Has corporation tax had its day?

Corporation tax delivers a diminishing share of tax receipts for the exchequer, and competition between nations continues to drive down rates. It should be put out of its misery, writes Stephen Herring.

 

There are four reasons why I consider that corporation tax, despite having survived for 50 years, is now in its final decade of existence – and, in my view, the sooner it is put out of its misery, the better. 

 

Firstly, corporation tax is already collecting a diminishing share of the exchequer’s taxation receipts in comparison both to major taxes, such as income tax, NICs and VAT, and to newer taxes, such as SDLT. All of these are much simpler to assess and collect. The figures are stark. In 2001/02, corporation tax collected 8.7% of the total tax take and was approximately 30%, 50% and 50% respectively of the tax take from income tax, VAT and NICs. By 2013/14, corporation tax collected only 6.9% of the total tax take, now representing around 25%, 38% and 37% of the take from the taxes listed above. 

 

Secondly, there will be a fanfare later this year about the role of the OECD/G20’s BEPS initiative, which will be led by politicians announcing that it represents a substantial step in counteracting tax avoidance by global corporations. The difficulty is that all will seek, quite understandably, to ensure that their national champions are not damaged by the BEPS outcomes. Other initiatives, such as the common consolidated corporate tax base (CCCTB), will be launched to similar fanfares but will similarly achieve almost nothing other than increased bureaucracy and compliance costs. 

 

Thirdly, and assuming that there was no such thing as corporate taxation, those same global corporations would have significant difficulties in attributing their profits between their sales and production functions, their intellectual capital and fixed capital resources and their key executives and employee locations. It is just too hard, too subjective and too imprecise to provide a solid foundation for taxation. In the 1990s, the increasing emphasis placed upon robust transfer pricing legislation was thought to be the answer to cross-border taxation issues, but it has proven to be neither satisfactory nor acceptable to politicians, the public or, indeed, many tax specialists. I foresee that dissatisfaction with the BEPS outcomes will arise much sooner. 

 

Fourthly, tax competition will continue to drive down corporate tax rates. This is inevitable and desirable, unless you are one of the few who believe that higher corporation tax does not result in lower employee remuneration, higher consumer prices; and/or lower returns to investors. This might well have the largest impact on reducing the corporation tax receipts in the shorter term; would you bet against an 18% rate in another G20 country or, indeed, the UK in the next five years? 

 

So why does the tax profession not focus upon alternatives to corporation tax which are easier to assess and collect and less susceptible to aggressive avoidance or abuse? Examples of such taxes might focus upon investor returns, sales revenues, employment costs, assets employed and occupation costs. Hopefully, the answer is not merely that corporation tax, because of its in-built complexity, currently constitutes a far higher percentage of advisers’ tax fee incomes than it does of the exchequer’s tax receipts.

 

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No

• It underpins the integrity of the tax system – without it, rich people would stash their wealth in zero-tax corporate structures and defer or escape tax entirely. Abolishing it would increase complexity and reduce efficiency.
• It curbs inequality. Most economists agree that the tax incidence falls largely on wealthy owners of capital: without it, corporations and their shareholders free-ride on public services. Research is clear: higher inequality means lower economic growth.
• Corporate tax cuts, incentives and loopholes ricochet around the world, as jurisdictions ‘compete’ for flighty hot money in a futile race to the bottom. The winners are mostly wealthy shareholders; the losers are everyone else, particularly in poorer countries.
• The corporate income tax provides a way to tax foreign shareholders, preventing them from free-riding on locally provided services like educated workforces.
• With corporations currently sitting on trillions in idle cash reserves, the CIT boosts demand by transferring wealth from a sector (corporations) that is under-investing to a sector (government) that will put it straight to use educating people and building infrastructure. Taxing corporate profits brings the economy back into balance.
• Tax cuts, special incentives and handouts don’t stop at zero: they turn negative and keep going down as jurisdictions ‘compete’. There is literally no limit to corporate subsidy seeking. 
• Corporate taxes also spur transparency and more accountable government. To collect the tax, states must put in place good tracking measures. It is no coincidence that zero tax havens are famous for financial secrecy and criminal activity.