A race to the bottom is not a good idea; paying for infrastructure and services is.
There is a lot of talk about reducing corporate taxes to attract investors and therefore jobs.
Essentially, the theory goes, if investors have to spend too much of their profit on tax, they will go elsewhere and with a globalised economy, they can go where they want with their money.
But tax isn’t as simple as this. I don’t want to discuss here the arguments about why paying tax in principle is a good idea. That’s for another discussion. What I want to do is to look at the facts (insofar as they are available without huge amounts of academic research) about what the reality behind the tax competition looks like.
What sort of tax?
There are several different kinds of tax that governments can levy; there are direct taxes (levied on income of individuals or profit of companies; whether tax on income from rental property should be considered an income tax or a property tax is probably debateable but in essence, it doesn’t make that much difference); these are considered progressive because on the whole the theory is that the more you earn, or the more profit you make, or the more income you have from rents you have, the more you pay.
There are indirect taxes; generally these are taxes on consumption such as sales taxes, VAT, excise duty (on alcohol, tobacco, and petrol for example). They are normally seen as regressive on the basis that people with less money spend more of it on consumption (and less on savings and investment) and therefore pay (as a proportion of their income) more in such consumption taxes than people with more money.
There are property taxes (or capital taxes); in the UK that would be Council Tax, Business rates, stamp duty and inheritance tax. They affect different people differently at different stages in their lives.
And then there are employment taxes, such as National Insurance contributions paid both by employees, employers and self-employed people.
So one of the key questions a government must ask is: how much of the overall tax income should fall on which types of taxes paid by whom?
Where the balance falls will determine how fairly the tax burden is distributed and – possibly – what decisions people make about their investments, their homes, their jobs, and where they live.
Here, I will talk about corporate tax only because that has been in the news. Prime Minister David Cameron is reported as saying that he will lower this again in order to attract jobs to the UK.
Corporate tax is one of the key taxes where countries compete with each other; but it is a race to the bottom; and if, in the end, this does not achieve either real increases in employment or any real contributions to the tax income, it doesn’t make sense.
Who are we competing against?
There are three groups of countries we may want to look at when we think about tax competition.
- Other EU countries
- Countries in the neighbourhood of the EU
- Countries with whom there could be said to be some competition in terms of economic strength; here I am talking about the other major economies and some of the emerging economies.
Tax havens aren’t really countries with whom a country would compete; they do not tend to be countries where jobs move but rather where capital moves through elaborate corporate structures, which to some are tax avoidance (legal though you can decide for yourself whether it’s moral) or tax evasion (illegal and immoral).
So let’s look at the corporate taxes in these different groups of countries. The figures which support the graphs which follow come from the KPMG website. There are some caveats; corporate taxes in some countries are not flat; the indication is that the figures quoted by KPMG are the top level of corporate tax in each of the countries. So there could be a number of ways in some or all of these countries in which companies could pay a significantly lower amount of tax than the percentage indicated.
The European Union
As the UK is a member of the European Union, and as the European Union is one of the key markets for the UK economy, tax rates in other EU Member States are important. There have been attempts by members of the European Parliament to raise the prospect of an EU-wide corporation tax, which would be at the same level in all EU Member States, but the governments of the Member States themselves are not really willing to consider this option.
The graph shows the corporate tax level for each EU Member State. As stated above, these are the top rates of corporate tax. That explains why Luxembourg appears to be high and above average; there are many and complex exemptions from corporate taxes in Luxembourg (as elsewhere). As a result, and whilst the graph is interesting for what it is, the fact that there isn’t a simple rate applied to all corporate profits makes comparison difficult and to a certain extent less transparent.
But that said, the graph shows that the UK is sitting pretty much in the middle of the graph and so is by no means a high corporate tax country. Germany, for example, a country whose economy has been relatively strong, has higher corporate taxes.
It also shows that many of the EU countries that are identified with migration towards the UK (and towards other Western European countries) have much lower levels of corporation tax; but that does not appear to translate into jobs (or at least not attractive ones) as citizens of these countries still feel that they would have a better life elsewhere.
The figures published by KPMG don’t cover all countries and they don’t cover all countries in the European neighbourhood. It is also arguable that the definition of the European neighbourhood could be debated.
The countries from the KPMG list, which I have categorised as European neighbourhood, are shown in the graph below:
Compared to this group of countries, the UK would come in somewhere between Syria and Egypt.
What is interesting is that many of the Eastern European countries have very low rates of corporation tax but this does not appear to translate into prosperity for their people.
It is quite difficult to look at other countries outside the EU and our immediate neighbourhood and to decide which of them are competitors and which are not. I have made a selection based on my own perception of this; I am sure others would make a different selection. I hope however, that I have captured at least some of the key competitors.
The graph below, again, shows their corporate tax rates (as reported by KPMG).
This is, maybe, the biggest surprise of the exercise. The UK would come just above Hong Kong and Russia (and below China) on this graph.
So whom are we competing against?
Why should businesses pay tax?
There is, in addition to the ranting about corporate tax competition also a debate about why businesses should pay tax. The argument goes that they contribute through the income taxes of their employees and through the employment taxes (such as NI) and through the VAT on their goods and so on.
This question goes, however, to the heart of the debate. Businesses need staff who are educated and who have health care. So contributing to these must be in their interest. Businesses need roads and airports and other transport infrastructure. So contributing to these must be in their interest; businesses need the judicial system to ensure they can enforce their contracts; businesses need the police and fire services to provide them with safety and emergency assistance; and so on and so forth.
And who are the ‘businesses’? The people who would ultimately ‘pay’ the corporate tax are the shareholders because any money that goes in tax doesn’t go to them. But why should people who give their labour to an enterprise pay tax on what they earn and people who give their money to the same enterprise shouldn’t?
Corporate tax reductions appear not to be necessary in order to make the UK comparable to other EU Member States, nor to countries in the immediate neighbourhood of the EU nor to our main competitors worldwide because many of them have higher corporate taxes than the UK. There is also the moral discussion about why it is right that businesses pay that tax; maybe in all the debates about austerity and jobs and growth there should be some reflection on questions of fairness with regard to tax revenue which do not set shareholders apart from everyone else – shareholders should also shoulder their share of the tax burden. Why is it acceptable in today’s climate for them to simply move their money in order to avoid this burden? They are also part of the society we all share.