20 September 2022

The truth about corporation tax


Corporation tax in the UK has been cut and these cuts have not lead to increases in investment. That’s the claim made in a new blog from the Institute for Public Policy Research, an which has been widely reported in the media. Unfortunately, it is wrong on both counts.

First, it’s incorrect to say that corporation tax in the UK has been cut. The key point here is that the headline rate and how much tax is paid are not the same thing. So, while it’s true that the headline rate has decreased, what is classed as ‘taxable profits’ now has widened significantly. That’s in part because tax reliefs – including those for investments – are far less generous than before. As tax expert Dan Neidle points out, it is simply wrong to claim that the UK has been leading a ‘race to the bottom’ in terms of corporation tax. 

This leads us onto the second point. Do cuts to corporation tax lead to higher investment? Well, it depends what you mean by ‘cuts’. The IPPR is right that many other advanced economies have both a higher headline rate of corporation tax and higher investment than the UK, but that’s because many of these countries have a much more generous system for capital investment than we do, ie how much companies can deduct from their tax bill if they invest in plant and machinery. The ‘super-deduction’ brought in by Rishi Sunak has gone some way to alleviate this, but it is only a temporary measure, sadly.

It also ignores another issue in the UK corporate tax regime: complexity. It’s an area where the UK compares very poorly to other advanced economies, ranking 27th out of 37 OECD countries. This is largely due to the many different taxes which apply to certain types of businesses, and the plethora of different narrowly targeted taxes and reliefs. Many of these taxes increase costs for businesses both directly (they have to pay them) and indirectly (they have to pay people to ensure they are compliant), which is obviously money that can’t be spent on investment.

That said, neither side of the political divide is really playing fair here. Leftwingers conjure a ‘race to the bottom’ that has never existed, whle successive senior Tories have boasted about cutting corporation tax while actually doing nothing of the sort. They may have cut the headline rate, but the overall corporate tax base has remained pretty static and the system remains unnecessarily complex.

By the same token, the IPPR is right to note that cuts to corporation tax are not a panacea. They will not deliver increased investment by themselves. We have to look at the bigger picture to see why investment in the UK is so much lower than in other advanced economies.

Political instability and poor access to international markets are both important factors. Even the most ardent Brexiteer has to admit that leaving the EU and increasing frictions to trade between the UK and the EU has had a negative impact on investment. If we want to give businesses the confidence they need to invest then the government needs to take a mature approach to the EU – one which will deliver increased trade, or at the very least won’t lead to a trade war.

The IPPR also rightly points to poor digital and physical infrastructure as a barrier to investment. This is particularly true in terms of transport infrastructure. Faster and cheaper travel will cut costs for businesses, allowing them to redirect the money into investment.  And that’s before we even get into the manifold problems with energy costs and the sky-high cost of land in our most productive areas, all of which are a drag on productivity and business investment too.

What this plethora of different issues underscores, of course, is that simply pointing to a line on a graph going up and down and claiming ‘X causes Y’ is far too simplistic.

Neither side can therefore confidently claim that a lower headline corporate tax rate does or doesn’t incentivise investment, because it’s just one of a whole series of overlapping factors that determine where business end up putting their money. Until we tackle all of those issues head-on, rather than fixating on a single tax, we won’t get the growth the country so urgently needs.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Ben Ramanauskas is a research economist at Oxford University.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.