Could we ever cut corporation tax?
Posted by Christie Malry on September 30, 2010 at 9:45 am
The excellent Idle Pen Pusher argues that we should cut corporation tax.
1. It falls on workers and consumers, not shareholders.
2. It’s taxing the same thing twice. Dividends (the whole point of profits) are taxed when paid to shareholders.
3. It makes society poorer and less efficient.
4. It rewards waste and punishes success. It only applies to companies which efficiently use their resources.
5. It fuels corporate over-borrowing. Companies borrow instead of issuing shares because of it.
He's right, of course. However, there are some practical difficulties with his suggestion.
Firstly, we need the money. We don't want to have income tax rates higher than they are and we won't tolerate higher duties or much higher VAT. And government isn't that willing to get even close to living within its means, so we need the income that corporation tax brings us.
Then we have the problem of overseas investors. Without corporation tax, we risk dividends being paid to overseas investors and, ultimately, being taxed overseas. Now, there are mechanisms that you can implement to stop this. For example, you can stick in a withholding tax that citizens can offset against their own tax bills but which foreigners can't. This is sort of what we had up until the early 1990s, where distributed dividends came with a tax credit which taxpayers could reclaim. But it was systematically unpicked, first by the Conservatives and then finally killed off by Gordon Brown in 1997, when he finally made tax unreclaimable by pension funds.
Then there are those that argue that corporation tax is the result of an unholy deal between governments and company managers. Governments get the money. Managers then support government proposals for double taxation of dividends (i.e. making tax credits non-reclaimable). That reduces shareholder pressure to distribute excess cash, leaving more in the company to be controlled by managers (I covered this before here).
But the real killer is that it'll never fly politically. While companies make big profits, they're just too juicy to leave untaxed. Yes, even if taxing them means lower wages for employees or higher prices for consumers. We won't do it, even if it might mean better outcomes.
And there are some potentially good outcomes. If we did drop corporation tax to 10% or lower, it should attract lots of inwards investment - the Wolseleys and Shires of this world - who would bring with them jobs for British workers. It's the model the Irish tried, only they were unable to manage their overall fiscal position sensibly, in part due to their adoption of the Euro. But that shouldn't undermine the basic idea - companies will quite obviously do anything to reduce their tax bills. Providing them with a low tax environment in the UK, with its well-educated workforce, stable society and enticing legal rights, would be irresistible.
However, because of all of the negatives, I'm afraid it will never happen.
I don't want to get into a discussion of the relative merits of Corporation vs other forms of taxation here, but the issues with the Wolseleys and the Shires of this world are not so much about the overall level of corporation tax - although reducing the rate to 10% would be a way of addressing it.
Rather their concern is about how UK corporation tax is applied to profits earned in overseas lower tax jurisdictions. This is why the government is planning to introduce change to the way CFC 's are changed. Firstly on an interim basis n 2011 and then more comprehensively in 2012. It looks like this will move toward a territorial basis for taxing corporate profits. My own view is that such a move is almost inevitable in the medium term.
Thank you for the flattery! I had meant to ask you today what the technical issues you referred to in your tweet.
1) Needing the money. Yes, this explains why my suggestion for now was 20% rather than your 10% or, ideally, nil. A few points below the EU average. Enough to remove the urgency in boardrooms to leave the UK for tax reasons, but not enough to lure companies here. I have no idea about the numbers, I have to admit, but 20% of something is better than 28% of nothing. And the cut would translate into higher tax receipts on salaries and dividiends which would recoup a portion of the lost revenues. And the NPVs of various entrepreneurial projects would rise, some from negative to positive, resulting in more revenues, albeit revenues that will materialise in future while our deficit crisis is now.
2) Overseas investors. Don't overseas investors pay UK dividend income tax on UK shareholdings? I was discussing this last night and I thought foreign citizens would pay UK tax on UK shares (and have it deducted from their home country's tax bills upon repatriation) as the situation is here when repatriating dividends on foreign shares. If not, I'd tax dividends at source as you suggest.
3) Principle-agent problem. I don't go for conspiracies, but it is an intriguing explanation. Though transferring power from managers to shareholders is a reason to do it, of course!
4) Realpolitick. Osborne is cutting by 1%. So cuts ipso facto are politically airbourne! I agree it'd be unthinkable to abolish it now, politically, for the reasons you said. But I don't know how much bigger a cut would have to be over 1% before it went from being politically expedient to politically dangerous. I think, at a minimum, cutting to 25% now, with further 1% annual cuts would have been doable. I don't know about my 20% suggestion. It'd depend on what econometric research you could get the Treasury to come up with, I guess. I don't argue that it'd be difficult. An immediate cut to 10% or 0% would, I think, seem too much for most people. Sadly.
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