Time to abolish corporation tax

Any time a politician suggests cutting corporate taxes, they are met with a barrage of protests, and not just from the left. They usually back away. But here is something odd. In Switzerland this weekend, there is a referendum on a major overhaul of its corporate tax system that will see the amount firms have to pay slashed by ten percentage points or more.

Switzerland, of course, has always been a low-tax corporate base. But it achieved that with lots of concessions and allowances, rather than a low headline rate. Under pressure from the European Union and the OECD club of rich countries to simplify its system, it has now come up with a sweeping package of reforms, implementing low tax rates across the board. They will still vary slightly canton by canton, but in some rates will come down as low as 12% or even less. That will make it one of the lowest-taxed business centres in the developed world.

The opposition is wheeling out all the arguments you’d expect. It will hit revenues too hard, it will force cuts in spending, it’s not fair on middle-earners and it will only favour the rich. But the poll looks likely to pass – by 51% to 35%. How did they manage that? Simply by making the case that the country needs low rates to remain competitive. And if it works in Switzerland, it can work here too. The arguments are simple.

First, in the wake of the EU referendum, and with the UK heading out of the single market as well, Britain needs to re-establish its competitiveness in the world. Market access is important for business, but it’s only one factor among many that they take into account when they decide where to base themselves. Over the years, lots of firms have moved to Ireland because of its 12.5% corporate tax rate – but London and Manchester have more going for them than Dublin and Cork.

Next, it is a relatively pointless tax anyway. Corporation tax is ultimately paid by the shareholders, the staff or the customers, and usually by some combination of all three. If corporate taxes are reduced, then the company is not likely just to sit on the money. It will pay out higher dividends, higher wages, lower its prices, and probably invest more as well.

Indeed, there is some interesting academic evidence emerging that the lower corporation tax feeds most dramatically into higher wages, especially for relatively lowly paid, unskilled workers. And if you want higher taxes on shareholders, or on customers or workers, then just take the money off them directly – it will be more efficient and more transparent.

True, corporate taxes are already relatively low in this country. From 28% when the Conservative-led coalition took power in 2010, they have already been reduced to 20%, and the plan is to take them down to just 17% over the next three years. That is far lower than the rate across most of Europe – across the Channel in France the rate is still 33%. But there is no room for complacency. In the US, Donald Trump is planning to slash the rate to 15% – one of his very few good policies. There is no reason why the UK shouldn’t match that, and then go a step further.

Why not take the headline rate down to 10%, making it the lowest in the developed world? Over time, we could set a target of abolishing it – after all, below a certain level, it may no longer be worth the hassle of collecting, and a zero rate would send out a very powerful signal that Britain was the most business-friendly country in the world. That would encourage a lot more companies to move to the UK, and to invest more once they were here. Lower corporate taxes are one of the few relatively simple moves we can make to ensure business still wants to base itself in the UK after we leave the EU.

  • J Hobson

    Oh great, a race to the bottom, the utter destruction of the welfare system, NHS and education. What’s not to like?

    • isidoreofseville

      The money doesn’t vanish. Less of it is confiscated by the vast and obscenely wasteful government machine, and business is freer to generate more of it.

      • EarthCitizenNumberOne

        Or the likes of Philip Green, Richard Branson, Alan Sugar (in no particular order, or reason) to pocket more of it making them mega-billionaires. Of course the bankers and financiers and producers of luxury yachts would be ever grateful for their largesse. As for workers on zero hours contracts, they will continue to toil away for a pittance plus 1p.

    • smspf

      The current government are clueless and the extent of their profound cluelessness is shocking to observe.

    • For every £100 a government spends it gets about £90 back in taxes and about £10 ends up as increases in private saving.

      For any positive tax rate.

      Because if one entity doesn’t pay tax, then the next person in the spending chain tends to.

      The total tax take has very little to do with the distribution of the tax take. The chancellor has control only over the latter and not so much the former.

      • That’s the thing – it’s easy to wax lyrical about how great Switzerland’s low tax economy is without mentioning what life in Switzerland is actually like. Being ex-Pharma and having worked for both of Switzerland’s two biggest pharma companies, I can tell you it’s an eye-wateringly expensive place to live. If wages have gone up for the lowest-paid, it’s probably only because costs of living are so great. I doubt they’re materially better off than low earners are in most Western countries.

        That’s the thing you’ve got to remember – despite all the talk of Swizerland being a libertarian’s wet dream, its state is not especially small and if the corporations aren’t paying tax, that tax burden has to fall elsewhere. In fact, my cousin is living the libertarian dream out there right now, working for GE. Last year he fell off his bike and fractured his skull. He had to pay a 7,000CHF fine, even though he’d slipped on someone else’s spilled diesel. How wonderful life is when the nanny state has been demolished, eh?

  • Christopher Cantrell

    With governments being so incompetent at collecting it and the expense of failing to do so, it’s probably the best solution. The additional money finding its way into the economy without being diluted by inneficient government infrastructure will make more of a difference.

  • smspf

    the ONS reported on >rising< UK deficit levels in its January report, the reduction of a n y taxes, be it for corporations, on dividends, in VAT, in council tax (grin) etc, are pure, 100% communist pie in the sky free money tree daydreaming. Taxes are rising. Everyone, whether an employer in business or the man in the pub can see how taxes are rising. Moving on swiftly…

    • Peter Edwards

      Nothing wrong with a rising tax base as long as it is progressive.

      During world war 2 and up to 1954 the american higher rate of tax was more than 90% there was never a time of greater technological innovation.

      Then the right came up with their dubious theories of trickle down economics a theory what would have had Adam Smith turning in his grave.

      And now today if we double down on tax cuts for the rich everything will be just fine….

  • Perhaps a more appropriate solution is to change the tax code so that the taxation base of all corporate bodies follows that of limited liability partnerships.

    The profit of a company should be ascribed to its members and taxed accordingly, with the company paying a simple withholding tax on the declared IFRS profits.

    Then like PAYE, VAT and the myriad of other taxes the company is not the entity being taxed, but it is the entity that does the collection.

  • Some of these points might be fair, but I have fairly serious doubts about others. I think dropping corporation tax might be an effective way to buffer the economy from the likely shock of Brexit, which we’re still some way from actually feeling (everything we’ve experienced so far that isn’t currency-related is either confidence or a lack thereof).

    Aims of competing with Ireland on tax grounds may founder on the Brexit sholes, too. Yes, London and Manchester may have more to offer than Dublin and Cork, but pretty soon Ireland is going to take our place as the premier English-speaking gateway to the Single Market. Just how big a corporation tax discount will it take to compete with that?

    I think it’s also an unsound assumption that lowering corporation tax ever closer to zero will result in more and more growth in the economy. I suspect there will be a point below which further decreases don’t equate to a boost for the economy and become counterproductive. The big problem is that in theory, allowing companies to keep more of the spoils means they can invest and expand, employ more people. In practice, an awful lot of that extra money just ends up going to shareholderss or being wasted in top-heavy salary structures. That’s before you even touch on foreign ownership, which we have an awful lot of in this country. A reduction in corporation tax for foreign-owned firms will just mean greater sums of money being taken from the British economy and funneled overseas rather than being reinvested here. Wake up. We’ve got to be smarter than this simplistic free marketeer evangelism in a globalised economy. We’re competing globally and some taxation is key to stopping other countries getting rich off of us.

    The big problem at the moment, of course, is that so many firms are legally and effectively ducking corporation tax. Personally, I’d be in favour of dropping tax rates across the board by quite a bit, but via a radically simpler tax code that we would be very, very strict about enforcing. An economy is, at heart, little more than a healthy, educated and secure population. It’s only right and fair that companies doing business here should contribute to the creation and upkeep of the population upon which they depend and profit from. They’re competitive animals, though, and will resist any and all attempts to make them contribute, whether reasonable or not. We’ve got to stop selling Britain short. It’s a good place to do business and businesses should expect to pay a certain amount to do business here. They need us at least as much as we need them, so let’s stop kidding ourselves that they’re doing us a favour. We should set well-balanced and enforcable tax laws, and stick to them. This libertarian utopia nonsense just isn’t going to survive first contact with the real world – that’s why there are no libertarian countries.

  • Jeremy Smith

    What makes a country competitive is the productivity of its workers, not tax rates. The author keeps repeating the same line (over and over again) about taxation and regulation (in other articles)!
    Well, based on the Heritage Foundation UK is the most deregulated major economy in the world! How much more can you really cut the Red Tape?
    Low corporation taxes in Ireland has only been useful to American companies that shift profits out of EU countries. How many of the large European corporations have left their domestic markets for Ireland?
    Why would any of the American companies leave Ireland’s 12.5% for UK’s 10% tax?
    Moving costs money, and if USA cuts its tax rate the companies will have every reason to bring the money back to USA! Trump or no Trump, USA will not look kindly at British attempts to steal its tax base nor would Europe.

  • patpending

    Almost no chance of this happening despite it being the best move we could make. Regrettably, the self apparent fact that companies cannot pay tax only people can will be as popular and misunderstood as ‘there is enough money in the NHS, its just not used in the right places’. Taxing companies is seen as a way of getting back at the audacity of making money just as the NHS is seen as a religion.

    Most people do not want to get their heads around it so politically it is toxic. The populist press would have a field day.

    Whatever happens taxation will happen. It is just a question of where it collected and what effect it can have on investment and therefore productivity leading to increases in the standard of living.

    Given the complexity, avoidance and cost of collecting corporate tax it would be better to abolish it and see it moved more directly to the people who ultimately pay it anyway – investors, customers, staff.

    But as I say, almost no chance

  • 1jamessmith1

    Any one who believes that lower business costs such as corporation tax lead to higher wages is a fool who should be reading the Sun/ Star/Mirror. All that happens is that a few people at the top pocket the money or it is spent on needless fluff around the business.