Jeremy Corby has said he will 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. 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.
So Corbyn has a plan that firstly beats avoidance, second raises revenue, thirdly can encourage investment and fourthly delivers growth. None of those come from the Tory plan.
On this occasion he is onto a winner.
And he's the one talking economic sense.
Give it two years and it will be a Tory plan. But right now they'll just ridicule it. Which will be a loss to us all.
Finally, let's talk education. I may be biased, but UK universities provide us with a real competitive advantage and a massive rate of return in terms of relative skills. Redirecting money to this sector whilst leaving those departing it debt free (or with reduced debt) would create a big economic stimulus.
Corbyn has a policy that is coherent in that case from beginning to end. And it is appropriate I say so.
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I’ve just heard about this on the Brow-beaten Broadcasting Corporation and the way they portrayed is that business will just work around the proposals and that it won’t have any impact.
Well that’s that done with then! Phew! It’s good to get to the truth of the matter don’t you think?
Next!?
Not quite. The IFS said the returns from increasing Corporation Tax would diminish over time. That leaves plenty of time to find other things to tax — e.g. chewing gum…
Peter
I was being sarcastic.
In order though to answer your point, all that needs to happen is that Government introduces a policy, and then reintroduces/amends it when behaviour changes – all such a policy has to do is keep up with the way in which the corporations behave around tax.
That is if you have suitably resourced HMRC and other government agencies to adequately administer such a way of working.
Under the Tories this is unlikely.
It is the Tories who are more likely to put more vat on your chewing gum Peter.
Corbyn’s policy proposals are broadly OK. It’s a pity that due to:
1. His colleagues not giving him a chance and undermining him from Day 1 – which is now going to rebound on a fair few of them.
2. His failure to do media management – promoting himself and his message and failing to rebut the opposition
3. The general monstering in the right wing press,
The British people’s mind is already made up. He needed the policies from Day 1.
The campaign is about to go to the next level. Theresa might have no international support apart from Russia and Trump so they can secure their billions they are making off brexit. I am pleased to say that France and Canada are behind the campaign and we are very pleased to have the use of Bernie Sanders campaign team who are flying in with him to help for the last few weeks. I think there’s lots more to come from Labour
I completely agree. What’s in it for the bankers, the big four, media barons, the super rich and big business though?
Surely it would make more sense to get to grips with what a company actually is – a collection of people – and instead of taxing the corporation, focus on taxing the people, so that in the circumstances you note above, the people involved in the corporation can’t use the corporation as a means to avoid or evade tax? A nil rate of corporation tax, for example, would free up HMRC’s resources which could be focused on the avoidance and evasion of personal income tax. Domestic businesses would benefit from this as the playing field between domestic and international businesses would be levelled. Personal income taxes, or VAT, might have to increase as a consequence, but as the tax costs of businesses would fall, costs to consumers would fall. The irony is: this is an approach that would benefit the poorer members of society in the UK, at a cost of poorer members of society in the word. Which begs the question: is Labour the party of the British poor, or the global poor?
See http://www.taxresearch.org.uk/Blog/2016/01/30/why-we-must-not-replace-corporation-tax-with-a-sales-tax/ and the blog this morning
There is absolutely no evidence whatsoever that higher capital allowances promote greater investment.
Nigel Lawson had it right – low rates, low allowances, broad base.
Respectfully, I disagree
I am all too well aware that they do
Problem is Richard you’re comparing apples with pears:
“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.”
Over six of those “seven times more” come from the 100% first year allowance. Apply that same change to the 19% corp tax rate and it’s worth 5x more than at present. Even with a reduction in corp tax to 17% it’s still worth nearly 4.5x more.
So really, you’re using a call for a higher first year capital allowance as a smokescreen to make a raise in corporation tax seem more attractive.
Secondly. What you’re talking about here is a tax rebate. So instead of offering companies £3.80 per £100 off their corporation tax bill in year 1, you’re actually offering £26 per £100 in the first year. So corporation tax receipts are going to fall through the floor – even if there’s no real growth in actual investment.
You make no comment about second or subsequent years, so I assume these remain unchanged?
It’s a sad fact that must companies have very low investment
I know I am talking an increase
And I am not proposing more than 100% allowances
Richard
I agree regarding small companies, especially as they are less likely to be able re-alocate their profits as the multi nationals can
But surely in the case of the multi nationals they will continue to allocate their profits to the country where CT is lowest. Not to do so would be failing their shareholders who always seek to maximise post tax profits. Here surely the Reagan/Thatcher idea that the tax take actually increases if yiu lower the tax rate, as Ireland has proved.
As there is no chance of all the nations of the world agreeing in this matter, there will always be rogue countries who offe low CT rates.
Regarding point 5, at least Ireland gets the CT to use for its citizens. If it had higher CT rates it woukd get nothing. Something is better than nothing.
See this http://www.taxresearch.org.uk/Blog/2015/11/04/the-case-for-corporation-tax-yesterdays-debate-in-montreal/
Whilst there is scope to have transfer prices within a range and at one end of that range you might achieve what you suggest, there is only so far you can go. Also, tax authorities are much more aware of this and are, I can assure you, more than happy to challenge bad transfer pricing. They challenge ‘good’ transfer pricing too in some cases.
Do I detect slightly gritted teeth ?
No
I give credit where due
Why not? Life’s far too short for silliness
[…] interview on Sky last night, reflecting the blog on Corbyn’s  corporation tax plans, can be seen […]
[…] IFS is showing its political colouring in reaction to Labour’s corporation tax plans, […]
At the risk of stating the obvious, surely corporate tax has a number of quite distinct potential objectives such as:
– ‘Conventional’ taxation role, recovering money back to the government
– Incentivising behaviour such as investment in people, technology, r&d, innovation
– Disincentivising behaviour such as pollution/carbon emissions, excessive executive pay, financial engineering
Shouldn’t any statement on corporation tax policy at least attempt to reflect all three goals, even if that might be a little complex for the average voter
Richard , you have advised Corbyn over ‘ People’s QE’ . Did you also explain to him what tax actually is ? I ask because in this election we are hearing the same silly arguments we have heard for sixty years between the parties about government spending and whether or not it is ‘ fully costed ‘ or ‘ fully funded ‘ when those of us who have made a study of government spending and taxation know this is all nonsense . If he knows the operational reality of how a sovereign currency works and were to explain it, or employ someone who can – that it is all made up and that taxation is simply a curb on spending power and, not simply an arbitrary curb, but for thirty plus years one that favours the very rich because their wealth was supposed to ‘ trickle down ‘ to everyone else – to the population at large then he might stand a chance because he would be telling the truth . Am I dreaming ?
Corbyn borrowed QE from me
I am afraid he bunked the tax class
Whether the £26 in year one will attract investment may depend on how sophisticated the business is in pricing new investment projects. If I look at a longer term model and a quick play with numbers leads me to believe that the additional tax in subsequent years will potentially out weigh the year one benefit, especially if you look at Net Present Values and Internal Rates of return. Certainly MNC’s are likely to use IRR/NPV models as part of their decision making process for deciding where to invest and using 17% tax with 20% CA’s versus 26% tax and 100% CA’s I am not seeing a benefit — admittedly a very simply back of the envelope calculation but I am not convinced.
But of course tax is only one factor in deciding whether to invest in Country A or Country B and you need to look at the whole picture. In financial terms this means taking into account how all other costs vary between the options to arrive at a post tax NPV/IRR and in the real world it is the option with the best post tax NPV/IRR that is going to be the preferred option. Of course financial results are not always the only thing to consider — political risk, country risk, stability (including stability of the tax regime) environment etc. will be taken into account and of course an important factor is likely to be looking at countries where you already have a presence and know the environment. So not as simple as just doing the maths.
I agree but research suggests crude numbers do have high impacts
Eh?
Firstly, why do you think the number of small companies has risen? With corporation tax rates lowered, this means higher dividends for investors (investors ALWAYS look at what will give them the most returns on their investment, that is literally their “job”, so they look at countries with the lowest corporation tax rates first; I’m sure you know this). They are more likely to invest in a same-size company in one with a lower tax rate than a similar-sized company with a higher one. And the more investment we get in a country, the more small businesses will expand, since small businesses are usually the ones which grow the fastest with more investment.
Secondly regarding the banking profits, we actually have the figures for these things
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/548398/Corporation_Tax_Statistics_August_2016_FINAL.pdf
“Bank Levy receipts have increased from £2.7 billion in 2014-15 to £3.4 billion in
2015-16. Bank Surcharge is a new tax introduced from 1 January 2016. Receipts were £22 million in 2015-16. 2015-16 receipts are relatively low because most banks are not due to pay it until 2016-17”
Annual corporation tax has risen from 36bn in 2010 to 49bn in 2016 to 56bn in 2017. That’s a 7bn increase this year alone – and somehow the ~722mn increase we get per year is supposed to account for this?
I’ll wait until the full 2016/2017 document is published but this argument seems pretty thin
If you really think companies are run for shareholders you are living in cloud cuckoo land
I’ll ignore all the rest for that reason
Lol, what? Why do you think people start companies? For the good of mankind, or to make money?
The entire reason some people get investors for investment in the first place is so they have initial funding to grow their project, at the expense of having a duty to the shareholder to return as much on their investment as possible… and why do you think investors exist? Because they just want to see the economy do well and give them a big fuzzy feeling in their heart? Obviously not, they want to make as much money as possible (unless they invest in family projects, in which case yeah, but most investors do not do that).
Also you didn’t respond to the bank point, which I feel is important considering it frames the opening of your argument.
Go on
Show me law that requires profit maximisation
Tell be too how you know you’ve done it
I know you can’t do either
So stop wasting my time with your fantasies
Richard, I didn’t mean from the perspective of the state, I mean from the perspective of the companies. There is no “law” that requires profit maximisation but that is obviously why companies exist, to make as much profit as possible.
I didn’t say there was a way for companies to know how they’ve maximised their profit but it’s obvious that if you have lower corporation tax, they will have higher net profit which can then be shared between the shareholders.
I didn’t mean with public companies alone, I’m also talking about private ones where there are less shareholders but they want to make as much profit as possible, that is why they invest.
No it isn’t
There are charities that are companies
And social enterprises
And those that simply hold property in common
There are also those who do it as a way of making a living that fits into a life style
Whilst multinational corporations satisfice shareholders and maximise returns to directors – which is very obviously tolerated by capital markets
You are, very simply, wrong
There’s no law that says you shouldn’t jump off a cliff. Some things are so self evident they don’t need laws.
There’s no law that makes runners want to run faster nor any way of knowing if they have run as fast as possible. Yet people do try to do this.
It seems sometimes Richard as though you live your life untroubled by reality. I suppose that’s why you retreated into academia and theory.
I teach reality
There isn’t a company that maximises profit
None would know how to
They may do their best, subject to limited resources and social judgements on acceptable behaviour but maximising does not happen
What is more it can’t. Even suggesting it creates demands for compromise e.g. Short v long term, that mean the outcome is compromised and uncertain
I am talking reality
On your point 3, there’s a fun graph here https://twitter.com/n_srnck/status/862667307356745729
Neat
Thanks Nick
You have been much mentioned in the last two days: I hope your ears were burning
Richard