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General election: Corporation tax and Brexit

Should corporation tax be raised? In terms of what’s best for the economy and UK competitiveness, Brexit is still a bigger threat.


Both Labour and Lib Dems are proposing to increase corporation tax. Labour want to raise it to 26% by 2020-21, which Labour leader Jeremy Corbyn has pointed out is still lower than what it was under the last Labour government. Raising corporation tax to this level would still mean the UK has the lowest rate of G7 countries and one of the lowest rates among EU countries. With the recent news that Germany’s economy is on the up despite the global risks, it doesn’t seem that a corporation tax rate of above 30% is hurting them too much.

Here’s a chart showing the corporation tax rate of G7 countries and other EU countries from the Institute for Fiscal Studies (IFS):

 

Chart from IFS report on Labour’s reversal of corporate tax cuts would raise substantial sums but comes with important trade-offs

The Evening Standard reports the Lib Dems have not yet said how much they would raise corporation tax. But both parties have pledged that the money raised from an increase in tax would help to fund public services including schools.

Both plans are in stark contrast to the Tories’ plan to cut corporation tax from 20% to 19% in 2017. And Theresa May plans to cut it further to 17% in 2020. This would, they argue, increase the UK’s competitiveness and attract more business and investment. The Tories argue that plans to raise corporation tax would hit the UK’s competitiveness and therefore hurt the economy. They also say that Labour’s plans don’t add up.

However, IFS director Paul Johnson told the BBC’s Today programme that they do. The Guardian’s live politics blog quotes Paul Johnson saying that the proposed tax increase would raise “somewhere in the region of £15bn to £20bn”, which would be “one of the biggest tax increases in the last 30 years or so”. Johnson added that whilst he had not yet looked into Labour’s pledges in more detail, the rise in tax could cover what they’ve promised.

Johnson also warned that such a rise could create “some risk” for the economy particularly in the context of Brexit.

In a world where we are particularly worried about investment into the UK, and a Brexit situation, to significantly increase the rate of corporation you would have to say is taking some risk with the productivity and investment in the economy over the next decades.

Paul Johnson, director of the Institute for Fiscal Studies

You can find an IFS’ report on Labour’s plans to raise corporation tax at www.ifs.org.uk.

The Brexit context is, of course, important in all this. Theresa May insists that a further cut in corporation tax will help maintain Britain’s competitiveness. But this is because their plans to take the UK out of the single market is one of the biggest threats to the country’s competitiveness. A broad range of industries including car manufacturing, aerospace, financial services, pharmaceutical, agriculture and universities have all said that taking Britain out of the single market and losing free movement would hurt them. Many businesses are already making plans to move staff and part of their operations to the rest of the EU. This is despite the majority of EU countries having a higher corporation tax rate than the UK. And foreign investors are also warning that they could cut their investment in the UK because it will no longer be a gateway to Europe. As an example, Business Insider reports the message from the Japanese government on Brexit couldn’t be clearer about the threat to their investment in the UK. A cut in corporation tax doesn’t make these issues go away.

Meanwhile, whilst the Tories have promised to cut corporation tax, they have refused to rule out a rise in income and national insurance tax. And Brexit is already making life more expensive for Brits. Indeed, the IFS Green Budget suggests this government’s plans for Brexit are likely to mean higher taxes for people (if not businesses) whilst spending on public services is reduced.

Businesses across the UK have highlighted the importance of the single market as well as a flexible and open immigration system. At present, the government that we’re likely to get on 9 June is promising to take the UK out of the single market as well as to drastically reduce immigration.

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