Corporate Tax Wars: May tries to trump Trump in a race to the bottom

The British Prime Minister today hinted that she is considering further corporate tax cuts and increases in corporate welfare after US President elect Donald Trump signaled he would seek to slash the US federal corporation tax rate to 15%. Theresa May’s speech signals a renewed commitment by her government to what it misleadingly called ‘tax competition’. In our view, the policy is an act of economic recklessness which puts the UK at the head of a global race to the bottom on corporate taxation that the world really does not need.

The cuts to corporation tax already enacted so far by the British government have done nothing to increase tax revenues through stimulating growth. Instead, tax cuts and increases in corporate welfare have simply left a larger hole in the government budget and led to years of further austerity.

Despite cutting corporation tax from 28% to 20% in the last Parliament and introducing a whole range of corporate subsidies in an attempt to boost growth, the UK government spectacularly missed their target to close the budget deficit by 2015. Yet they continued to double down: they announced further corporate tax cuts, further delays in their own self-imposed targets to return the country to a budget surplus, and further cuts to government spending on social services.

The impact of austerity is well documented. Cuts in public services and reductions in welfare spending have led to real and genuine hardship for millions. This has particularly impacted low income families, women, and people living with disabilities. 

The government knows that the policy doesn’t work. A study commissioned in 2013 by the Treasury and HMRC looked at the corporation tax cuts implemented between 2010 and 2015 predict a less than 1% increase in GDP as a result of the cuts over a period of 20 years, by which point only half of the tax lost from the cuts would have been recovered.

This is therefore not about boosting British business (although clearly shareholders in UK-operating companies will be grateful for the cash giveaway). Instead the government seems to be relying on the proposition that it can seek to attract more foreign capital through implementing a low tax regime.

In short, the policy of the UK government is to seek to become the first major world economy to turn itself into a tax haven. The impacts of this will not only be catastrophic at home, but will also cause serious damage to the UK’s standing in the world. For the government to pursue a parasitic policy, which seeks to encourage corporations to shift profits made elsewhere to the UK so that they can avoid taxes, is unlikely to help it make new friends.

Finally, it should also be noted that there has been a widespread misreporting of the position of the UK tax rate vis-a-vis the United States. The stated intention of President-elect Trump is to reduce the federal level of corporate income tax to 15%. State governments are able to levy their own corporate income taxes on top of the federal rate. A total of 44 of the 50 states in the Union do this, levying a corporation tax of between 4% and 12%. In addition the United States has implemented a system of unitary taxation, which shares out the profits of corporations to the states based on the amount of economic activity the company has in that state. So, whilst a company may be headquartered in Wyoming (addition corporation tax 0%), it will still pay the 12% tax rate in Iowa on profits generated in Iowa.

What this means is that even if the federal rate is cut to 15%, the tax rate for corporations in the United States will still be substantially higher than the 18% flat rate currently levied in the UK. To respond to the announcement of the President elect by cutting taxes further would obviously be foolish.

For more on why we need to defend the corporate tax rate see: https://www.taxjustice.net/2015/03/18/new-report-ten-reasons-to-defend-the-corporate-income-tax/