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Work and prosperity
23 November 2012

Heresy of the week: If we want lower business taxation then we have to accept higher personal taxation

A number of well-known multinational companies are currently in the news for all the wrong reasons. The reason why is that despite their thriving UK-based businesses they pay very little tax in this country.

Understandably, businesses that do pay much higher rates of tax to the Exchequer are not best pleased, pointing out the obvious and unfair competitive advantages enjoyed by their tax avoiding rivals.

Writing in the Daily Telegraph, Allister Heath has a radical solution: 

  • "Privately, even the Treasury accepts that corporation tax is finished and will one day have to be ditched… There is only one workable solution: ‘taxes on business’, especially corporation tax, need to be replaced by a new, much simpler levy which treats everybody equally and ends the present absurdities." 

Heath disputes the notion that corporations can ever truly be taxed anyway: 

  • "…only people can ever pay taxes. The burden of taxes supposedly levied on companies is borne either by investors (through reduced returns on their capital), workers (via lower wages) or consumers (as a result of higher prices).  
  • "Targeting firms is just a way of stealthily taxing these people, ensuring nobody really understands who is picking up the bill."  

Furthermore, business taxes are particularly prone to distortion: 

  • "Avoidance is rife; incidence is scandalously arbitrary. Some companies hand over vast amounts of corporation tax; other similar companies don’t. For example, interest payments are deductible from taxable income, which means that firms with lots of debt pay less corporation tax than those with none, even if the companies are identical in every other way. There are endless other issues and loopholes, including the way multinationals can account for their activities, thanks in large part to European single market rules.  
  • "Companies must do what is best for their shareholders – so they game the system. In response, the tax code keeps getting more complicated, as companies and the authorities engage in a costly, unproductive race." 

Conservatives could and should be mounting a compelling case for the radical reform of business taxation. But we will fail if we don’t face up to the full implications of doing so. The fact is that the lost revenue would have to be replaced and we ought to be upfront about this. Instead, there’s a tendency to avoid – even evade – the issue.

For instance, there’s the argument that one tax doesn’t need replacing with another because we can cut government spending instead. We could, should and must cut spending, but any savings ought first to be used to eliminate the deficit and, after that, to reduce our national debt. This will take some time.

Then there’s the old chestnut that tax cuts pay for themselves. Well, it may be that some of them do, eventually. But to pretend there is an instant cost-free solution to be had here is to engage in the same magical thinking that informs Labour’s economic policies.

As Allister Heath reminds us, business taxation is just a dishonest means of taxing personal income, wealth and consumption anyway – and one that is causing a great deal of damage in the process. Instead of fetishising headline rates of upfront personal taxation, we should be ready to raise these in return for a business environment that would make us all richer.

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