Don’t raise corporate tax, Rishi. Throw it.
The coronavirus pandemic has caused both a public health crisis and an economic crisis unprecedented in modern times. While the success of the vaccine rollout offers hope of escaping the former, the economic devastation is set to plague us for years to come.
Just as the government has taken aggressive action to ease the public health crisis, it must also take bold and decisive action to spur economic growth that will ease the country’s huge debt burden.
Before the pandemic, the UK had a debt of almost two trillion pounds. Now we are half a trillion pounds worse off, and every month off alone costs us £15billion. The government knows there is a long and winding road ahead just to get its fiscal house in order. As we emerge from the Covid lockdown tunnel, we must decide which economic path to take.
Much has been said in the media about the need to raise taxes, especially corporate taxes, because fat business owners can best afford it. Yet other voices have warned that now is not the time to impose additional taxes on businesses, just when we need the economy to restart. For their sake, we should wait until we are stronger and better able to resist the grip of the taxman.
There has also been talk of the “Laffer Curve” in the media. The public realizes that higher tax rates do not necessarily lead to higher tax yields, because the rate-revenue equation is dynamic. Tax people 100% and they won’t bother to work; taxing them at 0% and although they are fully incentivized, this will not yield any returns to Exchequer. The art is to find the right rate that does not discourage growth.
In a sense, finding the right tax rate is no different for a business than finding the right price at which to sell its goods. I have no doubt that if I lowered the price of the smoked salmon I sell, I would sell more. However, would we be more profitable as a business if we made less profit on each pack? Maybe not.
While commentators argue about whether corporate taxes should go up or down, and if so when, they all miss the blindingly obvious. That is to say, corporation tax is a bad tax and should be abolished in its entirety with immediate effect. Here’s why.
Companies only pay corporation tax when they make a profit. If they didn’t have to pay the tax, they would have three alternatives for spending the extra money. First, they could reinvest it – a great way for companies to invest in the growth of the economy; second, they could employ more people – which is all the more deserved as unemployment is on the rise again; or alternatively, they could raise salaries and/or pay bonuses to existing staff.
Since wages incur taxes at a rate between 20% and 45%, the government will collect more money for the treasury with all of these options, rather than if the company had to pay tax on companies at 19% and it’s much easier to collect too.
Of course, a company might not invest, hire more people, or pay higher salaries, choosing instead to pay out those extra profits as dividends to its shareholders. If a company did this, again, the Treasury would be collecting more tax than it would by collecting corporation tax. From the point of view of maximizing tax revenues and reducing our level of indebtedness, the abolition of corporation tax is a no-brainer. There are also many other benefits.
We hear a lot in the media about multinational corporations dodging corporate tax and the unfairness in their ability to shift profits to low-tax countries. Yet UK-based small businesses cannot escape the dreaded corporation tax and are therefore forced to pay, creating unfair competition. Removing the corporate tax would eliminate this imbalance and put everyone in competition on a level playing field.
A zero corporate tax rate would not only benefit and encourage investment in the UK, but would create a wave of direct investment into the UK from overseas. Just look to Ireland; their tax rate of 12.5 percent proves the positive effect that a low tax rate can have on foreign investment. Imagine if we had 0%.
The administrative burden would also be reduced if corporation tax were abolished – a burden that falls disproportionately on small businesses. And if there were no corporation tax, there would also be no real need for a company without outside shareholders to have audits. For savers and retirees, there would also be an advantage. If public companies did not have to pay a 19% tax on their profits, these companies would be more valuable; the value of the shares would increase and savers and retirees would benefit. The tax authorities would also indirectly benefit from higher capital gains and inheritance tax revenues.
The time has come, both politically and economically. In a normal year, the government levies £40-50bn in corporation tax, roughly equivalent to three months’ leave. This year, it will unsurprisingly rise much less as companies struggle to turn a profit.
Indeed, this low figure may remain for a few years to come, as losses are offset by future profits when calculating the amount of tax to be paid. If we abolished corporation tax now, companies would no longer be able to offset their current losses at all. Although some may consider this to be unfair, if it was done knowing that corporation tax was gone for good, businesses would accept it and the government could save a small fortune.
The political moment could not be more appropriate. Such a move would be a bold move.
Our European neighbors would no doubt complain that we were really becoming a “Singapore on the Thames”. That wouldn’t be a bad thing. After such historic and gargantuan changes to our economy, brought about by the double whammy of Brexit and Covid, we must not be timid or overly cautious in our approach. We should seize this moment for positive economic change. Boris Johnson says he is in favor of the wind. Let’s throw caution to the wind now.
Lance Forman is a former MEP and current Vice President of the Independent Business Network.