Thursday, 22 March 2012

The consequences of ever vanishing corporation tax revenues

In his Budget statement, Osborne gave corporate Britain another cash giveaway: taking corporation tax down from 26% to 24% from next month, and committing in his statement to reduce it further to 22%, with the aspiration of reducing corporation tax to 20%.
"So that by 2014, Britain will have a 22% rate of corporation tax ... And a rate that puts our country within sight of a 20% rate of business tax that would align basic rate income tax, the small companies rate and the corporation tax rate."
This largesse to big business will cost the Exchequer an extra £3.76bn in the period covered by the spending review. This is on top of the £25bn in tax breaks for business announced in 2010 which included Osborne's commitment to cut corporation tax from 28% to 24% over four years.

Now Osborne will cut taxes for big business from 28% to 22% over the same period. It is not as if the previous government had been loading the tax burden on business either. Under the New Labour government, corporation tax fell from 33% to 28% - costing the Exchequer £50bn in foregone revenues over 13 years (as LEAP previously estimated).

So how does Osborne's new coporation tax rate compare with other countries? He was kind enough to tell us in the Budget:
"A headline rate that is not just lower than our competitors, but dramatically lower.
18% lower than the US.
16% lower than Japan.
12% below France and 8% below Germany.
An advertisement for investment and jobs in Britain."

So more like ... Ireland? (well, yes as the table above shows, via OECD in 2011) And by coincidence that is a country that Osborne deeply admires. It was Osborne who said in 2006, "Ireland stands as a shining example of the art of the possible in long-term economic policymaking".

Ireland has been through an even more adverse austerity shock doctrine than Britain, and today slipped back into recession. Slashing corporation tax - Osborne's Irish solution - simply undercuts the tax base and hinders recovery.

But it does something else - it redistributes wealth. Lower corporation tax means larger net profits, so instead these larger profits go to large shareholders in dividends and directors in bonuses.

And instead of corporation tax, other taxes have to make up the void and/or public spending is cut. On the latter that has - as the IFS has shown (slide 4 here) - disproportionately hit the poorest: cutting benefits and tax credits.

The other part of this equation is the effect on the tax base (details can be found in OBR data published yesterday).

My analysis of this data shows that the OBR forecast the following increases between 2010/11-2016/17 in tax receipts from each of the four 'big ticket' taxes:

Income Tax
up 33.9%
National Insurance
up 36.1%
up 40.7%
Corporation Tax
up 14.9%

So while taxes from earnings rise sharply (and the regressive NI more sharply) and rise steeply for consumption (regressive VAT), taxation on profits falls as a proportion of the tax base, and relative to other taxation.

So whereas in 2010/11 corporation tax accounted for 8.13% of total tax take, by 2016/17 that figure will have fallen to just 7.02%. By contrast VAT will have risen from 16.32% in 2010/11 to 17.25% in 2016/17.

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