Duncan’s Economic Blog

Osborne’s Corporation Tax Failure

Posted in Uncategorized by duncanseconomicblog on July 12, 2011

Amid the ongoing News International fallout and the developing Eurocrisis, yesterday’s FT carried quite an important story on the likely failure of a key component of the government’s growth strategy.

Osborne has made boosting investment a core pillar of his economic strategy – something I entirely agree with. I have written at length on the need to boost business investment and also on the problem of the corporate surplus.

The problem is that Osborne’s preferred strategy is simply to cut corporation tax and hope for the best. Something I feel is unlikely to work. Especially when it has been largely funded by slashing investment allowances.

Significantly the OBR appears to agree, writing that the most recent cut will have a ‘minimal impact’.

Yesterday’s FT reported on some new analysis by the Centre for Business Taxation at Oxford’s Said Business School. The story – entitled ‘Osborne corporate tax plan will fail’  – is well worth a read. As it notes:

The researchers said that the main problem for the UK was that allowances for capital expenditure were the lowest in the G20. Few countries had pursued the policy of cutting allowances to recover revenue losses caused by lowering the tax rate as aggressively asBritain, it said. So while theUKhad the fifth lowest tax rate in the G20, the rate was applied to a broad definition of profit, implying that the effective tax rate was much higher.

As the report itself says:

Reforms which reduce allowances as a way of paying for rate reductions mainly redistribute the tax burden between companies, rather than making the tax system as a whole more competitive.

This was a point repeatedly made by the manufacturing trade body, the EEF, in 2010.

Cutting corporation taxes but reducing investment allowances isn’t a tax cut for business – it’s a transfer from businesses that invest heavily (i.e. manufacturers) to those who don’t (i.e. financials/banks).

As such it is likely to be ineffective as a growth plan as it totally at odds with the talk of an investment led recovery and rebalancing.

A proper, business friendly growth plan, would focus on increasing investment allowances  rather than going for headline grabbing moves like cutting corporation tax whilst hammering productive businesses in the small print.