Things not to do: Increase Corporation Tax

In the popular mind there is a degree of attractiveness in taking money from profitable businesses and spending it on desirable things such as health and social care. The call for Corporation Tax to be raised resonates with those who think in terms of "corporate bosses," "fat-cat CEOs," and "multinational businesses." Politicians, ever quick to buy votes, note that the likely beneficiaries of spending on such things as health and social care are far more numerous that the board members of big companies, and have far more electoral clout.

There are problems in raising Corporation Tax, though.  All tax is ultimately paid from someone's wallet or purse. Corporations are not people, but the taxes they pay are paid by people.  Studies of Corporation Tax show that it is paid principally by three groups of people: these are the shareholders, the customers and the employees. If some of the profits are taken by government, there is less money to be distributed in dividends to shareholders. If their taxes are increased, businesses will try to recoup it by increasing the prices they charge to their customers, and there will be less money in the wage pool, the sum available to pay the wages of their employees.

Studies show that the greatest burden, over 60 percent of Corporation Tax, is ultimately borne by the workers. The second largest group to pay are the customers, and the third group paying toward the tax are the shareholders. Thus the promise of higher taxes on corporations will impose most of its burden on employees and customers rather than on the faceless corporations who it is claimed will pay them.

There is another problem. It is that increases in Corporation Tax often result in less tax being collected, not more. And reductions in its rate usually yield more tax revenue.  The reason behind this apparent paradox is that the increased taxes make corporations less profitable, so their activity is less worthwhile. Increased investment, which brings expansion and jobs, is less attractive. Businesses do less and earn less, so the Treasury take is reduced. This effect is increased by the higher tax rates deterring foreign firms from locating in the UK.

When Corporation Tax is reduced, however, businesses take the opportunity to expand, and foreign firms to locate here, so the tax base is broadened, enabling more revenue to be yielded on a lower rate.  Practical experience has confirmed this effect. Most recently in the UK, as Corporation Tax has been lowered in stages from 28 down to 19 percent, the revenue yield has been greatly increased. In the year 2016-2017 the tax yielded £56bn, a 21 percent increase on the previous year. In purely cash terms this was still a 12.6 percent increase.

Although politicians talk of raising the tax back up to 28 percent, and how they plan to spend the "extra money," the reality would be that less money would be raised, making spending cuts a more likely prospect than the promised largesse.