I find myself laughing at the multitude of reports in the mainstream press about the dangers of Brexit, with many claims failing to stand up to scrutiny and little more than scaremongering. Occasionally this descends into the downright bizarre, none more so than Corbyn’s rant about the risk of a post-Brexit Britain becoming a ‘tax haven’. He presents this as a threat, but is it really a bad thing?
It’s worth understanding what Corbyn means when he says ‘tax haven’, and it’s fair to assume that it’s the same thing that Chancellor Hammond has threatened the EU with, namely the cutting of red tape and, more importantly, slashing the rate of corporation tax.
A massive reduction in corporation tax rates could do wonders for the UK economy. One does not have to look very far to see the positive effects such a measure might have by examining Ireland’s economic miracle, the Celtic Tiger. Through the second half of the 90s, the Irish economy grew at an average annual rate of 9.4% and continued at 5.9% for the next 7 years, a rate almost unheard of for a developed Western economy. It is widely accepted that this phenomenal growth rate was driven by foreign investment, attracted in large by having one of the lowest rates of corporation tax across the entire EU.
So rather than simply threaten to cut corporation tax, why doesn’t the Government do it now?
This is a good question, and there are a number of possibilities. The EU has already indicated that should the UK take such action, it is bound to make negotiations more difficult – the EU is clearly worried about Britain’s ability to become by far the most attractive country in Europe to do business. The EU is keen to promote a harmonisation of corporation tax rates and rules across the superstate, and one can be certain that in the socialist values that the EU holds dear, combined with a propensity to spend more money than it has, it is likely to lead to higher rates of taxation, not lower.
The second problem that a large reduction in corporation tax brings is that it is not a vote winner. Our Government, the Opposition and the other minor parties have in recent years been keen to educate the public on tax being a moral responsibility rather than a legal necessity. We are all used to stories of Starbucks, Google, Facebook and others paying a surprisingly small amount of corporation tax, and we, the public become predictably annoyed about it. This fervour is fuelled by our glorious overlords telling us that it is morally wrong, that it is against the spirit of the law, and that we all have to pay our fair share.
Our esteemed leaders have failed us, and that’s why they feel the need to virtue signal in this way. These companies are breaking no rules, they are operating within the framework of regulations that our ubermeisters have constructed for them, but heaven forbid we blame the rule makers. Hence all the noise and distraction from our elected-betters in trying to turn a matter of fact (their failure to draft robust law) into some sort of emotional argument.
We have been lead blindly to believe that large corporations should be paying large corporation tax bills, by use of flawed logic and comparisons such as contrasting Facebook’s corporation tax bill with the average earner’s income tax bill. A totally meaningless comparison.
It’s a difficult problem for any Government to surmount. We can hold off changes pending the outcome of Brexit negotiations, but how does a Government avoid losing votes and cut corporation tax at the same time? They need to begin by stopping the rhetoric, but maybe they should simply do what is best for the economy and risk the pain of losing votes.
The public are still to be convinced that corporation tax is evil and regressive, but for starters, here’s three good reasons why:
- It harms growth – A growing economy is driven entirely by business, whether that is new business or growth in existing business. When a company pays corporation tax, it is losing working capital which could be reinvested to generate that growth. The effects of this cannot be underestimated. The more cynical amongst us might think this money may simply be used to ‘pay the fat cats’. While that is almost certainly true in some instances, this money is still taxed, whether that be income tax on boardroom bonuses or dividend tax on distributions to owners. You cannot escape the taxman.
- It disproportionately penalises smaller businesses – Corporation tax is paid on profits, not turnover and there are many legitimate ways in which a business can reduce its profit and hence its tax bill. On closer examination though, many of the schemes available are open exclusively to larger corporations. Two examples include:
- Offshoring profits – A scheme only available to companies that operate internationally. Imagine your head office is based in an existing ‘tax haven’ and controls all stock and intellectual property rights. The head office is able to arbitrarily charge license fees to its foreign operators for use of its brand and materials which just so happens to wipe out any profit the foreign operator might have. The group company records a massive profit in a tax friendly jurisdiction while its subsidiaries appear to never make any profit.
- Debt financing – If a company wants to expand such as buying real estate, it can look to the shareholders to invest money in the company in exchange for equity, or it can look to the financial institutions for a loan. Larger, more stable businesses are always better placed to secure loans than smaller businesses, with the latter more reliant on the trust and entrepreneurship from shareholders. When a larger company secures a debt rather than issue equity, it is able to offset the cost of servicing this against its corporation tax bill, a luxury not available to the smaller business that is turned away by the bank.
- Only people pay taxes – Corporation Tax is calculated on a percentage of a company’s profits, but it is a miscomprehension to believe that this tax is paid by the company, because ultimately, only people pay taxes. It is open to economic debate upon who the burden of corporation tax falls. Earlier research suggested it was borne by producers and consumers, whereas later classical theory linked it to owners as a tax on capital. More modern thinking sees it as a blend of both as corporation tax gives rise to capital flight, which in turn shifts to workers. In a 1996 US survey¹ of public finance economists, it was deemed that 41% of the burden of corporation tax was borne by the owners, meaning the majority of the burden is on the workers and other interested groups.
The simple fact is, the more money a company has at its disposal, the better the opportunities for growth, a fact not lost on Corbyn (see 1m10s into this Sky News interview) even though he opposes any form of corporation tax reduction.
I for one would welcome the brave decision to abolish corporation tax altogether post Brexit and enjoy the fruits of economic growth a ‘tax haven’ would surely bring. However, I’m not convinced we have a Government brave enough to do it, or a public that is ready or willing to accept it.
¹ Congressional Budget Office. The Incidence of the Corporate Income Tax. Washington, D.C.: U.S. Government Printing Office, 1996. – not available online
Image supplied and modified under a creative commons license from Madeleine Tsoi