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Damon Lambert: Business taxation – policy to win votes, policy to win business

Damon_lambertDamon Lambert authors the first of two Platform pieces on tax.

Business taxation has become an issue of intense global competition.  Corporation tax rates are reducing throughout the rest of the globe, yet the UK keeps its rate stagnant whilst Labour invents ever more complex tax rules in the name of ‘anti-avoidance’ that discourage investment into the UK.  Taxing capital and profits is dangerous, as these are increasingly transportable, and transported they will be if the UK refuses to reforms its corporate tax regime.    Yet the Conservative party has failed to produce sensible, if any, tax policies for business in its last three election campaigns.  No wonder, our economic competence is doubted.

So what should we have done?   Well, Conservatives should instinctively question the taxation of profits.  Profits are made by successful businesses, often largely owned, directly or indirectly by current and future pensioners via pension funds.  By definition, long-term profitable businesses are the best creators of jobs and the most effective investors.  Corporate tax takes money off such entities and gives it to government, classically the worst choice at creating sustainable jobs and investment. 

The Conservative party needs to get away from the idea that a cut in tax rates, means a cut in tax revenues, and hence public spending.  An analysis of  current tax revenues in the developed world, shows that regimes such as the increasingly harsh UK one tend to collect less and less revenues, at least in real terms and normally in historic cost terms.  Those, like the Thatcher governments, that cut tax rates and reform their tax regimes, who seek to remove fiscal distortions in capital allocation and remove supposed taxraising laws that discourage investment, tend to actually raise more revenue, just witness the increase in Australian, Baltic State, and Irish corporate tax income in the last few years. 

So it’s time for Conservatives to assume the Flat-Tax mantle, not so much as a recent invention of Eastern European states, but as a restoration of the brilliant work of Lords Howe and Lawson in the 1980s.  Unfortunately this has been messed up by Messrs Clarke and Brown, who in complicating the UK system, are close to having jointly tripled the size of UK tax legislation.   

First step should be to have a single corporation tax rate, cut from 30% for most business to 22%, and hence equal to the basic rate of income tax.  This would  put UK tax rate well below the OECD average, which is where it should be.  Second should be to simply delete the complicated rules on overseas investment that effectively charge a large entry fee on the repatriation of profits back to the UK for reinvestment and increasingly seek to penalize multinational investors for coming to the UK.  Third should be an all-out attack on the complicated UK tax regimeThere are many market-distorting lumps that need to be flattened.  It is time to get back to the Conservative taxation principles that won not just 4 successive general elections, but global respect.

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