Do low corporate tax rates reduce revenues but fail to create jobs?

The TUC report out today argues that low corporate tax rates reduce revenues but fail to create jobs. Their argument is that the UK enjoys “an extremely competitive tax rate. More than 90 per cent of UK businesses pay the small business rate of 20 per cent while the effective corporate tax rate for large companies is currently estimated by PriceWaterhouseCoopers to be 23.2 per cent, far lower than the OECD average of 26.5 per cent.”  The report also compares corporate tax and employment growth rates between 1997 and 2010 across OECD countries and finds no strong correlation between low taxes and high employment or GDP growth.

The study suggests that at a time of constrained public finances, the economic benefits are not significant enough to justify tax cuts of the scale that the government has embarked upon, particularly given the UK’s “already low corporate tax rates”. Thus, cutting corporation tax to attempt to stimulate growth is a poor economic strategy, says the TUC.

My verdict is “nice try brothers”.

Even on their figures the UK is only mid-table and we can’t just compete with big countries, as Ireland’s success in attracting our firms shows and commonsense suggests (think of the billions parked in the Caymans, British Virgin Islands etc). The experience of the Irish economy recently has nothing to do with a low corporation tax rate, and it is really all they have for the time being to attract investment – i.e.  they have floundered despite low corporation tax not because of it. If it was so irrelevant I don’t see why the French and Germans make such a fuss over it. Plus there is evidence of major companies e.g. WPP moving abroad because of tax (not just corporation tax but other taxes too income tax higher rate, non dom levy and maybe in time bank levies/cap requirements).

It’s certainly true that there’s a lot of tax dodging but it was ever thus; generally things like the patent box and lower headline rates ought to reduce this (and were introduced under labour). The 90% of firms bit just reflects the number of tiny companies registered/dormant – it isn’t the same as 90% of tax revenues, and there are a few statistical fast ones like that in this report.

Also jobs are not the only factor or valid goal of economic policy; firms that don’t use much labour esp. in financial services can contribute to output and growth after all. Although there’s a lot of beggar my neighbour and free rider activity associated with incentives (tax breaks, subsidies, planning relaxation) for inward investment between and within countries it does work, again as the Irish experience longer term shows very well, or Docklands in the UK, or Spain in the 1980s, though again it is not the sole factor. Germany has certainly benefited from a gradual reduction in her rates, and the dynamic point is that if the UK had stuck by its old rates, i.e. without Osborne’s reforms, it would indeed have had the highest rates in the advanced major economies. Ask yourself what would happen if we raised corporation tax to 50% or 100%. Would that create jobs? So my verdict is “nice try, brothers”.

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