Scrap the modern-day beard tax

Corporation tax makes it too easy for big banks to wriggle out of paying their fair share, says author David Craig. The good news is we already have the answer.

Recent revelations about the amount of money our big banks make, and how little tax they pay, have many ordinary taxpayers fuming in impotent rage. But nobody has questioned whether corporation tax is still the best way to make companies pay their share of national income.

Any tax has a limited useful life for a time it will raise revenue. But most taxes outlive their usefulness because people change their behaviour in order to avoid them. In Britain, we've had many taxes that have come and gone.

There was Henry VIII's beard tax, introduced in 1535. Avoidance was easy you just shaved off your beard. In 1662, Charles II brought in an early type of poll tax, the hearth tax. It was considered too difficult to count how many people lived in each house, so instead the tax was based on the number of chimneys per property. The result was that enterprising citizens started combining several fireplaces into a single chimney. A few hundred people are thought to have died in the ensuing fires. In 1696, William III brought in a window tax, which led many householders to brick up some of their windows. The year 1795 saw the introduction of a tax on wigs and wig powder. Result: wigs became less fashionable. And around 1800 the government started a hat tax. Each hat had to have a stamp sewn into it to show that it was legal. The penalty for forging these stamps was death, which might give some people odd ideas about how to deal with large companies which avoid tax.

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Corporation tax came in with the 1965 Finance Act. Prior to that, companies and individuals paid the same income tax, with an additional profits tax levied on companies. And now, perhaps, like so many taxes before it, corporation tax is getting past its sell-by date as companies become increasingly international, they find ever more ways to avoid paying.

During the Gordon Brown boom of 2000 to 2007, corporation tax on small companies shot up by more than 130%. But at the same time, even as their profits and bonuses soared, financial services firms only paid a modest 27% more tax. Our largest, usually international, companies handed over just 5% more.

Banks, larger companies and, of course, rock stars, employ a bewildering variety of methods to pay as little tax as possible. And when they do pay tax, it's usually in a country where tax rates are minimal.

Chancellor George Osborne has proposed to cut corporation tax very slightly over the next two to three years. But he could be missing a trick. Maybe it's time for corporation tax to go the same way as the taxes on beards, hearths, wigs, windows and hats. As it currently works, corporation tax has an immensely destructive effect on our economy.

Corporation tax places an unfair burden on smaller companies. It encourages financial firms and larger companies to move their profits and sometimes even their people out of Britain. And it makes it advantageous for financial manipulators to borrow huge sums of money to buy productive, tax-paying companies so that they can extract enormous payments for themselves while using the interest payments to minimise the amount of taxable profits. Takeovers at firms such as BAA and Cadbury have made their acquirers wealthy, while slashing our government's tax receipts.

If we are to deal with the deficit and create growth, we need to scrap corporation tax completely. Instead of corporation tax, we should have a transaction tax on all business activities carried out in Britain, regardless of whether the company claims to be based in Switzerland, Bermuda, Ireland or the Cayman Islands. The good news is that we already have that tax it's called VAT. Instead of fully refunding VAT to businesses, the government should get rid of corporation tax and replace it by retaining the necessary amount of VAT. Financial firms should also pay a similar transaction tax rather than corporation tax. This would greatly reduce their ability to avoid taxation.

Binning corporation tax would have quite a few almost miraculous benefits for our economy. Firstly, it would make tax avoidance almost impossible, as the government would already have collected the money. Secondly, there would be no need for companies to play all sorts of games to shift their profits offshore. Moreover, there would be a huge incentive for our companies to stay in Britain and for many thousands of foreign companies to move their bases to Britain, creating hundreds of thousands of well-paid jobs. And finally, of course, the practice of buying companies while loading them with massive debts would no longer make sense for financial predators.

It's simple. Scrapping corporation tax would be the most imaginative and beneficial act that Osborne could ever undertake. It's a pity that today's politicians are lacking in the necessary imagination.

David Craig is the author of Pillaged! How They Are Looting £413 million A Day From Your Savings & Pensions And What To Do About It (Gibson Square Books £8.99).