Why scrapping the corporate tax hike is a no-brainer
Generally speaking, the more you tax something, the less you receive. Government plans to raise corporate taxes and end relief on new factories and machinery will result in lower business investment and high costs for households.
By my estimates, current Treasury plans to raise the corporate tax rate to 25% and end a temporary 130% “super-deduction” for new investment in qualifying plant and machinery would reduce UK investment by nearly 8% and reduce the size of the UK economy by more than 2%, compared to continuing under the current rules.
Perhaps more importantly, since the economic costs of corporate taxation are ultimately borne by both shareholders and workers, raising the rate to 25% would permanently reduce the average household wage by 2 £500. This calculation is based on a thorough analysis of the relationship between corporation tax and wages, and primarily reflects the fact that a smaller UK productive capital stock would mean fewer plants and equipment per worker, and therefore lower productivity and wages. Furthermore, a higher national corporate tax rate increases the value of companies’ outside options in low-tax and lower-cost jurisdictions, which would degrade the bargaining power of workers.
Proponents of increased corporate taxation often point to increased revenue. But here there is much less than it seems. By reducing the future productive potential of the UK economy – and therefore the potential future tax base – the macroeconomic effects of raising the corporate tax rate to 25% would alone offset 40% of the revenue gain. static over a period of 10 years, and up to 90% over the long term.
By contrast, simply keeping the rate at 19% and allowing businesses to continue deducting the cost of new investment in equipment at a 100% lower rate would further increase UK investment by nearly 5% and GDP by 1.3%, compared to the current one. plans are implemented. A further cut in the rate, to 15%, would raise the average household wage by a further £1,700.
Critics of corporate tax reform should look to the recent experience of the United States, where in 2017 we lowered the federal corporate tax rate from 35% to 21% and allowed businesses to deduct 100% of the cost of investments in new equipment. At the time, I predicted that these changes would increase business investment in new plant and equipment by 9% and raise average household incomes by $4,000 in real, inflation-adjusted terms.
Although business investment in the United States slowed in the years leading up to 2017, after the 2017 tax reform it surged, defying criticism. By the end of 2019, investment had risen to 9.4% above its pre-2017 level. Business investment in particular rose even more, reaching 14.2% above its pre-2017 trend in real inflation-adjusted terms. Meanwhile, in 2018 and 2019, real median household income in the United States increased by $5,000 – a bigger increase in just two years than in the previous 20 years combined. In 2019 alone, real median household income increased by $4,400.
What about corporate tax revenue? As in the UK, corporation tax was already a smaller share of state tax revenue than in the US on the eve of the 2017 tax cuts. Yet in 2021, even if the U.S. economy was only marginally larger than the nonpartisan Congressional Budget Office had predicted following the 2017 tax changes, corporate tax revenue as a share of the U.S. economy was significantly higher than expected, at 1.7% against 1.4%. In other words, corporate tax revenue did not fall off a cliff after 2017.
Economic policy-making is a matter of trade-offs. In this case, the trade-off is between a larger, more productive UK economy paying higher wages, and a modest short-term income gain that declines significantly over time as lower growth reduces the tax base. corporate and personal income tax. Given recent US experience and my own estimates of the effects of corporate taxation in the UK, I think this is a no-brainer.
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The columns are the author’s own opinion and do not necessarily reflect the views of CapX.