15 05 2017

Think Tanks Say UK Corporate Tax Hike Would Be Self-Defeating

Proposals by UK opposition party Labour to increase corporation tax would reduce investment from multinational companies, two think tanks have said.

Labour said recently that it would raise the main rate of corporation tax from 19 percent to 26 percent by 2020 – reversing almost all cuts since 2010, when the rate was 28 percent.

The Institute for Fiscal Studies (IFS) said that while the measure could raise around GBP19bn (USD24bn) in the short term, it will raise "substantially less in the medium to long run because companies would respond by investing less in the UK."

The Institute of Economic Affairs (IEA) said that the policy would not achieve Labour's aim of rebalancing the tax burden towards the "rich."

"The reality is that everyone benefits when companies are encouraged to invest and create jobs," said Julian Jessop, Chief Economist at the Institute of Economic Affairs. "Indeed, big increases in tax rates rarely translate into big increases in tax revenues, because they undermine growth and incomes for all."

"What's more, with many other countries now planning to cut corporate taxes, Labour would make the UK a much less attractive location for global businesses. This is exactly the wrong signal to send as the economy prepares for Brexit."

Meanwhile, the IEA also questioned Labour's plans to reintroduce a small profits tax for companies with annual profits below GBP300,000 at 20 percent in 2018–19. It would rise to 21 percent in 2020–21.

"The oft-cited justification for having a separate and lower small profits rate is to encourage new business formation and, in particular, entrepreneurship," it said. "However, there is a lack of compelling evidence that levying a lower rate of corporate tax on the basis of companies' profits achieves this aim."

It added that reintroducing the small profits rate would reintroduce unnecessary and unwelcome complexity into the corporation tax system.