Why Labour’s Corporation Tax Increases Will Hurt the Many, not the Few

The Labour Party is pledging to fund much of its grandiose spending plans by increases in corporation tax, intended to raise £20 billion or so. Rises in company taxes are less unpopular than income tax increases because we imagine that people don’t actually pay company taxes. This is wrong. It is one of the golden rules of tax that no matter what name is on the bill, all taxes are ultimately suffered by human beings. It’s true that companies are taxed on their profits rather than on the money they pay to their employees and directors. Nonetheless, it turns out that corporation tax is really levied on people. Companies are just legal fictions: a way of organising businesses that are ultimately owned and carried on by humans.

To understand how this can be, consider what a company can do with its profits. Firstly, it can pay them out as dividends to its shareholders. If those shareholders are people, they have to pay income tax on the dividends they receive. Corporation tax is just a down payment on the tax paid by shareholders. By shareholders, I mean anyone with a pension plan, insurance policy or other investments. ’Shareholders’ in the collective are very much an example of ‘the many’ rather than ‘the few’. An attraction of corporation tax for governments is it’s a way of taxing them that they don’t notice. Also, many shares are held in pension funds or other tax exempt vehicles like ISAs, which don’t pay tax. Corporation tax is a way to tax this income indirectly even though it is supposed to be tax free.

The other thing a company can do with its profits is invest them in growing its business. In other words, corporation tax is a tax on investment. Directly taxing the investment the country desperately needs to improve productivity is not a terribly good idea. Most politicians realise this, which is why the rate of corporation tax has been cut from 30% in 2007 to 20% from 2015, and 17% in 2020. It was 52% in the 1970s. Jeremy Corbyn is proposing to reverse this trend.

Alternatively, the company might feel it needs extra profits to pay the extra tax. To do that, it either has to pay its staff less or charge customers more. Again, we see that the increase in corporation tax is actually being passed on to real people. All the money that the company has really belongs or is owed to someone else. Some economists have argued that it is workers who take the biggest hit from corporate taxes. But whether that is true or not, the fact is someone has to pay them. And that someone is you and me.

In essence, the only way to raise large amounts of extra money from taxation is by increasing how much ordinary people pay. Corporation tax is just a stealth tax which the Labour Party hopes ordinary people won’t notice that they are paying.