Labour sets out advanced world’s harshest corporate tax regime
Labour’s radical election manifesto would create the harshest tax regime on business income among large advanced economies, according to comparable international tax data.
The findings will reinforce concerns that a Jeremy Corbyn-led government would undermine the attractiveness of the UK as a place to do business and skew the tax system out of line with other countries.
Once the extra burden of Labour’s proposal to force companies to hand 10 per cent of their shares to workers is taken into account the effective tax burden on profits would be higher than any other advanced economy.
On Friday, John McDonnell, shadow chancellor, maintained the pressure on companies, saying his party would prevent companies taking the “easy option of cutting wages or raising prices” because “we’re democratising the way in which these corporations work”.
“Instead of being driven by short-term profiteering and shareholder interest only, they will think for the long-term, invest and grow the economy, and that’s what’s happening elsewhere,” he told the BBC.
If Labour’s proposals for public spending were implemented they would add a little over 6 percentage points to the share of public spending as a proportion of gross domestic product, raising the level to roughly 44 per cent. That figure is not out of line with countries such as Germany and still below France.
But on the tax side, Labour proposes a radically different mix to countries such as France and Germany. According to the OECD, the Paris-based international organisation that collects comparable tax data, the UK’s taxes on profits raised 2.7 per cent of national income in 2016, well above the 2 per cent levels in France and Germany.
Even though Britain had a 20 per cent corporate tax rate in 2016, much lower than the statutory rates of 33 per cent in France and 30 per cent in Germany in the same year, revenues were higher because the UK taxes a much broader definition of profits.
As former chancellor George Osborne reduced the corporate tax rates between 2010 and 2017, he also expanded the reach of corporate taxes. Rupert Harrison, his then chief of staff, said: “It was base broadening and rate reduction, which was always the intention.”
Labour calculates that by maintaining the broad tax base, raising the UK corporate tax rate from 20 per cent to the 26 per cent level of 2011 and adding a new tax on multinational profits, it can raise an extra £30bn a year.
The Institute for Fiscal Studies said the move would imply “raising more in corporation tax than any other G7 country”, casting doubt on Labour’s ambitions.
Other tax experts pointed out that the effective burden on companies would be even greater than the IFS calculations because they did not include Labour’s requirement for large companies to hand over an element of their profits to create “inclusive ownership funds”, giving workers a stake in company ownership.
Dan Neidle, tax partner at Clifford Chance, said: “In its latest guise [Labour’s inclusive ownership fund plan] is exactly equivalent to a 10 per cent rise in the corporation tax rate, taking corporation tax revenues to about 6 per cent of GDP.”
An effective corporate tax rate at that level would be higher than any other country in the OECD, a group that also includes the US, Japan and South Korea.
Britain also collects more in capital gains taxes and property taxes than other advanced economies, further undermining Labour’s claims that companies do not pay their fair share. OECD data show the UK collecting 1.3 per cent of total tax revenues from capital gains compared with next to nothing in France and Germany.
Where the UK stands out in international tax revenue comparisons is not on low levels of revenue from taxes on company profits, but on social security contributions.
Britain’s national insurance collects 19 per cent of UK tax revenues compared with equivalent social security taxes of 40 per cent in France and 37 per cent in Germany.
Paul Johnson, director of the IFS, said: “If you want to transform the scale and scope of the state then you need to be clear that the tax increases required to do that will need to be widely shared rather than pretending that everything can be paid for by companies and the rich.”
Labour’s proposals to raise £83bn for additional day-to-day public spending would raise the tax burden from an expected level of 34.6 per cent of national income in 2023-24 to 38 per cent.
This level of taxation would represent an all-time record, even higher than in the second world war, when Winston Churchill as prime minister raised public spending to 61.5 per cent of national income in 1943-44. But that was financed largely with enormous borrowing amounting to almost a quarter of the size of the economy.