Boris – help workers by cutting corporation tax

Published by FREE MARKET CONSERVATIVES on

BY MADSEN PIRIE

A common fallacy is that “business” pays Corporation Tax, and some argue that it should pay more. This ignores the fact that every tax comes out of someone’s wallet or purse, and a business, not being a person, does not have a wallet or purse. What it does have are workers, shareholders and customers, all of whom do have those wallets and purses, and who pay that Corporation Tax between them.

Some on the Left suppose that if taxes are raised on “business,” this will bring more money to be spent by the state. The reality is that increased taxes on “business” sometimes produce less revenue for the Treasury as (legal) tax avoidance becomes more worthwhile and incentives to expand are diminished. Moreover, studies show that about 60 per cent of Corporation Tax falls upon workers, as money that would have funded wage rises is taken by government. The remainder is borne by customers in the form of increased prices, and by shareholders receiving smaller dividends, making it harder for the company to attract investment capital.

When President Trump’s first budget cut Corporation Tax from 35 to 21 percent, the cry went up that he was “rewarding his rich friends.” What actually happened was that within a few weeks over 300 companies had announced bonuses averaging $1,000 for 3 million workers, putting $3bn into workers’ pockets. At the same time, firms announced $110bn in new investment. Since then, growth which in the corresponding previous (Obama) period had averaged 0.8% rose to 2.3%. The wage growth of workers has risen faster than that of managers, and the bottom 50% have outgrown the top 1%. Opportunities for less-skilled and minority workers have risen as the labour force has expanded and the number of new jobs has increased.

The Trump cuts in Corporation Tax have overwhelmingly benefitted those at the bottom far more than those at the top. Far from “rewarding his rich friends,” Trump has rewarded his poor friends. In the UK, Boris Johnson announced during December’s election that the impending Corporation Tax cut from 19 to 17% would not now take place. His motive was probably to avoid the charge of “rewarding rich friends,” but the cut would probably have been of more benefit to workers.

He still has another way to lower the damaging impact of Corporation Tax. At present, while current expenses can be offset against revenue for tax purposes, longer-term investments can only be written down against tax in long-term instalments. This is a disincentive to the investments that bring increases in productivity and expansion. The government should introduce full expensing, as in the US, and allow company investments to be offset against revenue in the same year. This would incentivize companies to invest, creating jobs and growth in the future, growth that would bring the Treasury more revenue than that foregone by the switch to full expensing.

If government wants to reward the workers who “lent” it their votes last December, removing some of the burden that Corporation Tax imposes on them might be a good way to start.

Dr Madsen Pirie is President of the Adam Smith Institute.