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Stephen Hammond MP is Member of Parliament for Wimbledon and a Shadow Transport Minister  Charlie Elphicke is a partner with a leading international law firm, a research fellow of the Centre for Policy Studies and Deputy Chairman of the Cities of London and Westminster Conservative Association.

Time was when UK business taxes looked inexpensive and the UK was seen as an attractive location for inward investment. Not any more.  Britain’s business taxes have stayed at the same level while other countries have been making big cuts. This, combined with an increased regulatory burden, has not only ceased to make the UK a location for inward investment but is forcing UK domiciled companies overseas.

The international evidence shows that we can cut business taxes without losing revenue – and at the same time boost inward investment, jobs and prosperity.  So why not do it?  In fact the evidence indicates that we could reduce taxes for large businesses from 30% to 15% and small business taxes from 19% to 10% over the course of a Parliament. 

Why cutting business taxes will be good for Britain

Cutting business taxes means that the incentive to avoid tax, and the complexity of tax legislation, is reduced. Business would benefit from greater simplicity, lower compliance cost and less money wasted on tax compliance.

And it’s a big, bad world out there.  Globalisation has taken hold whether we like it or not.  We are in competition with other countries and this includes tax.  The 2006 KPMG annual tax survey found that the average business tax rate in the EU is 25.04% and OECD 28.31%.  In 2000, the average OECD rate was 34.1%, and the EU was 35.44%. 

So while in Britain we have been standing still at 30% under Labour, our competitors have cut business taxes on average by 8-10%.   The result is that non-oil business tax revenues have been pretty flat at a time when the economy has been growing.

Cutting business taxes will not mean lower revenues

A number of countries have reduced business taxes with striking results:

  • Ireland cut its corporation tax rate from 38% in 1996 to 12.5% in 2002 and saw business tax revenues rise by 170% between 1996 and 2002.
  • Australia reduced its corporation tax rate from 36% in 1998 to 30% in 2001. Business tax receipts rose by 116% between 1997 and 2004.
  • South Africa reduced its corporation tax rate from 35% in 1998 to 29% in 2004. Revenues rose by 259% between 1999 and 2004.

Other countries have not reduced business taxes and seen stagnating revenues:

  • The UK business tax rates remained at 30% between 2000 and 2005. In 1997 were £30.4 bn – in 2004 receipts had increased by 12% to £34.1.
  • The US has a 35% rate of Federal Tax plus State Tax (usually around 5%) making an overall corporate rate of about 40%. In 2000, revenues were $255 bn and had barely increased by 2004.
  • Japan has an effective rate of corporation tax that can reach 41%. It saw revenues fall from ¥18,720 bn in 2000 to ¥18,075 bn in 2004.

It is not a given that a drop in the tax rate will always produce a rise in tax revenues, especially in the first period after the cut. However, the evidence tends to suggest that a drop in rates will raise revenues and the J-curve effect predicts that this effect will increase over time. What does seem certain is that tax revenues will not fall in the long run – and therefore the sterile debate about tax cuts vs. public expenditure does not hold validity for corporate tax rates.

Less tax means more inward investment

Countries that have been cutting their rates of business tax have seen benefits from higher foreign direct investment (FDI).

The countries which reduced corporate taxes between 1995-2004 saw the following increases in FDI:

  • Ireland: net FDI inflow of US$92.7 bn.
  • Australia: net FDI inflow of US$44.4 bn.
  • Czech Republic: net FDI inflow of US$39.4 bn.

In contrast, those countries which did not reduce their business taxes saw the following reductions in FDI:

  • UK: net FDI outflow of US$404.1 bn.
  • Japan: net FDI outflow of US$223.5 bn.
  • US: net FDI outflow of USD $50.2 bn.

So let’s make Britain richer

We believe that in sharing the proceeds of growth between public expenditure and lowering tax, business taxes should be a foremost priority. The halving of business taxes over the lifetime of a Parliament should increase tax revenues over that period, accelerate economic growth and cause inward investment to return. Indeed, a consequence of lowering business taxes, cutting regulations and introducing business-friendly policies would be that the City of London would be the financial centre of choice in the European time zone.

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