The Coronavirus pandemic has delivered both a public health and economic crisis the likes of which are unprecedented in modern times. While the success of the vaccine rollout offers hope of escape from the former, the economic devastation is set to plague us for years to come.
Just as the government has taken aggressive action to quell the public health crisis, so too must it take bold, decisive action to stimulate economic growth that will alleviate the country’s enormous debt burden.
Before the pandemic, the UK was almost two trillion pounds in debt. Now we are another half a trillion pounds worse off, and each month of furlough alone costs us £15 billion. The government knows the road ahead is a long and tortuous one, purely in terms of getting its financial house back in order. As we exit the Covid lockdown tunnel, we must decide which economic path to take.
Much has been mooted in the media about having to raise taxes, especially corporate taxes as fat-cat business owners can best afford it. Yet, other voices have warned that now is not the time to burden business with additional tax, just when we need the economy to reboot. For their sake, we should wait until we are stronger and fitter and better able to withstand the taxman’s grip.
There has also been mention of the ‘Laffer Curve’ in the media. The public realises that increasing tax rates does not necessarily yield higher tax returns, as the rate-revenue equation is dynamic. Tax people at 100 per cent and they won’t bother working; tax them at 0 per cent and whilst they will be fully incentivised, it won’t yield any return to the Exchequer. The art is finding the right rate that does not disincentivise growth.
In a sense, finding the right tax rate is no different to a business finding the right price to pitch its wares. I have no doubt that if I dropped the price of the smoked salmon I sell, I would sell more of it. However, would we be more profitable as a business if we made less profit on each pack? Perhaps not.
Whilst commentators are discussing whether corporation tax should go up or down, and if so when, they are all missing the blindingly obvious. That is that corporation tax is a bad tax and should be scrapped in its entirety with immediate effect. Here’s why.
Companies only pay corporation tax when they make profits. If they didn’t have to pay the tax, they would have three alternatives for spending the extra cash. Firstly, they could reinvest it – a great way for business investment to help grow the economy; secondly, they could employ more people – particularly merited as unemployment is on the rise again; or alternatively, they could increase the wages of and/or pay bonuses to existing staff.
Given that wages result in taxes being paid at a rate anywhere between 20 per cent and 45 per cent, the government will raise more money for the Exchequer with all these options, rather than if the company were to pay corporation tax at 19 per cent and it’s far easier to collect too.
Of course, a company might not invest, take on more people or pay higher wages, choosing instead to pay out those extra profits as dividends to its shareholders. If a company did this, once again, the Treasury would collect more tax than it would from collecting corporation tax. From the perspective of trying to maximise tax revenues and reduce our debt levels, scrapping corporation tax is a no brainer. There are plenty of other advantages too.
We hear a lot in the media about multinationals avoiding corporation tax and the unfairness in their ability to shuffle profits off to countries with low-tax regimes. Yet smaller businesses based in the UK cannot escape the dreaded corporation tax and are thus forced to pay, creating unfair competition. Scrapping corporation tax would remove this imbalance and have everyone competing on a level playing field.
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A zero corporation tax rate would not only benefit and encourage investment within the UK, it would create a wave of direct investment into the UK from overseas. One only has to look to Ireland; their tax rate at 12.5 per cent proves the positive effect a low tax rate can have on inward investment there. Imagine if we had 0 per cent.
The administrative burden too would be lessened if corporation tax was scrapped – a burden which disproportionately falls on small businesses. And if there was no corporation tax, there would be no real need for any business without outside shareholders to have audits either. For savers and pensioners, there would also be an upside. If public companies didn’t have to pay 19 per cent tax on their profits, those companies would be worth more; share values would increase and savers and pensioners would benefit. The taxman would also benefit indirectly from higher capital gains and inheritance tax receipts.
The timing is right now, both from a political and an economic perspective. In a normal year, the government raises £40-50 billion in corporation tax – roughly equating to three months of furlough. This year, it will unsurprisingly raise much less as companies struggle to make profits.
Indeed, that low figure may remain for a few years to come as losses are offset against future profits in calculating how much tax to pay. If we scrapped corporation tax now, businesses would not be able to offset their current losses at all. Whilst some may see this as unfair, if this was done in the knowledge that corporation tax was gone for good, business would accept it and the government could save a small fortune.
The political timing could not be more apt. Such a move would be a bold decision.
Our European neighbours would no doubt be complaining that we really are becoming a ‘Singapore-on-Thames’. This would be no bad thing. After such historic and gargantuan changes to our economy, brought on by the double whammy of Brexit and Covid, we must not be timid or over-cautious in our approach. We should be seizing this moment for positive economic change. Boris Johnson claims to be in favour of wind. Let’s throw caution to the wind now.
Lance Forman is a former MEP and current Vice Chairman of the Independent Business Network.