Britain’s corporate welfare is out of control – increasing it makes no sense

http://www.theguardian.com/commentisfree/2015/jul/10/corporate-welfare-budget-tax-money

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Wednesday’s budget in some ways typifies the tensions between corporate welfare and social welfare. Tax credits are a good example of a provision that falls into the categories of both corporate welfare (in that they act as a wage subsidy for employers) but also social welfare (in that they provide essential support to low-income families).

Increasing wages at the lower end is good for low-paid workers, and it has the advantage of reducing the cost of in-work benefits and, potentially bringing in higher tax revenues. But it’s also likely to force up the cost of the wages bill for employers. Thus employers and employees alike are likely to lose out in the short term. As the Institute for Fiscal Studies showed yesterday, the new “living wage” will fail to compensate low-income workers from the cut in tax credits. Those who face the biggest barriers to work – the sick and disabled, and those with more than two children – exactly the types of families for whom wage supplements were originally devised, are set to be the biggest losers.

Corporations, on the other hand, will be compensated, most notably through further reductions in corporation tax.

Governments have competed vigorously over the setting of corporation tax rates for at least the past 30 years. They compete in terms of tax rules, including the setting of the level at which companies pay tax. They also battle over related policies - what kinds of activity should (and shouldn’t) be subject to tax and where, as well as what can and can’t be written off against taxation. The setting of these rules is so important that they have been viewed as being equivalent to a subsidy (according to the Global Subsidies Initiative) or state aid. Yet, businesses still argue that corporation tax in the UK is too high.

To weigh up the arguments, we have to examine the recent history of changes in corporate tax revenues. More specifically, we have to look at: comparative movements in headline taxation rates, changes in the amount of taxation levied on corporate profits; and changes to corporation tax over time, as a proportion of GDP and as a proportion of the total tax burden. In all three respects, British businesses get a relatively good deal.

The current UK corporation tax rate of 20% is the lowest of the G7 countries, and the UK shares the bottom spot among the G20 countries (with Turkey, Russia and Saudi Arabia). But headline rates only tell part of the corporation tax story. What matters is how much businesses pay in tax on the profits they make. Among the G7, only Japan and the UK have reduced their main rates of corporation tax since 2013: Japan by almost five percentage points and the UK by three percentage points. But looking at the G7 economies from 2000 onwards reveals a more interesting story.

OECD data reveals that UK corporation tax fell as a percentage of GDP, from 3.4% in 2000 to 2.5% in 2013, which was the lowest annual amount recorded since 2000. This was lower than the OECD average of 2.9%, and lower than Canada, France, Italy and Japan. It was slightly higher than the US (at 2.3%), and also higher than Germany (at 1.8%). But while corporation tax fell as a percentage of GDP across all G7 economies, it fell furthest in the UK and Canada.

UK corporation tax also fell over this period as a percentage of all tax revenues. Corporation tax receipts made up almost 9.7% of total tax revenues in 2000, falling to 7.7% in 2013. They also fell in Canada. In the US, Germany and Italy, corporation tax receipts increased as a percentage of total revenues over the same period. Corporation tax receipts have also been falling in the UK if we consider taxes on actual profits since the Conservatives came back to power. Even if we look at “chargeable” taxation – after capital allowances and other tax deductions – corporation tax made up 25% of total chargeable profits in 2010-11 but had fallen back to 22% by the of 2013.

Business organisations may point out that corporation tax is only one of the tax burdens faced by businesses, which is, of course, true. But if we include another significant tax on businesses – employer’s national insurance contributions – businesses in the UK look to be in an even more advantageous position. Employers NI contributions contributed 11% of total revenues in 2013, compared with 12.2% in the US, 18% in Germany, 18% in Japan, 25% in France, 21% in Italy. Only Canada was lower at 9% of total revenues.

UK corporation tax is already relatively low, and reducing it further, at a time when the government is telling us that we can no longer afford to fund the welfare state, makes little sense. Whether the reason is to compensate employers for increases in pay, or to increase the UK’s tax competitiveness, comparative data suggests that neither measure is justified. The “red book” suggests that the costs of the living wage will be equivalent to just over 1% of corporate profits by 2020 and that previous budgets will have saved businesses £10bn a year in corporation tax cuts. Even business organisations such as the CBI appear to have been caught off guard by the apparent generosity of the measure. Surely we cannot afford to lose this revenue, equivalent to £2.9bn according to the Office for Budget Responsibility or, if we take into account growth and inflation, up to £27.8bn according to Richard Murphy – money that could have been used to protect the range of public services upon which citizens AND private businesses both depend.