Company tax debate rages… in UK

By Leith van Onselen

Just like in Australia, there’s a ferocious debate taking place in the UK over whether the company tax rate should be slashed in a bid to spur investment and jobs.

The debate centers around Chancellor George Osborne’s proposal to cut the UK’s company tax rate to below 15% (from 20% currently) in order to show that the UK is “open for business” in the wake of the Brexit vote:

“We must focus on the horizon and the journey ahead and make the most of the hand we’ve been dealt”.

The Chancellor wants to focus on generating investment from China as well as ensuring support for bank lending…

Mr Osborne already cut the UK’s company tax rate from 28% to 20% in 2010.

Critics have lined-up against the proposal, fearing that it will crush Budget revenue, increase the deficit, and erode important public services and investment. From The Independent:

“I think there is this kind of confusion between wanting a competitive economy and saying the way we get it is reducing the rate of corporation tax. I think that is just a mistake” said John Van Reenen of the London School of Economics’ Centre for Economic Performance.

“The way you get a productive economy is changing the fundamentals. You get your people to be more skilled, or you have your infrastructure working efficiently. You’re never really going to get there just by reducing corporate tax”.

…the Treasury’s model [of the company tax cut] does not assume the increase in GDP and boost to tax revenues is large enough that rate cuts end up “paying for themselves”.

And the Institute for Fiscal Studies estimates that the Chancellor’s corporation tax cuts over the past six years mean tax revenues are now lower by around £10.8bn a year (in 2015-16 terms) than they otherwise would have been.

ScreenHunter_14048 Jul. 15 08.38

“There are lots of spending decisions for which this money could be utilised” said Simon Kirby, head of economic modelling at the National Institute of Economic and Social Research.

“[They say] this has long-run positive growth implications because we get more investment. But lots of things have long-run positive growth implications, be they investment in infrastructure, investment in education and training and so on. And that’s what you should be comparing it to”…

Larry Summers, the former US Treasury Secretary, writing in the Financial Times, has suggested that previous corporation tax rate reductions by the UK and other nations, seen as an element of an elite-focused policy agenda, had been partly behind the rise of popular disaffection with established political parties, which helped deliver the Brexit vote.

“Tax burdens on workers around the world are a trillion dollars or more greater than they would be if we had a proper system of international co-ordination that identified capital income and prevented a race to the bottom in its taxation” he wrote.

The debate over company tax in the UK is eerily similar to that raging Down Under, where 2 in 3 economists believe that Australia would receive a bigger economic growth dividend in the long-run by spending on education than offering an equivalent amount of money on a tax cut to business:

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We too have witnessed a veritable conga-line of commentators questioning the company tax cut, including:

Bottom-line: cutting company taxes in isolation is spurious “trickle-down” economics, and there are far better uses of scarce taxpayer funds.

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Comments

  1. “Critiques have lined-up” – if that was a joke it was a good one!

    Osborne has form on these sorts of tool bag ideas and is just using any excuse to push the twisted agenda. It amuses me that he seems to have ignored that Brexit reflected a deep mistrust of the corporatized model of public governance, so he deserves to be made out to be a fool. There is a germ of an idea lurking in his twisted logic though. If tax cuts were made to personal income tax and/or VAT then the increase of disposable income in many hands would promote a demand boost to the economy. This would feed the corporate beast with increased profits so tax cuts are not such a bad idea in the right hands. A tax cut to corporate tax would just funnel itself into capital – trickle down is a myth.

  2. I assume the UK doesn’t have the issue of sending the tax cut benefit offshore to the extent that we do though?

    Not having a go but sincerely looking to have someone debunk the following which suggests (with no significant foreign leakage) that company taxes is effectively taxing households?:

    “Ask yourself where businesses get the money to pay taxes? There are three possible sources; through higher prices, by paying their employees less (than they would if a tax didn’t exist), reducing the return to business owners or a combination of all three.

    So if you buy goods and services, if you earn wages or have ownership in a business (either shares or through your superannuation funds ownership of businesses) then the taxes businesses pay are being funded by you. And that brings me back to my point, in the end taxes are paid by households.”

    https://www.linkedin.com/pulse/careful-what-you-wish-funding-brisbanes-cross-river-jeff-lassen

    • There are other ways the money disappears: internal transfers in multi-national corporations (i.e., local branch of big company is set up as “licensee”, wholly owned subsidiary, but remits license fees back to headquarters and a million variations on this). Also, rich countries tend to get much higher retail prices from these organisations so the profit margins are much higher in places like Oz and the UK, which is leaked back to the parent company in ways where taxation is completely avoided.

      It’s not as simple as saying “the consumer always pays the tax anyway” because local consumers are not always the main source of revenue – Rio Tinto exports a lot of dirt for example, the activity takes place in Australia but the customers are overseas.

      • Thanks UteMan. Both salient points but I suspect not significant enough to carry the day? If the transfer argument holds and this is the position currently then a new tax cut would likely reduce pressure on those households who are actually, currently paying the company tax in question and this might be a good thing. RE: RIO situation this might give a break to overseas customers via the same mechanism but again a cut may still yield net benefit to the aussie economy as a whole as the bulk of domestic taxpayers(households) get relief?

        Surely this mechanism as described does not hold? Competition should set price and profitability? Businesses that optimise their operations against the operating environment (rather than tax regime that applies to all) should do best and those that overpay owners and fail to re-invest into the business should lose out in the long run? Households should pay the optimised price and a choice of taxation is just an ideological, distributional choice to take less money from one group rather than another? With no net impact. I’m confused.

      • That’s kind of a backwards way to look at it.

        It’s better to start from the other end. The cost of doing business in a politically stable, safe, modern economy with good infrastructure and highly trained employees is naturally higher than doing business in an emerging economy. The higher taxes pay for all those nice things.

        If you are largely a retail company importing into (or based in) Australia relying on private consumers, sure, you could say those consumers end up paying the tax as reflected in the base pricing of your widget or service. On the other hand, if you are exporting, that doesn’t apply whatsoever.

        It’s specious to suggest that taxes should be lower for companies because local consumers get slugged more. We get slugged more because companies can charge more here because we are rich, it has little to do with our taxation regime. Drop the tax rate and the company would merely pocket the difference because competition is largely illusory in most major markets for consumer goods in Australia. The proof of that is in the prices we pay for things like mobile phones. Drop the tax rate for exporters and overseas consumers get all the benefit and we get nothing.

    • adelaide_economist

      Part of the complexity is alleviated for sure if you assume away any external links (although of course you’ve already lost connection with reality in Australia’s case, which is – frankly – pretty shitty of the economic consultant to leave out but entirely expected). But really the foreign angle is just drawing a larger circle around the bigger issue of distribution.

      It’s kind of a truism in undergraduate university economics textbooks that ‘a tax on capital is a tax on labour’ and this is easily shown in simple models. Where it comes undone (even without an ‘external sector’) is that it boils down to a whole range assumptions about capital and labour. The big one is often that all returns to capital are reinvested which simply defies belief.

      The models also ignore distribution issues. Is society actually getting an ‘optimal’ return from having 0.1% of the population ultimately owning 99.99% of society’s wealth? The model (by remaining silent on it but implying it given we live in the real world) says yes. You would need to overlay the ‘benefit of avoiding revolution’ which would justify some adjustment to the simplistic ‘don’t tax capital’ argument if you were being truly ‘rational’ and ‘optimal’*

      * not withstanding the huge diversity of views on the optimal distribution of welfare in society.

      Edited to add this link: The actual article is a brief summary of why ‘capital tax is bad m’kay’ but the real gems are in the comments section.
      http://econlog.econlib.org/archives/2013/03/redistributing.html

  3. There you go you are off the rails in your first line
    Just like in Australia, there’s a ferocious debate taking place in the UK over whether the company tax rate should be slashed in a bid to spur investment and jobs.

    How will cutting the tax rate spur investment and jobs???? Ratshit logic UE !

    • UE is just stating the argument made for it, no matter how daft and illogical it is. UE is certainly not in favour of it as is apparent if you read right to the end.

      • CB explains:
        China-Bob July 15, 2016 at 10:01 am: Over the last 30 odd years I’ve plied my trade as a techno-whore on 4 continents so I can say with some confidence that although the local faces and the local rules may change, the end game always remains the same.
        From my limited experience in Australia this is what the wannabe players just don’t understand, it’s not about how well you play the game but rather how well you finish off each chapter of the game.
        In Australia I had the hardest time selling this concept to would be employees, they all thought I was trying to scam them, everyone wanted salaries that were simply unsustainable for any startup venture with zero revenue, making it easier in the end to just move the whole project development elsewhere. The point that they simply couldn’t understand is that the market Value of any startup is a function of it’s growth whereas to pay high salaries you need good solid net positive cash-flow which is a function of Revenue and margin. Personally as a manager I will always maximize Growth in a Startup. For an End-Of-Life (EOL) business I’ll definitely focus on maximizing Revenue and margin, unfortunately EOL is the only business model that most Aussie know and that’s the real problem. Before I left Australia I tried to create some real ground floor startup opportunities for serious growth with great exit options, the key personnel were all focused on the initial revenue (or lack thereof), I lost count of the number of times I said forget about the revenue, look at the market, look at the opportunity, look at the team we can put together, look at the skills we’ll have, look at the exit valuation when we succeed. They listened politely and then pointed out the lack of revenue, at which point I told them all to go back to their EOL jobs and EOL lives.
        REPLY Wiley Wolf July 15, 2016 at 10:16 am
        Exactly, this is why the Nation will cascade into some state of “dishevelment” until the circuit breaker resets Banana Republic,will be paradise compared to the outlook on the way down..

  4. Stephen Morris

    Surely that should be former Chancellor George Osborne.

    p.s.

    When dealing with psychopaths, it is a common mistake to take their words at face value. Two of the characteristics of psychopathy are superficial charm and accomplished lying. This is how they win over their victims.

    When they say they want to reduce company tax to improve productivity that doesn’t actually mean they want to improve productivity.

    They want to reduce company tax so that they and their Mates can be richer. But one can’t just say: “I want me and my Mates to be richer”, so one needs to think up some pretext that will gull the gullible.

    It is a common mistake to assume that adversely selected aggressively narcissistic, machiavellian political agents are like the “rest of us”.

    They are not.

    To debate these issues as if they were is already half-way to conceding them victory.

    • adelaide_economist

      “Surely that should be former Chancellor George Osborne.”

      Came here to say the same thing. We shall see how Philip Hammond approaches the issue.

      And just like Australia, it’s telling that Osborne was prepared to threaten the UK with additional austerity if they chose Brexit *at the same time* as trying to push big new corporate tax cuts.

    • adelaide_economist

      I suspect Corbyn would happily do so but given he’s already under sustained assault from the Blairite members of the party over Brexit I think he’s more or less paralysed at this point.

    • Corbyn is a lame duck.
      Actually, he is worse than a lame duck. He is a lame duck infested with parasites. If the Labour party membership is so stupid to vote for him in the up coming ballot it will cause a party split which will render the Labour party dead and leave the Tory party the major “left wing” party as UKIP will become the opposition after the next general election.

  5. It shows how well Brexit is working out for them that they need to become “Ireland” to attract business. The country will be in recession before the end of the year.

    • Stephen Morris

      It is commonly overlooked that until the accession of the eastern European countries Ireland was the biggest per capita net recipient of EU funding. It was the huge EU subsidy which initially allowed Ireland to lower its company tax rate and evolve into a tax haven.

      It is also interesting to note that Ireland is the only member of the EU with a constitution requiring a referendum to approve any changes to EU treaties. Accordingly, the EU treats Ireland very generously. On two occasions, EU treaties have had to be modified specifically to overcome Irish resistance after being defeated at a referendum.

      If other EU members wanted to improves their negotiating positions, what constitutional change should they make???