Progressives should stand against the reduction in corporate tax and argue for the point that a dynamic, highly skilled economy needs a dynamic and highly skilled citizenry.
Additional reporting by Aaron Peters, writer on public policy, social media and social networks; he works as a researcher at Tomorrow’s Company
With only a few weeks remaining till the emergency budget is delivered by the new Chancellor of the Exchequer George Osborne, closer scrutiny of one of his key policy positions to date, a more competitive business environment founded on a reduced rate of corporate tax, is now necessary.
Mr Osborne recently declared in his first major speech to the CBI that he had a five year ‘roadmap’ to comprehensive corporate tax reform and that the coalition government would:
“Reform the corporate tax system by simplifying reliefs and allowances, and tackling avoidance, in order to reduce headline rates… our aim is to create the most competitive corporate tax regime in the G20, while protecting manufacturing industries.”
What is all too infrequently overlooked however is that when one looks at international examples there is very little correlation between comparatively lower rates of corporate tax and a successful private sector, specifically when it comes to success in export-oriented manufacturing.
Indeed the current rate of corporate tax (27 per cent) that we have in the UK is already the lowest among the G7 and among the lowest in the G20 – it is much lower than in Brazil or India, both of whom have a levy of 34 per cent.
Importantly of those countries that record greater levels of exports than the United Kingdom (and there are nine of them) only three – China, South Korea and the Netherlands – have lower corporate tax rates, leaving countries with truly innovative and world class private sectors such as Germany, Japan and the USA, second, third, and fouth in exporters after China, with less ‘competitive’ business tax regimes at present than the United Kingdom – the rate of corporate tax in Japan, the great success story of 20th-century enterprise and innovation economics, is a somewhat staggering 40 per cent.
The evidence is overwhelming – while lower rates of corporate tax serve to attract overseas companies to relocate (as was the case with Google going from London to Dublin) indulging in a race towards the bottom is hardly the way to build a more export-oriented, high-tech economy that Messieurs Clegg, Osborne and Cameron have consistently strived for.
According to the Geneva-based World Economic Forum, Sweden, followed by Finland and Denmark, is Europe’s most competitive economy. The organisation points this out in its Lisbon review 2010:
“The Nordic countries are the strongest European performers in the area of innovation, attributable to their companies’ aggressiveness in adopting new technologies and their level of spending on research and development, and the high degree of collaboration between universities and the private sector in research.”
Britain is languishing in ninth place, behind both France and Germany. The key is not in reducing headline rates of corporation tax, but incentivising long-term strategic and sustainable investment and innovation.
Osborne should be focusing on how capital allowances can be made more effective, and in particular, how the government can conjure a more inventive manufacturing culture in Britain. As the WEF explains, the key to Sweden’s success was their dynamic and creative investment culture:
“In terms of innovation ‘output’, they register among the highest rates of patenting per capita internationally.”
We need a government that will rebalance our economic base, not one that shifts the tax burden from the city to the manufacturing world.
The examples of Japan, Germany, France and even the US serve well to remind us that what is the cornerstone to an innovative and dynamic private sector can never be simplistically reduced to just lowering taxes but must also include a strategy founded upon a capability-formation approach that centres on building the skills of citizens and adds to our nation’s aggregate human capital. In his book ‘Development as Freedom’, Amartya Sen points out how history tells us that it is this key factor, human capital and the formation of skills, that is the single most crucial variable in creating dynamic and enterprising private sectors.
For a progressive it makes far more sense to retain the present level of corporate tax or even slightly increase it in order to foment greater capability formation among the population focusing particularly on the long term unemployed and low skilled. Of greater importance to creating a dynamic 21st-century British economy than a low tax framework for businesses is offering companies a British population that is highly skilled, competent and self-reliant.
Much crossover exists in this area with the issue of long-term unemployment, NEETs and the historic proclivity of the UK to fill shortages in the labour market with better qualified economic immigrants. Progressives should stand against the reduction in corporate tax and argue for the point that a dynamic, highly skilled economy that adds high end value in global commodity chains needs a dynamic and highly skilled citizenry. The latter can only be paid for through general taxation and if companies are to benefit from British talent they should seek to adequately contribute to its formation.
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