Three reasons why the Chancellor is wrong to slash tax for businesses

5th July 2016 / United Kingdom

By New Economics Foundation – The fallout from Brexit continues. Today, the Chancellor George Osborne has pledged to cut corporation tax from 20% to below 15% in an attempt to encourage businesses to keep investing in the UK following Britain’s vote to leave the European Union.

This would mean businesses in the UK would enjoy the lowest corporation tax rate of any major developed economy – a race to the bottom that would boost profits for big business while short-changing the rest of us.

1. There’s no evidence that cutting corporation tax has an impact on the real economy

There is no clear evidence that cutting corporation tax leads to improved private sector performance and overall economic competitiveness. In the US for example, corporation tax is the highest in the world (40%) but business investment is far higher than in the UK.

The UK already charges one of the lowest corporation tax rates in the world at 20%. Yet since the financial crisis in 2008, the UK has continued to suffer low growth in productivity, and a lack of fixed capital investment. UK businesses are already sitting on huge cash profits and a cut in taxes may incentivise firms to hold on to more profits.

The chancellor’s proposal, if carried out, would see the UK join a race to the bottom, competing alongside Ireland, Russia and Eastern European countries to be the centre of a low tax, low wage, low productivity economy.

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2. Slashing tax for businesses is the wrong incentive

A tax cut would be the government’s attempt to compensate business, especially big business, for the potential loss of easy access to the single market.

But merely changing the tax rate will do little to genuinely improve the economic conditions for business. Instead, its main consequence will be a decline in the total tax take. These kinds of tax incentives can be an incentive to relocate financial operations but rarely do they result in actually operations or manufacturing moving.

With limited resources at the government’s disposal it is highly debatable whether a corporation tax rate cut should be prioritised over other forms of tax incentive, that could have a more direct impact on individuals, or other spending or infrastructure priorities.

3. High taxes for business is not the cause of our unstable economy

The fallout from the Leave vote has thrown the UK’s already vulnerable economy into serious jeopardy. It has exposed the flaws of an economic strategy reliant on financial services and high levels of private debt to sustain growth.

But the answer is not to turn the UK into a tax haven. British businesses are aware of the real problems: low public investment, particularly in infrastructure and education, low public support for research and development and stagnant demand in the UK economy, triggered by austerity and the referendum’s result.

What’s the alternative?

Instead of cutting corporation taxes, the government should maintain demand in the economy by increasing investment, in particular bringing forward capital investment projects in housing and infrastructure.

We should be warding off recession by investing in the disenfranchised communities that voted to leave by taking advantage of record-low borrowing rates, or through a revamped round of quantitative easing.

But in doing more of the same, the Chancellor is not only failing to address the real underlying problems but is also jeopardising the medium-terms prospects of the UK economy.

 

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