The UK won't profit from a race to the bottom on corporate tax
For a prime minister who is often described as cautious and ‘on top of the detail’, Theresa May’s pledge on corporation tax could hardly be more reckless.
By brazenly stating that the wants the UK to have ‘the lowest corporate tax rate in the G20’, just days after Donald Trump had strongly hinted that the US might cut its rate to 15 per cent, she has potentially committed to taking a staggering five percentage points off our current corporate tax rate.
It is hard to think of a clearer or more egregious example of the race to the bottom on tax. Yet just last week, the European Parliament’s Panama Papers Committee, on which I sit, heard Nobel Laureate Joseph Stiglitz giving evidence on how this race is leading to huge numbers of losers and very few winners.
Between 2004 and 2014, the average top corporation tax rate has dropped from 27.2 per cent to 18.6 per cent, and it is continuing to fall.
This reduction has not been cost-free. Nor has it painlessly made countries more competitive. On the contrary, cutting corporation tax leads to the tax burden being more heavily placed on other forms of taxation, most of which are paid by citizens and those companies which can’t simply relocate somewhere with a friendlier regime.
The Resolution Foundation has calculated that May’s reckless tax cut would cost the UK Treasury £10bn — a gap which will have to be filled. Furthermore, by rushing towards low tax rates May is legitimising behaviour by companies like Apple who form secretive tax arrangements with governments to escape paying their fair share.
Instead, the UK government should focus on ensuring that all companies operate on a level playing field, so that they are genuinely competing on innovation and quality, thus boosting productivity. We should also deal with those issues that genuinely act as a brake on growth for companies, like the business rates system.
There are plans in place to create this level playing field, but they require political will if they are going to happen. Right now, for instance, the EU is in the process setting up a blacklist of tax havens around the world, ahead of establishing a meaningful sanctions regime. This could target countries like the Bahamas, where there is currently some €200bn sitting in their banks — that’s 26 times the GDP of the nation.
This should go hand in hand with other actions which I have called for in the past: a public register of who really owns a company or a trust; a requirement for companies to report publicly, broken down country-by-country, exactly where they make their profits and pay their tax; and a fair cross-border system of tax calculation that prevents companies like Starbucks playing one country’s tax regime off against another.
In her comments on corporate tax, May has inadvertently plumped to benefit the richest and leave all the rest of us to pick up the tab.
She has to be persuaded to change course, before the tax race to the bottom impoverishes us all.
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