Britain goes down with its corporation tax rates after Theresa May said the country will have the lowest rate within G20. Yet there’s also the US, where the new president Donald Trump aims at lowering corporation tax to 15%.
It’s expected that the Treasury will start a dispute on the matter. If other state taxes in the US are included, even 17% that the UK former chancellor George Osborne aimed at by 2020, will be a lower rate.
The largest question of the situation is whether lowering of corporation tax rate will rescue British business industry. Even after her unsuccessful Conservative Party speech, Mrs May still thinks it’s the best way. However, we still don’t know whether the businesses want the taxes to lower, not to mention Northern Ireland that has 12.5% to come. Of greater concern to them are some of Mr Osborne’s other legacies, notably the apprenticeship levy, which will raise more money from businesses than the former chancellor returned to them in his corporation tax cuts in his 2015 summer budget. Many companies are also far more annoyed by business rates than corporation tax.
If the aim of such measures is to encourage more recruitment, cutting employers’ national insurance contributions would work better than cutting corporation tax. Raising tax relief for research and development would encourage more innovation than corporation tax cuts. For the banking sector, corporation taxes represent less than a quarter of their total tax burden, with the banking levy costing more than corporation tax.
There is also a danger that cutting corporation taxes will increase public alienation with business. This was a concern flagged by respondents to a survey by PwC, the business services group, two weeks ago. Seventy-one per cent of companies questioned told PwC that the corporation tax rate was sufficiently competitive at 20 per cent or should not go below the 17 per cent planned. Most businesses wanted tax simplification rather than corporation tax cuts.
Such reductions also cost money. Cutting the rate to 15 per cent would cost the Treasury £10 billion that would have to be funded either by extra borrowing or tax rises elsewhere. Ah, say proponents of such a reduction, the extra growth generated would pay for the move. However, just as the economist Arthur Laffer has proved taxes are damaging when set too high, it is worth asking if there is also a point at which further tax cuts fail to stimulate extra growth but merely damage a government’s revenue base. Ireland, for example, has one of the most competitive rates of corporation tax in the developed world. Yet many other factors impede its ability to capitalise on that rate and attract inward investment. Just ask anyone who has been stuck on Dublin’s congested roads, struggled to find affordable accommodation there or been stung by Ireland’s high personal taxes.
It is also debatable whether past reductions of corporation tax were as generous as they seemed. Mr Osborne, like Gordon Brown, specialised in cutting a headline rate of tax and increasing it surreptitiously elsewhere. His corporation tax cuts last March, for instance, were funded by widening the scope of the tax.
Perhaps a bigger question is whether, as another former chancellor, Lord Lawson of Blaby, has suggested, taxing company profits “has had its day” when multinationals can shift those profits around the world.
It is an irony that seeking to grab a share of those ever-shifting profits, however small, remains one of the best arguments for setting an ultra-competitive rate of corporation tax.
Ian King is business presenter for Sky News. Ian King Live is broadcast at 6.30pm from Monday to Thursday