When is a tax cut unattractive?

As attractive as it may sound, slashing the corporation tax rate to 15% is unlikely. But it is interesting. A quick survey of tax rates around the world (according to a KPMG study) reveals 15% to be very low indeed. The UK’s main competitors in Europe, France and Germany, levy rates of 33.3% and 29.4% respectively. The Swiss have a rate of 21.1% and Denmark 25%. Even Ireland would only be marginally lower than the proposed rate, at 12.5%.

But look at the averages too. The average global rate is 25.51%, among OECD countries it is 26.30% and in the EU it is 23.22%. Globally our current rate of 28% doesn’t look extreme, though by EU standards it looks a little over the odds. Against the world’s biggest economies – the US charges 40% and Japan 40.69% – the UK looks positively comfy, as far as corporate tax goes. A Tory promise to cut three percentage points from the rate to make it 25%, would make the UK look more competitive too.

Politically, such a large cut would be difficult to back. Fiscally it doesn’t look overly attractive either. It’s quite right that corporation tax is a relatively small contributor to the UK exchequer, but a reduction to 15% would represent close to £17bn in revenues, going by figures in the 2009 Treasury red book. In the greater scheme of things that doesn’t seem much. But, when you’re trying to cut costs to claw back a huge deficit, even modest figures can seem significant. For this reason, if you sacrifice it you have to make up the difference somewhere else.

If only the headline rate were the whole story – the UK, better than any other country, knows it isn’t. On one hand, there is the base rate. On the other, the rest of the tax system and political economy. As KPMG wrote in its survey of tax rates: “A low tax rate does not necessarily mean a low tax burden. Effective tax rates and the general ‘business friendliness’ of a country’s tax environment are also significant factors.”

What is hampering the UK is not necessarily the rate, but the uncertainty that has developed around the system. A focus on non-doms, the new rate for higher earners (which can be up to 60% in effect), the controlled foreign companies regime, the current aggression of HMRC and uncertainty over management of the government’s Budget deficit all contribute to the growing wariness that surrounds doing business in the UK.

Studies are sceptical on whether cuts in corporation tax actually produce economic stimulus. What companies are in business for is not low tax rates, but selling their goods. If there is no demand, there is doubt that businesses would invest money saved in tax. Indeed, many claim tax cuts in such an environment end up as savings, being passed back to shareholders as dividends or used to cut debt, not to invest. The case for such a large cut therefore remains doubtful.