Corporation tax reductions: the wrong approach to corporate welfare…

I have written in the past on how corporate tax rates are used in a misguided way to reward businesses and boost investment. But now George Osborne has gone even further in using the tax system to demonstrate that UK PLC is open for business. But there comes a point when tax reductions reduce the ability of governments to provide the services businesses so heavily depend on. In other words, one for of corporate welfare –  corporate tax reductions – begins to impact on another – essential business services.

This is what George Osborne said:

In the past six years, we have reduced Britain’s corporation tax rate from 28% to 20% today, and 17% in the future. I did that at the same time as taking difficult decisions elsewhere to balance the books. In my view, the strongest signal we could send to the world that Britain, after the referendum, is open to the world and ready to do business would be to cut corporation tax still further. We should aim for a rate of 15% and preferably lower, because if we are pro-business, we are pro-jobs, pro-living standards and pro-working people.

But there is little evidence to suggest this will work. Osborn’s admission that he had taken difficult decisions elsewhere is to recognise that tax cuts come at a cost. The cuts to date (without taking into account the further planned reduction to 15%) is, according to the Institute for Fiscal Studies around £10.8bn. Although there is a supposed link between these reductions and increases in investment, there are clearly other ways of boosting investment – not least through investment in education and training or in using other mechanisms to offset business risks. The key is to use incentives to try to shape good, sustainable investment. And there is a lot of support for this position from economists and others. Pascal Lamy, former head of the WTO stated that the proposed cut leads to the further risk of damaging tax competition and social dumping in future.