Truss claims that corporation tax cuts induce foreign direct investment in the UK.
This chart of FDI is from the World Bank:
The data is adjusted for inflation.
Tory tax cuts appear to have been an abject failure on this criteria, one freak year apart.
Maybe we should go back to Labour's rates? They seemed to work if tax is the driver of FDI.
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so let’s get this right..you think higher corporation tax rates encourage overseas companies to invest in the U.K.?
Yes, because that delivers better infrastructure, rule of law and better trained people who have a social safety net
Great things companies look for
BOOM. One sentence that says so very much. It goes to the heart of what a country should be and what a Government should be doing. It’s the easy answers that carry the weight. Thank you.
Possible exception is film industry, who demand tax cuts to get foreign productions made here.
As I recall, the Japanese car makers & chip makers (Silicon Glen) were attracted by UK investment (bribes) and UK’s membership of EU (EU trade barriers).
film industry an exception as they tend to bring all their crew and actors with them, relying only on a small number local workers for marginal roles (location,drivers,hospitality) and for a short period of time. Most films are only on location for a matter of weeks, while longer tv series can be up to a few years they are far and away the exception.
Largely untrue. Films made in the UK use majority UK workers, the exception often being the talent. The film companies also use UK facilities (studios, post production facilities, camera hire, caterers, security companies etc etc). Not only that but the film budgets are much higher than locally produced television.
Sony arrived in the UK with its TV factory in Bridgend in the 1970s when tax rates were +80%? A TV tube factory was built in the early 1980s (when rates were still high). However, even back then transfer pricing and the use of “consultants” (= Japanese personel working for the factory at consultancy rates) meant that by the end of the 1980s, Sony with a turnover of circa £400m in the Uk paid exactly zero taxes. Rationale for both developments: tax breaks, UK subsidies and membership of the EU.
Fast forward to 2003 & Sony built a flat panel TV factory in the Czech Republic – cheaper labour – I have one of their screens by the way (& indeed used to own one of the last CRT televsions out of the Bridgend factory). The Bridgend factory closed in the 2000s.
Moral of the story: corporations are at best fickle creatures. FDI has little to do with tax rates. I have no doubt that if the Russia – Ukraine war ends & Ukraine looks to be a good prospect, Sony et al will move there.
PS: for those from Japan – I ain’t anti-Japanese but please don’t pretend that you are good corporate citizens – you go where the money is – always have – always will.
Most companies put tax at about 5 or 6 on their priority list when it comes to location
I have heard that time and again
Same old broken economics from the conservatives as usual. Low tax somehow high growth and zero quality of life economy.
I fear we are losing the battle on interest rates. The Fed is digging it’s heels in on the entrenched expectations narrative and Lagarde stood there today and refused to forecast a recession for next year. The hawks at the BoE may see this as some sort of cover for more hikes. So economics goes out of the window and central banks have to be seen to be doing something. Very independent
Richard
Claims about FDI flows need careful treatment. How much is genuinely foreign rather than UK origin capital that has been round-tripped via tax haven structures? How much is invested in new productive capacity rather then merger & acquisition of existing capacity leading to greater concentration / monopolisation, etc? How much is heading into the real estate markets, inflating asset values?
Much of the inward FDI flow is rent-seeking in nature, yet HMG want to encourage this by throwing tax breaks in its direction and lowering the CIT rate, which is beyond clueless . .
Keep up the good work.
jc
John
I agree with all that – but whatever the reasons for FDI, tax cust don’t appear to have worked
Richard
A little like Dominic Raab being unaware of how much trade comes through Dover, I once heard an amusing anecdote about a politician who had not realised how much foreign direct investment comes from Luxembourg (!)
I’ve never understood why there seems to be a common belief that reducing corporation tax encourages investment. FDI aside (I think Richard’s response to “Paul Merson”, above, was a better reason than I could consider), if you want companies to invest in either infrastructure or human capital, high CT rates would be the nudge factor, encouraging companies to use those profits improving the company (since CT is paid on profits after expenses and investment) before having to hand any over to the treasury, would be common sense? Or am I totally wrong here?
I agree with you
I was at a pharma/biotech event a few years ago and Sir John Bell, he of we don’t need access to the EU Horizon science program, and around the time he wrote his 2017 Life sciences: industrial strategy report for the government, was banging on about low tax regimes to attract and grow pharma and biotech. Notably the next speaker, a major US figure in the industry, pointed out that taxes, as Richard has stated, are very low on the list of priorities, and the things Richard mentioned earlier were much more important. Doubt Sir John felt as sheepish as he should have.
I set up a manufacturing company in India when corporation taxes were 30%. In the first years of most startups you don’t make profits anyway, and often losses can be offset against future tax, so from an accounting view point the tax rate prevailing was not a go/nogo issue. What was far more important for us was the long term revenue and profits we would make, as well as growing with a market that we could see was about to take off in a big way. I am pleased to say the company is now profitable, but even now tax has fallen to 22%, it is our growing market share and the innovation talent in R&D that is the real prize, not 8% less tax, over which we have no control anyway.
The UK will always be an attractive place for FDI – provided we don’t have idiots running the government. The current bunch seem to think the Laffer curve has some credibility. That says everything you need to know about their understanding of economics.