Published On: Tue, Jan 7th, 2014

Yes, we should get rid of Corporation Tax. We need jobs

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The amount of money raised by corporation tax is tiny, compared to other forms of taxation.  So tiny that it is not worth the cost to society for imposing it.  This chart, from Yahoo finance based on HM Treasury data for 2012/2013, below shows just how little revenue is derived from corporation tax in the United Kingdom: £45 billion out of £592 billion, or 7.6%.

UK tax and spend

The bulk of the UK’s government receipts comes from Income Tax and National Insurance which, for the benefit of non UK nationals, is another form of Income Tax that the government pretends is not Income Tax by calling it National Insurance.   National Insurance is partially paid for by the company and partially paid for by the employee – which makes the employee think the National Insurance tax is lower than it actually is.  Council Tax is a tax on where you live and Business Rates is a tax on your work location.  VAT is a tax that is ultimately borne by anybody who spends money at a retail level as businesses pass through their VAT costs to customers.

Corporation Tax is a tax that corporations are supposed to pay to the government but the amount that is gathered remains stubbornly low at a mere 7.6% of all of the UK Government’s receipts.  Many people on the left of the political spectrum complain that this is too low and a travesty of natural justice.  They complain that companies are using complicated accounting tricks to make their taxable income lower than it should be.

The problem for those on the left, however, is that corporate directors have a fiduciary duty to only pay what they are legally required to pay.  And so they pay armies of lawyers and accountants who work tirelessly to figure out how they can reduce their tax bill via legal means.  This includes lobbying for quirky new laws through Parliament to make their tax payments even lower.  To counter this the state also pays for armies of accountants, lawyers and civil servants to try and increase the Corporation Tax that they receive.

In this arms race between private companies and the state the state always seems to end up worse off.  And if the state gets the upper hand the corporate will simply relocate their headquarters to a more tax favourable nation.

But all of this effort is pointless.  Even counter productive.

Since the bulk of government tax receipts comes from Income Tax, National Insurance and VAT, the best way to increase tax receipts is to have more people in employment paying more tax.  If the UK became a corporation tax free country companies that have left the UK to avoid paying tax would return. Companies that are not from the UK would move from their higher corporate tax jurisdictions to the UK.

Why? The UK is already a “perfect” country for business: due to its time zone and luck of geography it can easily do business with East Asia AND the Western United States in the same day.  Few countries can do that.  English is the international language of business, making it easy for non-native English speakers and their families to relocate.  English law is the effective international law for major international contracts.  This makes it easier for non-UK companies to relocate.   Heathrow is the best airport in the world for flying direct to wherever you want to go and the UK private school system is perfect for the employees of multinationals.

And this employee aspect is the critical part.

When companies “move” to the UK they are effectively moving their head quarters staff. This means that the board of directors will mainly be based in the UK.  The CEO and others in the C-suite will be moved to the UK.  Most of their direct reports will be based in the UK.  All these employees are all paid much better than lower ranking employees.

This is good for people living in Britain. They will no longer need to move abroad in order to get the best paid and most interesting senior multi-national jobs.  This will encourage them to invest more in the UK.  This is great for jobs, and more importantly good, high paying jobs that pay lots of taxes.  Income Tax receipts will go up.  National Insurance tax receipts will go up.  VAT receipts will go up.  Business Rates receipts will go up.  Council Tax receipts will go up.  This should be more than enough to compensate from the loss of Corporation Tax.

All people on the left have to do is get over the fact that “nasty” corporations can get away with not paying corporation tax.

So change the law. Time to get rid of Corporation Tax!

 

 

 


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