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.
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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.
“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:
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
