26 Nov 10 reasons to scrap corporation tax
Everyone agrees we need economic growth, but we cannot agree on how it can be achieved. There are two fundamental approaches the government can take.
The first is through more public spending, which would put the country into even more debt. In the short term, while interest rates are low, the problems of this are not so severe, but the long term impacts are a different story.
The other option is to stimulate the private sector with lower taxes and eliminate red tape. However, deregulation takes time to implement whereas the positive effects of reducing business taxes are immediate. The best and most immediate action the government could take to put a proverbial rocket up our economy is to scrap corporation tax in its entirety.
Lance Forman, Vice Chairman of the Independent Business Network (IBN) sets out 10 reasons why the Government should scrap corporation tax:
If a company is fortunate enough to make a profit, this is taxed at 19 per cent. However, if this tax were removed, companies would have greater revenue and the capacity to increase employment. Something important during a time where unemployment is the highest it’s been in three years.
Higher salaries to staff
Rather than increase employment, the company could increase staff wages. For management, who are most likely to be higher rate taxpayers, the government will collect tax at around 40 per cent, significantly more than the 19 per cent it was previously receiving from Corporation Tax. Even at the lower end, tax paid at 25 per cent also yields greater revenue.
If the company does not want to increase employment or wages, they are likely to invest it in their future growth. Investment means greater spending in the economy and innovation for the future, which ultimately helps the company grow in the longer term.
Another possibility is that without having to pay the tax, companies will pay out the higher untaxed profits in dividends to the shareholders. Assuming much of this is being paid to higher rate taxpayers, the Government will collect tax at 32.5 per cent rather than 19 per cent corporation tax rate.
Businesses can grow by reducing its prices. If it makes surplus profits, it can lower prices to expand market share, which will bring longer term growth. At the same time consumers benefit from lower prices leaving them with more in their pockets to spend elsewhere; great for the economy and excellent for improving living standards.
Level the playing field between small and large UK businesses
Multinational businesses are criticised for operating in the UK and paying little tax. But, through employing many and selling goods, these businesses are indirectly generating tax. Frustratingly, small businesses do not have the luxury to transfer profits offshore to lower tax regimes, making it harder to compete. Scrapping corporation tax would result in a level playing field and give a huge boost to the millions of small UK based businesses.
Foreign Direct Investment
Not only would scrapping corporation tax bring about greater investment within the UK, but it would also generate massive direct investment into the UK from overseas. You only must look to Ireland to see the effect. Their low corporation tax, at 12.5 per cent, has resulted in huge multinationals moving their HQs to Dublin. If we scrapped corporation tax completely, global companies would be swarming to come to the UK – Brexit or no Brexit – and the positive effects for our economy would be immense.
Remove the administrative burden
Studies have shown that the administrative burden, especially for smaller firms, of calculating their corporation tax is considerable. In 2009 it was reported that the UK had the longest tax code in the world, at 11,520 pages. The burden of collecting corporation tax for the government is disproportionately high compared to other taxes. Scrapping Corporation Tax would be hugely beneficial to economic growth.
Currently, if a company makes a loss, it can get previous tax payments refunded, or future taxes reduced. This year, more than ever, businesses will be making losses from COVID-19 and associated Government action. By scrapping Corporation Tax now, the Government could make enormous savings by stopping these repayments. Whilst this may seem unfair to businesses in the short run, eliminating Corporation Tax will significantly benefit them in the future, mitigating those concerns. That is why the timing for this action is perfect now.
In a normal year Corporation Tax raises about £50billion; this year it is expected to be about £30billion. This amount is a small fraction spent by the Government on COVID-19 measures, which have so far amounted to approximately £400 billion. Scrapping corporation tax does not mean a loss to the Government of tax revenues, the Treasury will collect far more money in different ways through tax on payroll and dividends at a higher rate and with a growing economy.
Not since Nigel Lawson during Mrs Thatcher’s tenure have we had a Chancellor confident and decisive enough to take such bold measures. In a time when Britain is grinding to halt, our economy needs to be transformed. We are in unchartered territory both with the pandemic and with Brexit, if there ever was a time to take courageous action, it is now.
This strategy is exactly what is needed to make Britain reach its economic potential.