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.