Cor­po­ra­tion tax num­bers game that leaves busi­nesses out of pocket

Bri­tain may have a low head­line rate but the true pic­ture is not as gen­er­ous, dis­cov­ers Tim Wal­lace

The Daily Telegraph - Business - - Business -

Cut­ting cor­po­ra­tion tax has been a sta­ple Con­ser­va­tive pol­icy for the past decade. Ea­ger to boost the econ­omy by en­cour­ag­ing busi­nesses to start up and grow in Bri­tain, the Gov­ern­ment cut the head­line rate from 28pc in 2010 to 19pc by 2017, with prom­ises to lower it fur­ther.

That plan was aban­doned by the Prime Min­is­ter last year.

In the elec­tion cam­paign he “post­poned” a planned cut to 17pc, on the ba­sis that the Gov­ern­ment needed the money for the NHS, and in any case Bri­tish com­pa­nies al­ready en­joyed “the low­est [rate] of any ma­jor econ­omy”.

Yet that might come as a sur­prise to any­one who tries to run a busi­ness in the UK.

The head­line rate is in­deed rel­a­tively low. At 19pc, it is the joint-fourth low­est of any OECD econ­omy.

Only Hun­gary (9pc), Ire­land (12.5pc) and Lithua­nia (15pc) are lower.

Spain is far above at 25pc. The US charges just over one-quar­ter, as the OECD adds to­gether its typ­i­cal na­tional and state taxes.

Ger­many comes in at 29.9pc. France trails the pack, just shy of one-third.

This would ap­pear to jus­tify the Prime Min­is­ter’s claim. But the head­line rate is only one fac­tor. In prac­tice, a whole raft of re­liefs and al­lowances af­fect the level of cor­po­ra­tion tax ac­tu­ally paid by busi­nesses.

The OECD also crunches th­ese num­bers to work out how much tax would be paid on a busi­ness in­vest­ment project that breaks even.

This com­pos­ite ef­fec­tive mar­ginal tax rate, as it is snap­pily known, rep­re­sents some­thing closer to the true tax bur­den for an en­tre­pre­neur.

As the UK’s al­lowances kick in, the ef­fec­tive rate falls from the head­line level of 19pc to 13.6pc.

A rea­son­able fall, one might think. Yet other na­tions’ num­bers plunge much more dra­mat­i­cally. In the US, the rate is cut by more than half, over­tak­ing the UK in terms of com­pet­i­tive­ness. Ger­many, Canada, Is­rael, Ja­pan and many oth­ers surge past Bri­tain. Italy’s rate col­lapses to minus 56.3pc, ef­fec­tively show­ing sub­si­dies through the tax sys­tem for th­ese break-even projects. Bel­gium, Por­tu­gal and Poland all join it in neg­a­tive ter­ri­tory.

It means Bri­tain is 25th in the league, not fourth as the head­line num­bers in­di­cated.

When it comes to funds raised by cor­po­ra­tion taxes, Bri­tain rakes in the equiv­a­lent of 2.8pc of GDP, al­most bang in line with the OECD av­er­age of 3pc.

Aus­tralia is at the top, haul­ing in 5.3pc. Lithua­nia takes least at 1.5pc.

All of which pro­vides food for thought for Trea­sury hawks hun­gry for fresh in­come.

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