The announcement by AstraZeneca that £320 million of investment has been lost by the UK to the Republic of Ireland because of high tax rates is a reminder of Edmund Burke's words 'To tax and to please, no more than to love and to be wise, is not given to men'.
The great Tory philosopher's words resonate down the generations. Nonetheless, some taxes are better than others and among the worst is Corporation Tax. Inevitably, Governments are attracted to taxes that do not appear to hit individuals. The Labour Government of 1997 to 2010 made the imposition of stealth taxes an art form, but simply because the immediate pain of the tax is not apparent does not prevent its economic consequences from being harmful.
In a global economy with the free movement of capital, Corporation Tax is damaging to the United Kingdom. Businesses will invest when they see the best and most reliable net returns. In deciding where to set up a headquarters or a factory it is not turnover or gross profit that matters but the cash that will ultimately belong to shareholders after all imposts have been borne. This means that high Corporation Tax will deter job creating investment which will go to sunnier climes. The success of the Irish economy in attracting multinationals, such as AstraZeneca, shows how the economic sun can shine in a quite meteorologically rainy nation.
Global companies that have already set up operations in a country that raises its Corporation Tax will not necessarily vamoose. This can fool governments into thinking that there is a free hit on existing businesses even if they acknowledge the decreased likelihood of further investment. However, because international companies are interested in their net, after tax, return, they will adjust their business model to take account of a tax increase. This means increasing prices or cutting costs, especially employment, to maintain the target level of profitability. In an inflationary era increasing the likelihood of price rises is unhelpful and making the job market weaker is always a bad policy.
It is, therefore, clear that increasing Corporation Tax because of low investment, potentially higher prices and lower employment is economically damaging. Worse, it also hits the Treasury in the pocket. Lower rates generate more income. This comes both from the benign economic effect of lower rates and from an element of tax competition which encourages companies to declare profits in this country rather than in higher tax ones abroad. It is a beneficial effect of tax competition.
George Osborne, to his credit, as Chancellor of the Exchequer cut the Corporation Tax rate from 28 percent to 19 percent. This led to revenue increasing from £43 billion to £67 billion between 2010/1 and 2021/2. It boosted the economy and helped fund more public services. It was a thoroughly Conservative policy that was vindicated economically.
The current Government ought to learn from his wisdom and cancel the planned Corporation Tax rise. It would help balance the books, stimulate growth and attract the investment of companies such as AstraZeneca.
