The Sunday Essay: How cutting corporate tax rates raises revenue

Many thanks to Matthew Sinclair, of the Taxpayers' Alliance, for the Sunday Essay below.  We accept Sunday Essay submissions from any of our readers - be they MPs, policy wonks or nothing to do with politics at all.  For more information on how to submit an essay, please click here - Pete Hoskin

With the public finances deep in the red many are arguing that there simply isn’t the money for tax cuts.  Britain has one of the largest deficits in the developed world and, as the economic slowdown leads to greater unemployment, borrowing could easily spiral out of control.  However, maintaining Britain’s high tax rates is not the way to control that deficit.

Spending has increased by around £30 billion at each Budget for the last five years.  That has created deficits despite a strong economy and increases in taxation on a broad range of activities.  Controlling spending is the essential step that any politician hoping to reduce the deficits has to take.  Even if taxes were pushed up that would only delay the reckoning with the momentum that a decade of extravagant spending in the public services has built up.

While it might be tempting to look at the public finances and conclude that we can’t afford tax cuts, the truth is that we can’t afford high tax rates.  Britain needs to be an attractive place to do business, now more than ever.

Over the last ten years Ireland has cut its corporate tax rates and revenues have grown far faster than they have in the United Kingdom.  Of course, people might argue that Ireland’s achievements cannot be replicated here because Ireland is smaller, enjoyed EU subsidies or enjoyed some other advantage.

A TaxPayers’ Alliance report released this week shows that other countries have enjoyed similar increases in revenue following cuts in corporate tax rates.  From France to Japan revenue gains have followed rate cuts.  Testing this relationship empirically, our evidence suggests that low corporate tax rates are associated with greater revenue growth.  Including other factors like growth in a country's export markets or increasing oil revenues didn't imperil our central conclusion that rate cuts would lead to increased revenue growth over time.  We studied a cross-section of different countries’ average performance over a number of years, to try and work out whether cyclical factors were creating our result, and again arrived at the same conclusion that corporate tax revenue grows faster in countries with lower rates.

We have seen firms moving to avoid high corporate taxes in Britain.  Shire Pharmaceuticals, Krom River, Hiscox and United Business Media have all announced that they are moving abroad.  However, outright corporate flight is almost certainly a drop in the ocean compared to countless investments directed elsewhere to avoid high corporate tax rates.

The present chaos in the corporate world makes corporate tax cuts even more essential.  With so many banks and other businesses being merged or otherwise reorganised corporate organisation is more flexible than it has been for years.  In the United States commentators are already suggesting that New York risks losing its economic position if the investment banks that call it home go out of business or are moved in mergers.  Businesses are choosing where they should locate themselves and jobs, prosperity and future tax revenues depend on encouraging them to choose London.

The British people clearly recognise that they are overtaxed.  Polls show that 64% believe that the state spends, and therefore taxes, too much.  Politicians who commit themselves to reducing the tax burden will enjoy a hefty electoral reward.

Controlling spending, not maintaining high taxes, is the way to control the budget deficit and some tax rate cuts can provide such a boost to our competitiveness that they increase revenue.

The Conservatives should promise that they will take aggressive action to control public spending and deliver tax cuts.  They will be rewarded at the polls and with a much healthier economic and fiscal state with which to make their appeal for a second term.

Matthew Sinclair is a Policy Analyst at the TaxPayers’ Alliance. To join the TaxPayers’ Alliance for free visit www.taxpayersalliance.com