Budget 2017: The Miscalculations Behind Corporate Taxes (And The Government’s Distorted Priorities)

The Chancellor reiterated her commitment to keeping UK corporation tax at low levels in this year’s budget. Grace Blakeley explains why Hammond’s numbers are wrong and writes that while public sector workers, utilities and Universal Credit recipients all face hardship, people have every right to question government priorities .

In his 2017 budget, the Chancellor reiterated the government’s commitment to keeping the UK corporate tax rate at 19% – the lowest rate ever and well below most of our main competitors . Philip Hammond argued that corporate tax cuts raised an additional £20 billion to pay for our public services. In fact, cutting corporate tax rates from 28% in 2007 to just 19% today has dramatically reduced the corporate tax burden, costing the Exchequer more than £5 billion a year.

After rising this year, the Office for Budget Responsibility projects that total corporate tax revenue will fall to just 2.4% of GDP by 2021-22. This compares to 3.3% of GDP in 2005/06, when corporate tax rates were 30%. At a time when public sector debt is higher than ever, these tax giveaways have questionable economic value.

The Chancellor says these cuts have led to increased business investment and helped make the UK economy a “hub of enterprise and innovation”. But with GDP revised down and business investment on a continued downward trend, you’d be forgiven for questioning the Chancellor’s calculations.

Credit: Agência Brasil Fotografias (Flickr/CC BY 2.0)

Professional taxes

At least part of the explanation for this disparity is that corporation tax is just one of many taxes levied on UK businesses – and it affects some businesses more than others. Corporation tax is levied on profits. It is therefore the fairest form of corporate tax because (like personal income tax) it is directly linked to ability to pay.

But for the majority of businesses in the UK, business taxes paid on property and national insurance contributions paid to employees make up a much larger proportion of their total tax bill. Unlike corporation tax, these taxes are not tied to ability to pay – they must be paid regardless of how profitable the business is. So, for many companies, it would be much more useful to reduce these taxes rather than corporation tax.

In fact, the reverse happened. While the share of government revenue from corporation tax has fallen, revenue from other corporate taxes has increased. Indeed, the government’s seven years of corporate tax cuts have not only reduced taxes for businesses overall, but have also shifted the tax burden from highly profitable businesses that can afford to pay to businesses who employ more people and own more property in the UK. There will be plenty of good UK businesses trying to do the right thing for their workers who will see no benefit in prioritizing corporation tax cuts over corporate tax rate cuts and NI employers.

The Chancellor partially acknowledged this, arguing that “business tariffs represent a high fixed cost for small businesses”, and announced that from now on tariffs would be indexed to retail price inflation rather than price inflation. to consumption. This is welcome, but it will not relieve the pressure on small businesses whose activity rates have increased in recent years to compensate for falling corporate tax revenues.

Avoidance

Corporate tax cuts have often been seen as a sign of ‘pro-business’ political commitment, and those who have opposed it have often been labeled as ‘anti-business’. But this is very misleading. In a survey last year, a majority of UK businesses opposed further cuts in corporation tax, agreeing they would be economically irresponsible given the public sector debt.

The government claimed that if the UK did not give multinational companies a competitive corporate tax rate, these companies would simply not pay tax in the UK. But as corporate tax rates have been reduced, the proportion of firms paying no tax has actually increase. While historically the top 800 companies were responsible for paying half of all corporate tax revenue, in recent years more than a fifth of these companies have paid no tax.

In any case, the government should not have to induce profitable companies to pay their taxes by offering them low rates. As long as a business has a physical presence in the UK and sells to UK consumers, HMRC is able to ensure that it pays its fair share of tax. The corporate tax cuts since 2010 are the result of political calculations, not economic necessity.

The Chancellor belatedly acknowledged this, announcing in the budget that income tax would now be levied on the (very small) amount tech companies earn in royalties in tax havens. But the question then arises: if the government can tax royalties relocated to tax havens, why can’t they do the same with profits?

As the recent publication of the “Paradise Papers” showed, corporate tax avoidance has become big business. This deprives treasuries around the world (not just ours) of much-needed revenue and raises taxes for everyone else. Low corporate tax rates exacerbate the problem. As public sector workers face their eighth straight year of real wage cuts, further cuts are made to public services and Universal Credit recipients face a Christmas of poverty, many members of the public will be questioning surely in question the priorities of the government.

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About the Author

Grace Blakeley is a researcher at the IPPR.

All articles published on this blog give the point of view of the author or authors, and not the position of the LSE British Politics and Policy, nor the London School of Economics and Political Science.