governed failures (see banks)”, stay far from huge public spending feeding up only the sluggards, truly helping the people (and the companies, only private no public) in disadvantage, with a narrow well paid public administration system and about EEC… as far as the eyes can see. (In my opinion you will survive thanks to the Pound. The Euro is an “authentic” failure)
I’m sorry – but this is just nonsense
What you are actually arguing for is the apparent end of government
For you must be a non sense – we are at the opposite side -. We have a different cure for. Actually less government is, for me, the recipe to overthrown the situation. Of course, less Government not no Government at all! But not involved too much in economy as entrepreneur (because the entrepreneur is only who puts at risk himself. Without personal liability no one perceives the outcome of his management, as the public managers or the kid a t school), less producing laws, ordinances, rules, statutes, regulatory statements…
Please check how many “rules” are issued EVERYDAY from the Government in UK. Then check in EEC.
Do you think possible to have a future in this cage of rules? I dissent spiritually before than physically.
Thanks a lot for your attention to my thoughts.
This is utter drivel: the vast majority of the economy is not entrepreneurial
The biggest risk taker is often the employee who puts their well being at the peril of one provider
And I note you are now taking us away from limited liability too
Your fantasy is my waste of time
Why the need to add pointless insults like “small economic brains” … because your brain is so big? It detracts from the piece.
The problem with your analysis is you exclude context. The country has just voted to leave the EU. It may be your preference not to lower corporate tax rates any further but raising them would be much more ridiculous. At this stage in the exit process -particularly now the Commission published their draft directive on corporation tax – letting the EU know this is a card we can play in the negotiating process is rather sensible.
So far all I’ve read are criticisms on here. You don’t need an economic brain to criticise (large or otherwise). It’s time to move forward in your grieving towards ‘acceptance’. You were in the minority when you voted to stay, got it?
I was amongst 48%
That does not deny me the right to think
Or to point out crass ideas when I see them
And I did not argue for an increase in rates: you made that up
What you did not make up is your wish to suppress free speech: that is apparent throughout
And I object to it, very strongly
At this stage in the exit process -particularly now the Commission published their draft directive on corporation tax — letting the EU know this is a card we can play in the negotiating process is rather sensible.
So I’ve rather no idea what you’re talking about, sorry. Of course there’s freedom of speech – it’s a blog.
If you think presenting a crass argument likely to lead to blacklisting is a negotiating ploy then I accept you are right
But I don’t think that
People have POLITELY pointed out where your argument falls down and you feel the need to insult and make baseless claims about suppression of free speech. What is the matter with you ?
A number of your recent postings are beginning to sound increasingly desperate and some of the arguments frankly irrational in the wake of massive historical evidence to the contrary. I understand that you have recently suffered rejection by a number of parties, so perhaps you sense you are becoming increasingly irrelevant, and that is driving your blatant rudeness ? It might be time to have a break, and rethink your behaviour to others ?
This is my blog. I ask no one to read it, or comment.
Over many years people have written as you have now. They have only ever had one reason, which is their fear of my argument.
I will, politely ignore your desperate plea as I have all the others.
And I will continue to present rational, evidence based argument for change. That’s a basic freedom I enjoy, even if you appear to greatly resent it. I suspect that’s because you have no counter argument.
I was part of the 48% also for an advisory referendum. This was a snapshot on the 23rd June. The polling I have seen would put me as part of the 53% today. It will be interesting to see how things go over the next few years. I welcome constructive debate and as an Emeritus Professor have spent decades looking at arguments in general and PhD theses in particular. I may not always agree with Richard, but what I admire most is analytic rigour and depth and coherence of argument. Possibly the smaller economic brains comment was a mistake – but I think his adversaries will need to up their game to bring Richard down on this.
The comment was actually deliberate and referred to the fact that the perspective was narrow – which it was for reasons I noted
Others thought it meant something more