Will corporate tax increases always lower wages and raise prices? | Politics

To claim

Shadow Chancellor John McDonnell says it is not inevitable that higher corporation tax will lead to lower wages and higher prices.

context

The biggest source of additional revenue under Labor’s plans would come from a rise in corporation tax. By reversing cuts to the levy to 26% for the main rate and reintroducing a small profit rate of 21%, the party plans to raise £23.7bn by 2023-24.

It would also raise £6.3billion through ‘unitary multinational taxation’, by taxing multinational companies operating in the UK on the basis of total profits, rather than those generated solely in Great Britain. Brittany.

The Institute for Fiscal Studies (IFS), an influential independent economic think tank, said a rise in corporation tax would lead to lower wages for employees and higher prices for consumers.

McDonnell, defending the policy, said moves to bring workers onto company boards and boost collective bargaining – bolstering the power of unions – would dampen the urge to cut wages.

Reality

It is difficult to establish a direct link between corporate tax and the costs and benefits for consumers, workers and shareholders, because tax levels are only one of the factors which companies must take into account account when considering wages and prices.

Businesses must also consider commodity prices, distribution and marketing costs, competition, laws, regulations and borrowing costs. But the tax changes would certainly have some impact, according to the Resolution Foundation think tank and the IFS.

For pension schemes, the Resolution Foundation said a corporate tax hike would have a significant effect, as a decline in corporate profitability would hurt investors, including pension funds.

Labor says its economic changes could protect workers and consumers from pressure. The party would raise the minimum wage, increase benefits and expand the use of collective bargaining – negotiations led by unions for wage agreements – which it said would support wage levels. Giving workers seats on company boards and giving consumers more of a say in company management could also have an impact.

Since the Conservatives took office in 2010, the nominal corporate tax rate has been reduced from 28% to 19%. However, the average inflation-adjusted salary is still below its pre-financial crisis peak.

Critics say Labour’s plan would discourage business investment, which is seen as key to boosting the productivity of the UK economy and boosting long-term wages – as businesses invest in new technology, buildings and skills of their workforce.

Despite corporate tax cuts, levels of business investment over the past decade have been relatively low, lagging behind some other developed countries. Investment growth has stagnated due to Brexit uncertainty over the past three years. Government austerity could also have had an impact on productivity, economists say.

Labor says its £400billion investment package would help boost productivity and attract private sector investment by giving businesses the confidence to invest, as the government is doing. However, the party’s nationalization plans could also discourage investment, critics suggest.

Verdict

The impact of corporate tax is complex. Although Labour’s proposed overhaul tries to protect those on low incomes, there could still be a potential impact for a wider group of workers, customers and shareholders.