Osborne's Budget: The Case for Lower Corporation Tax Rates
Osborne’s proposal to cut the corporation tax
from 20pc to 18pc by 2020 should help to encourage businesses to invest in
Britain. The tax rate has seen a steady decrease from its level of 28pc in
2013.
Investment
A cut in corporation tax should lead to increased revenues for the Treasury. This
is because more companies are likely to invest in the UK, and so the Treasury
is likely to receive more revenue, provided that these new businesses are
profitable. Furthermore, a lower tax rate may result in businesses previously
not paying the Corporation Tax to switch to paying it, as they now feel that
the lower rate is more just and therefore that the risk of not paying it outweighs the potential benefit of keeping 20pc of its profits.
Furthermore, by reducing the Corporation Tax
rate, companies receive a greater proportion of their profits and thus this
could make marginal investment projects
more attractive as they are more profitable. Therefore, it is likely that companies
that are already established in the UK would increase investment into their
business, thus providing greater employment opportunities and increased profits
for the firm, and thus increasing revenues for the government. Indeed, Djankov
et al have estimated that a 10pc increase in the Corporation Tax rate reduces
the investment to GDP ratio by 2pc.
VAT and Income Tax
In addition, the lower tax rate would also
help to increase the Treasury’s revenues indirectly. As new companies invest in
the UK, they will hire more workers, thus increasing employment, and also the
incomes of the working population. Moreover, wages are set to rise as
companies, attracted by lower tax rates, invest in the UK and thus increase
their wages in order to attract the limited pool of specialised workers away
from competitors. Indeed, Felix et al have modelled recent evidence from 20 high income countries between 1979
and 2002 and have observed that a 10pc reduction in Corporation Tax increases the mean gross wage by 7pc, both for unskilled and skilled labour. As
these workers earn higher wages, they too will pay higher income tax and will
consume more, thus increasing VAT revenues.
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| Figure 2: The Laffer Curve |
Indeed, the low tax rate in the Republic of
Ireland seems to have encouraged foreign companies to locate in Ireland, thus
bringing employment opportunities and increasing the country’s GDP. Indeed,
Apple, Google and FaceBook have their European Head Quarters in Ireland. Google
currently employs 2 000 staff whilst Apple has a workforce of 4 000 and is set
to create a further 1 000 jobs in the near future. Not only have office jobs
been created, but manufacturing also takes place in Ireland which means that
Irish citizens from different sectors of the economy benefit from Apple’s
diverse operations.
Indeed, the ‘Laffer Curve’ illustrates how an
increase in the tax rate will not necessarily increase revenue from tax. Arthur
Laffer first suggested this idea, supposedly drawing this now familiar curve on
a cocktail napkin during a meeting with the assistant president in Washington
1974.
Other
Furthermore, lower Corporation Tax rates
could also lead to lower prices for
consumers, if the business is in a competitive market where a low price is the
main incentive for customers to purchase a product from certain brands. Thus,
lower prices could increase consumption as consumers have more disposable
income left and so they purchase more goods, thus increasing aggregate demand
in the economy and so increasing GDP.
Moreover, for those who adamantly believe
that lower corporation tax rates and lower incomes tax rates will not encourage
further economic growth, another point should be borne in mind. From a
microeconomic and moral perspective, companies who earn profits are undoubtedly
working hard to achieve these high revenues and thus should not be taxed on
their wealth. It seems unjust that companies should be taxed for the effort
that they have put in to further their own incomes, as well as the incomes of
employees.
Northern Ireland
Northern Ireland will implement a Corporation
Tax rate of 12.5pc from April 2018 and this, it is thought, would attract
investors away from the Republic of Ireland and towards Northern Ireland. It
should lead to greater foreign direct investment, thus creating more jobs for
the Irish economy. Although the two states will have the same rate of tax,
Northern Ireland has a lower cost of living than the Republic, perhaps acting
as a further incentive for investors. Indeed, Enterprise Minister Jonathan Bell
has estimated that with a 12.5pc rate of tax Northern Ireland could create 30 000 additional jobs than at the
current rate of tax. Although it is projected that the cut in the Corporation
Tax rate will reduce government revenue by £240
million a year, the increase in tax revenues from VAT and income tax due to
an increase in employment should offset this reduction. As lower rates of
corporation tax should encourage further investment, more jobs should be
created for the Irish citizens. Thus, thus should increase consumption in the
Irish economy, not least because those now with wages have a high propensity to
consume. Thus, government revenue should increase indirectly through VAT
receipts and Income Tax, which already play a larger role in the government’s
revenues than Corporation Tax.
In favour?
Thus, a decrease in Corporation Tax to 18pc by
2020 should increase revenues to the Treasury as more companies are likely to
invest in the UK and firms engage in more investment projects. This should
increase employment, thus leading to greater consumption in the economy and
thus increasing aggregate demand. This should therefore lead to increases in
price levels, helping to combat deflation, an important issue that Britain is
facing today. Moreover, a decrease in the Corporation Tax rate should help to
reduce tax avoidance, as the revenue ‘lost’ through paying taxes is not as
significant as the effort exerted in
creating a Double Irish Dutch Sandwich.
