In July 2016, then-Chancellor of the Exchequer George Osborne declared his desire to lower the corporate tax rate to 15 percent after lowering it from 28 to 19 percent. Rishi Sunak, the current chancellor, is expected to reverse his budgetary course on Wednesday. If so, it would be a telling symbol of how Covid-19 and the response to austerity measures introduced by David Cameron’s administration in 2010 have changed political realities. Brexit Great Britain should not be the low-tax country desired by many conservatives.
Even before Covid, many accepted that taxes would have to rise. The pandemic made it clear to almost everyone. This doesn’t mean they need to be raised while the economy is so weak. However, once the government affirmed the “triple tax lock” that excludes higher income rates, social security or VAT, higher taxation of corporate profits was ultimately inevitable.
However, taxing profits is also problematic because corporate capital is mobile and so important. The result was fierce competition between tax jurisdictions. Osborne was an avid player of the game. Fortunately for Sunak, the rates he left were low. According to the OECD, the UK’s effective corporate tax rate was the lowest among large high-income countries at 18.4 percent in 2019. Under Donald Trump, the US cut its headline rate to 21 percent, but the Biden administration wants to increase it to 28 percent.
In this context, a modest hike in the UK base rate should not cause any real difficulties. However, it’s also unlikely to be a cornucopia. Any one percentage point increase in corporate tax would bring in only £ 3.3 billion – even a 5 percentage point increase would bring in less than 0.8 percent of GDP in additional tax revenue. In 2017, the most recent year for which comparative data is available, UK corporate tax revenue was 2.8 percent of GDP, close to the OECD average of 3 percent. Australia’s share was 5.3 percent and Japan’s 3.7 percent. However, Australia can tax high resource rents, while FDI plays a relatively minor role in Japan’s economy.
In the long run, the UK could not achieve a much higher share of GDP without agreeing to much greater cooperation between jurisdictions on interest rates and information exchange. The latter could be easier now with the Biden government arrived and the EU Council decided last week to oblige large corporations to publicly report their per-country profits and taxes. But how far will the UK want to work with the EU?
Nor should there be any attempt to generate more revenue from the business without considering the impact on foreign investor attitudes and corporate investment and borrowing. A higher tax rate makes investment incentives stronger, especially since investments in the UK were so low.
If the chancellor were desperate for revenue now, he could theoretically levy a higher corporation tax for the next year or two before lowering it to the new long-term tax rate. That would be a tax on the companies affected by the pandemic. Those who made big losses would be protected against a brief rise in interest rates, as would almost all new investors in the UK.
The realization that corporate income taxation will help stabilize public finances is inevitable. This does not have to happen now, but when it does it must be done carefully. Most importantly, the UK’s public finances will not be filled by higher taxes on companies alone. In the long run, the government has to be much bolder.