Rory Meakin: Three steps to fix our broken corporate tax system

By Rory Meakin, Head of Tax Policy at the TaxPayers' Alliance

Google, Apple and Starbucks have all recently been enjoying the attention of the House of Commons Public Accounts Committee or equivalent bodies in the US Senate. Committee Chair Margaret Hodge even said that it is 'evil' of Google to fail to arrange its affairs in a way that would result in it paying more tax than it is required to. But however silly some of the claims in Parliament might be there is genuine and justified anger about a tax system that very few of us really understand.

Whether it's Google executing its sales in Ireland thereby creating profit there instead of here, Apple leaving its profits outside the US's taxman's reach or Starbucks UK paying a management fee for sales made using the brand, most people agree that the system we have now doesn't make sense in a world of multinational companies, intellectual property and the internet. How much UK tax should companies like Starbucks and Google pay with a fairer system? Are they getting away with paying too little?

The most important point to remember is that companies never have paid a penny in tax ever, in the sense that you or I will pay tax. Only people pay taxes. Whether it's shareholders receiving less in dividends, customers paying higher prices or workers making do with lower wages, companies themselves are just legal entities through which money is passed to and from real people. But when Corporation Tax is increased or cut, nobody knows exactly how much falls on workers, consumers and shareholders. Research by economists suggests that workers bear the lion's share of the burden, but the estimates vary and in real situations it depends on the complicated interaction of how mobile shareholders' capital is compared to the employees' labour. So what should be done?

Last year the 2020 Tax Commission proposed a comprehensive overhaul of the system, with Corporation Tax and Capital Gains Tax replaced by a new Single Income Tax on distributed income. In other words, cash leaving companies in the form of dividends, interest and share buybacks would be taxed at the same rate as cash leaving in the form of salaries. The improvement would be dramatic: equal treatment of interest, dividends and salaries; an end to the complexity of profit, depreciation and allowances; and an end to the corporate tax bias in favour of debt. So how could we get from the mess we're in now to that?

Our report published yesterday, How to fix corporate taxes, shows how with three key recommendations. First, cut Corporation Tax significantly. Secondly, abolish Capital Gains Tax. Finally, reform capital taxes for the long term. And we set out four practical options on how to go about that. Ministers could extend the tax benefits of Real Estate Investment Trusts or partnerships to other companies, or they could implement a trial version of the Single Income Tax either regionally or nationwide but for small businesses only. Any one of those reforms would sow the seeds for more comprehensive changes by showing what can be done. And it wouldn't be long before businesses that didn't qualify started to clamour for the same simple and fair treatment.

Over recent weeks, the economic outlook seems to have become rosier. The endless pessimism of the past half a decade seems finally to be lifting. But after six years of negligible or negative growth, it really says something if the prospect of a recovery limping along at perhaps one per cent a year is thought of as good news. For the sake of both restoring economic growth and restoring legitimacy to an increasingly discredited system, we need fundamental reform designed to last, not tinkering at the edges.