When breathless lobby groups warned that tax rises would hurt businesses, Samuel Brittan would chuckle “that argument is for the children”. The eminent economics commentator was making the point that only people pay tax. Companies are just convenient places to collect it. Chancellor Rishi Sunak must think so. He has floated a plan to increase corporation tax which may feature in March’s budget.
Mr Sunak’s longest-serving recent predecessor, George Osborne, fetishised low corporation tax, egged on by the CBI, a business lobby group. As a result, the levy now sits at an inexpensive 19 per cent. For a government seeking to pay for a coronavirus support package costing more than £300bn, this looks like the place to start. Harmonising UK corporation tax with the OECD average of 23 per cent would theoretically raise about £14bn extra every year.
Some Tories harrumph that lifting the tax rate does not automatically increase the tax take. Economic activity may be correspondingly suppressed. But Stuart Adam, of the Institute for Fiscal Studies, a respected think-tank, says this substitution effect would only kick in at much higher levels.
There is a more convincing argument against corporation tax hikes embedded in Sir Sam’s riposte. Beleaguered employees are one of three main groups of people that bear the burden of corporation tax. The levy holds back wages, even as it increases prices for customers.
Perhaps the chancellor has investors — including readers of Lex — in his sights? Wealth taxes are much ballyhooed right now. Higher taxes on dividends and capital gains would target investors more surgically than corporation tax. Either way, investment would suffer.
Clever Mr Sunak will understand Sir Sam’s point. It is the failure of others to do so that may have inspired his tax plan. Because it is so fuzzy and indirect, corporation tax is politically easier to hike than direct taxes on individuals. Employees and investors will just have to hope it rises gradually, with trade-offs for the vulnerable. Lighter taxes on the lower waged and on retail premises, please.
The Lex team is interested in hearing more from readers. Please tell us what you think of UK tax reform in the comments section below