Should we just give up on corporation tax?

The fuss about multinational companies paying no tax in the UK makes perfect sense.

I wrote here a few weeks ago about how, thanks to the fact that modern money accrues mostly to intellectual capital, we are gradually losing much of our tax base. Losing tax revenues is never a happy thing for a state, but it is a particular problem for a country such as ours with an expanding welfare state and a seeming inability to cut spending to anywhere near income.

When I interviewed Douglas Carswell MP a few weeks ago, he suggested that there is no solution to the problem: there is no way to tax the profits of the multinationals, so we might as well give up and work harder to cut our cloth to suit our circumstances instead.

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There is a good case for both parts of this but also a case for thinking that if we were to give up, our circumstances might not be as dire as all that.

A reader emailed last week to make the case for companies (who let's not forget, don't get a vote) to pay no tax at all. If we had a nil rate of corporate tax, he says, "I wonder how many foreign firms who are looking for assembly factories or even operations in Europe would flood into Britain?" They might not pay direct taxes but "all their employees would pay taxes, they would rent offices, they would create jobs in the local economy", and all their UK shareholders would pay the usual dividend and capital gains taxes in the UK. (It is worth noting with that in mind that the 10% dividend tax credit in the UK recognises that corporation tax and tax on dividend payments are effectively the same thing.)

Add all this up, says our reader, and "I rather expect it would only take four or five years before that figure was far surpassed with the growth and the personal taxes thereon which this country craves." This all makes some sense after all, our aim here is not specifically to get tax from companies, it is to finance our state (albeit preferably a smaller version of our state). We need to do what works.

And if we don't do this, what do we do? We could perhaps put a flat fee on companies operating in the UK. As long as they pay some kind of charge that we think reflects something of their profits every year, we let them be (think of this a bit like the £30,000 or £50,000 we charge non-doms every year to be left alone). We could keep on with the naming and shaming. Or we could chuck a pile more money at HMRC to have a go at getting companies to pay more.

But none of these will really work. The first is too random. The second is too boring and, as Michael Devereux points out in the FT today, it could also "undermine the integrity of the tax system" - if people are constantly told that other people are not paying their fair share, they are less likely to feel inclined to do so themselves. And the third? Fine as far as it goes, but it addresses the wrong problem: most big companies are abiding by the law perfectly well, so putting HMRC on their case will make no real difference.

Anyway, in the end it might not matter what we want to do. We have already slashed corporation tax in our efforts to stimulate the economy (to 22%) and it may be that over time corporation tax might, as Devereux puts it, simply wither away "as governments compete to reduce rates without finding the political will to reach a better long term solution to the allocation of international profit".

PS If you want to discuss any of this in person or anything else for that matter click here and you can bid to have lunch with me. It's for a very, very good cause the Global Fund for Children. And at the moment it is also a bargain (well, I think so anyway)

PPS If you think that raising taxes is a better way to increase revenues than cutting them, you might look at the Times today. It notes that in the first year of the 50% income tax, the number of people declaring an income of over £1m fell from 16,000 to 6,000. And since we introduced a new 7% stamp duty on house sales over £2m? You guessed it. Sales are down 30%.