9 reasons why George Osborne was right about cutting corporation tax
13 July 2016
George Osborne, the now former Chancellor of the Exchequer, went down fighting for the UK’s business agenda. He was recently in New York, spreading reassurance that the UK is not “withdrawing from the world”. Was this a “Norman Lamont-style singing in the bath” moment? Despite campaigning to Remain, Osborne was not slow to seize the opportunities that Brexit presents for the UK to become more competitive on corporate taxation. His aspiration was a 15% corporate tax rate, and “preferably lower”. Here’s why that could be a really good idea.
Osborne’s pitch was ostensibly to large corporations in US and Asia, but the veiled threat to the EU27 will not be lost on them: something along the lines of ‘we need a good deal in the Brexit negotiations or we will put a very large tax haven 20 miles offshore’. Cutting corporation tax is a delicate topic within the EU. Indeed, it was suggested by some parties that Ireland should increase its corporate tax rate as a condition for its financial bailout in 2010.
However, cutting corporation tax is an economically sound idea, as well as a politically appealing one. We would go further: here are 9 reasons why the UK should consider becoming the first major economy to cut corporation tax to zero:
- 1) Corporation tax does not apply to sole traders or partnerships: it is effectively the cost of limited liability. Therefore, it can cause business to incorporate when it may not be in their best interests to do so.
- 2) The tax deductibility of interest encourages debt financing and leads to over-leveraging of companies in risky sectors.
- 3) Abolition of corporation tax would lower the cost of capital and thus encourage marginal projects to be taken on that are not currently worthwhile.
- 4) The issue of double taxation: the company is a legal fiction owned by shareholders. The company pays corporation tax, and then the shareholders are taxed on their dividends. A more sensible way would be to tax the shareholders more and the company less.
- 5) Studies suggest that the incidence of corporation tax falls almost entirely on the staff via lower wages: various studies have put the proportion between 45% and 92%. If the level of wages rose as corporation tax fell, much of the lost tax revenue of corporation tax would be replaced by increased income tax revenue.
- 6) Corporation tax is also regressive. While small companies are invariably hit by the tax, the big multinationals seemingly skate around it. Furthermore, the relative costs of compliance are proportionately greater for smaller companies than larger ones. Similarly, a person with a small equity pension is paying the same corporation tax rate as a multi-millionaire heiress.
- 7) The money that large companies invest in avoiding corporation tax could be put to more productive use. The same is true of the money that is spent on self-interested tax lobbies.
- 8) There is a range of estimates, but around 8% of corporation tax goes unpaid. This tax evasion is apparently 15 times more expensive than benefit fraud in the UK.
- 9) Corporation tax has also fostered the over-distribution of income as dividends, thus reducing the funds available for reinvestment in the company.
Of course, there’s no easy way to administer an alternative tax and corporation tax is popular with the electorate who see it as taxing the faceless corporations and ‘fat cats’. It may give rise to numerous companies that are little more than a name plate making no contribution to the economy, and it may be possible for people to register as companies to avoid paying income tax; but there are a number of good points for the new Chancellor of the Exchequer, Philip Hammond, to consider if he does continue to cut the corporation tax rate.
Were the UK to eliminate corporation tax, then there is a good chance that there would be an influx of companies into the UK. Ireland offers a ready example of the responsiveness of international business to a favourable tax environment. Cutting corporation tax is also a good way to disincentivise international relocation. Post-Brexit, the UK still has a strong hand in the poker game of international location – decent infrastructure, the language of business and education, a skilled workforce, the time zone, a respected legal system, as well as rich cultural landscape. Add in the lowest corporate tax rate in the developed world, and we are on to a winner.
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