Slash corporation tax to boost wages

Apart from in the US, where they are still ridiculously high, corporation taxes have been coming down across the world. But it is Britain that has reduced them most aggressively. The former chancellor, George Osborne, had already cut the main rate from 28% to 20%, and it is scheduled to drop even further to 17% in the next couple of years. In the wake of the Brexit referendum, Osborne, in one of his last moves as chancellor, pledged to cut that again to 15%. That will be by far the lowest rate of any major economy, and only just above tax-haven rates.

Perhaps inevitably, the left will tell you that is a terrible idea which is why Labour politicians such as Owen Smith, in his campaign for the party leadership, have promised to put the corporate rate up again. To them, the money is just going to wealthy shareholders, and to greedy corporate bosses and not to the state, which could then spend it on helping ordinary people.

But here is a surprise. In fact, corporation tax cuts will benefit workers most and manufacturing workers more than any other group. Not convinced? Take a look at the research carried out over the last decade by the American Enterprise Institute. It has shown that, although they might be levied on companies, corporate taxes are in the end mostly paid by employees. How so? Well, we already know that sales taxes end up being paid by consumers, so it should be clear that corporation tax is ultimately paid by the workers, and not by the company itself or its shareholders.

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The mechanism is that higher taxes reduce the return on capital, and so encourage firms to move production elsewhere. Over time, that reduces productivity and so, in turn, the compensation of relatively immobile domestic workers who are left behind. The company will take off somewhere else where the taxes are lower, but it is hard for the staff to do that, so they will end up earning less than they otherwise would so they are the ones who ultimately pay for the tax through lower wages.

There are plenty of empirical studies to demonstrate that happening in the real world. In the US, Switzerland and Canada, for example, corporate taxes vary by state, canton, or province, so it is not that hard to measure their direct impact on returns on capital and ultimately on wages as well. In Canada this year one study has shown that, for every dollar corporate taxes go up, total wages go down by almost exactly the same amount. Studies in America and Switzerland have shown the same thing.

The process works in reverse as well. Lower corporate taxes increase the return on capital, and so increase capital spending, and therefore increase productivity. They also attract more companies to a country or region, and so increase the competition for a given number of workers. Both higher productivity and more competition should give wages a powerful boost.

Low pay has been one of the major problems with our economy over the eight years since the crash. Our ability to create jobs has been fantastic. The deficit has come down to more manageable levels. The start-up rate is better than ever. But the one big negative has been that real wages have struggled to keep pace which is one of the main reasons why ordinary people are not that impressed with the recovery.

Once the 17% and then the 15% rate comes into force, our hyper-competitive corporate tax should attract a lot of industry to this country. But more importantly, it should finally get wages moving up as well. That may not have been what Osborne intended but if it happens, it will be an important part of his legacy.