Arguments against raising corporation tax don't hold water, writes Prof Prem Sikka. Pictured: 55 Tufton Street, where many right-wing think tanks have their HQ.
This 2019 UK general election is going to be dirtiest ever. The right-wing press and organisations are using all kind of untruths to change the debate.
So it’s worth looking at some of the claims of the Taxpayer’s Alliance (TPA), a group well-known for promoting right-wing policies.
It claims that the Labour Party’s policy to increase the rate of corporation tax would directly lead to “lower wages” for workers and an increase in “shop prices”.
The TPA has a chequered history of smears, dubious funding and one of the lowest ratings for transparency for think tanks – but that has not stopped the Daily Express from amplifying its claims. Let’s have a look at a few of them.
Wages
The TPA seems to imply a link between wages and the rate of corporation tax, without evidence. If its logic holds then the era of cuts in corporate taxes should have been accompanied by huge rise in wages.
In 2008, the UK had a headline corporation tax rate of 28%, now declined to 19%. This has not been accompanied by rise in wages. One study estimated that in 2018 some parts of the country, the wages were one-third less than in 2008. In money terms some workers, especially in London and the South East, collected higher wage but that is not the story elsewhere.
Another study reported that average wages for British workers, when adjusted for inflation; fell by more than 5 per cent between 2007 and 2015. In this period the UK workers suffered the biggest drop in average real wages of any OECD country except Greece. Cuts in corporation tax have not resulted in higher real wages.
Wages are a function of the power of labour rather than rates of corporation tax. In the 1970s, UK had high trade union membership and in 1976 workers’ share of gross domestic product (GDP) in the form of salaries and wages was 65.1% even though the rate of corporation tax was 52%.
The anti-trade union laws introduced in the Thatcher years weakened trade unions, their membership declined and we saw workers’ bargaining power systematically undermined. At the end of 2018, workers’ share of GDP stood at 49.2% whilst the rate of corporation tax declined to 19%.
Rather than higher wages, the era of low corporate taxes has accelerated worker exploitation as evidenced by the rise of zero hour contracts, a shift towards low-aid jobs, involuntary part-time work, end of many final salary pension schemes and expansion of foodbanks. Some four million British workers are living in poverty.
The cash bonanza unleashed by corporate tax cuts has been used to maintain dividends rather than making higher investment in productive assets and research & development.
The TPA mistakenly assumes that tax is a factor of production rather than a distribution of economic surpluses. The providers of human capital get wages, the providers of social capital (i.e. society) get a return in the form of taxes, and the providers of finance get returns in the form of dividends and other financial returns.
The return to society – tax – is used to provide social infrastructure which enables corporations to make profits. Apparently corporations should pay little or nothing towards that.
Shop prices
In its scaremongering frenzy, the TPA seems to assume that there is no effective competition in the market place and that the demand for goods and services is inelastic: that there are no substitute goods and services, that consumers will somehow insist on buying the same items at higher prices, and that companies will always increase prices to cover higher taxes. The TPA does not explain why an increase in corporate taxes will lead to price rises.
Again, we have a living laboratory to draw upon. Starbucks and Caffe Nero, as well companies in diverse fields such as water, energy and property have been associated with tax avoidance. Yet there is no evidence to show that this has resulted in lower prices at these companies.
The Fear Campaign
This election will will see a campaign of fear directed at Labour’s economic plans. Right-wing ideologues promote the view that if we increase the rate of corporation tax, employees and consumers will be punished.
This ideological war poses serious questions about the role of the state and society. If the state is to become a prisoner of corporations and not have a degree of autonomy, it can hardly meet citizens’ aspirations about education, healthcare, pensions, security, rights and other things that hold a society together.
There is no magical rate of corporation tax, and the rates across Europe vary. The rate depends on social settlements, welfare rights and public goods that address a particular society’s concerns.
In advocating lower corporation tax, the TPA does not explain how the pressing social issues of our time are to be addressed.
Are ordinary people expected to pay more for a crumbling social infrastructure, or is it finally time to stop corporations trying to opt out of their social obligations?
Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor to LFF and tweets here.
To reach hundreds of thousands of new readers and to make the biggest impact we can in the next general election, we need to grow our donor base substantially.
That's why in 2024, we are seeking to generate 150 additional regular donors to support Left Foot Forward's work.
We still need another 124 people to donate to hit the target. You can help. Donate today.
7 Responses to “Don’t fall for the fear campaign: The so-called Taxpayers’ Alliance are wrong on corporation tax”
Anthony Sperryn
I may be accused of protectionism, but one thing seems glaringly obvious to me. Foreign-based corporations in the UK have a huge advantage over British-based ones, in that they can fiddle and diddle their corporate structures, interest charges, rent-payments, royalty-payments, labour charges, licence-fees and the rest so that they are woefully under-taxed, compared to a British-based one. The consequence is shortage of money for the Public Services, which we all need, and to hell with free-market fundamentalism.
The European Union, with its individually-based national tax charges and tax systems, adds to the scope for fiddle, whereas a proper European Union would have standard rates, across the Union, together with standard social charges and social conditions. We shouldn’t need to steal doctors trained in Romania, or anywhere else, in order to staff our National Health Service.
What has happened in terms of integration of the countries of Europe has happened all too fast. It is no surprise that so many people are fed up with the EU and that we had the Brexit vote.
6033624
I used to deal with Corporation Tax for HMRC. The arguments put forward by TPA are utterly spurious. Most of the companies that should be paying the most in CT are in fact benefitting either from ‘sweetheart deals’ or are using group accounting to avoid paying much or any at all. The penalties for being late with CT returns and/or being late with payments are less, in real and actual terms, than for individual self-employed people. HMRC also deals with Tax Credits, they way Tax Credit ‘overpayments’ are dealt with is even yet more harsh than with SA (Self Assessed, for self employed) Tax The more money you have the better you are treated.
None of this is due to how employees at HMRC feel or think, this is entirely due to successive government policy. The Taxes Management Act set out exactly how these matters are dealt with, these are legislated for by the government of the day and are political decisions, not financial ones or moral ones either.
Successive governments of all colours have decided to give a ‘free pass’ to big businesses and to clamp down hard on self employed, directly employed and tax credit claimants. The majority of our tax take, despite the vast wealth of many multinationals, comes from lower rate tax payers, among them the ‘working poor’ The system works in exactly the opposite way to which it should. We are NOT protecting the vulnerable and taxing the rich, we are protecting the rich and taxing the vulnerable. Even the Tax Credit system itself is part of that, if wages were at a reasonable level then Working Tax Credits would never have been required. Instead the system was designed to subsidise employers who wouldn’t pay the right money for the job. Now cheapskate employers can hire part timers and have the government make up the difference. This damages our economy by keeping interest rates down and dampening investment. Our low wages ensure we MUST import cheaply from China, which we ourselves cannot compete with. They are cheap because Chinese workers are paid pennies per hour and have working conditions akin to the Victorian Era.
Pandering to donors in this way, which is all it is, is damaging our economy and keeping our people unnecessarily poor. It’s ideological abuse for the sake of it. Blair’s government was bad for this but Boris takes the biscuit…
6033624
NB, for another commentor. You need not be a foreign based company to take advantage of group accounting (which is what you’re talking about) You can own a series of companies and subsidiaries solely in the UK and do much the same. Spanning over a few countries means you can take advantage of even lower CT rates elsewhere BUT clever use of group accounting will mean your liability starts approaching zero in any case. Add a ‘sweetheart deal’ to the mix and maybe even a few grants from the government, EU and local authority and you may find yourself with gaining more than you pay, these kinds of deals tend to be used to encourage larger companies, leaving smaller startups out in the cold.
The tax avoidance industry is in full swing in this country, a fundamental change is required but so far NONE of the political parties seem interested in doing anything that upsets their donors…
red squirrel
CT should certainly be raised, at least to pre 2010 level. But concerning elasticity of prices, surely we must distinguish the inelasticity of needs (for basic foods and fixed rent) from elasticity of wants (eg new clothes, cars, the latest phone, eating out etc).
Anthony Sperryn
To 6033624. Thank you for that very useful information, which I was not aware of. It just shows that a great level of knowledge and expertise is needed to sort the mess out. I take a simplistic view that our economy has been hollowed out, with foreign investment needed to pay the import bill. The Labour Party is now largely crowd-funded, so it may be less inhibited regarding business donors. A nice aspect of real democracy.