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.

4 thoughts on “Why Labour’s Corporation Tax Increases Will Hurt the Many, not the Few

  1. Of course all taxes are paid by people, the question therefore is which people, and as you rightly point out, increasing corporation taxes will levy these taxes on investors. Most “ordinary people” have investments, typically in pension plans, but generally levels of investment are highly elastic to wealth. Therefore, by increasing corporation tax the wealthy will typically pay more; it is a far more progressive tax than VAT, for example.

    Then we have the “tax on investment” argument. This is true, but can also be offset by offering incentives to invest, such as tax breaks on R&D, which already exist. Not to mention the fact that corporation taxes in Britain lag significantly behind all G7 neighbours. Our productivity is three percentage points lower than US, France and Germany, whilst our effective Corporation Tax rate is lower by 20%, 13% and 10% respectively. This implied causal link between Corp Tax and Productivity clearly doesn’t hold up to scrutiny.

    Companies cannot pass tax increases onto workers through wage decreases if there is preventative legislation in place, as is proposed through national minimum wage increases. Prices? Yes companies can increase prices, but in doing so have to remain competitive with importers not suffering the same tax increases (but in many cases already paying higher taxes in their resident country).

    Put simply, this is an attempt to redress the distribution of wealth in the country, and I don’t think it is being packaged as anything but. The real question is what this will do for inward investment into the UK, especially in the wake of Brexit. The Tories seem intent on turning post-Brexit UK into a race to the bottom based on low taxes. The alternative is a higher price, higher quality marketplace, whereby the gains from corporation taxes are spent on health, education and infrastructure to create a more skilled, efficient and productive workforce. I don’t know enough about the perception of Britain and its relative strengths to resolve this dichotomy, but I’d be interested to hear your thoughts on it.

  2. It’s all a bit naive to think that Companies, won’t think very seriously about what they do with their profits, if CT is increased and don’t forget, there are significantly more SME’s than Corporations, but they all have to pay it.
    Simple fact is, most SME’s will probably reduce their expenditure on staff and put it to better use in investment in modern machinery, where less staff are required, as the burden of PAYE / NI & VAT, can be a major cause for concern. In the current climate, cash-flow for any business is king and the manner in which those items are now collected, means there is no lee-way, so any good company will automatically have to ensure that the payments are available on the due date. Add to that, the new pension arrangements have to be met, which also add to the ‘cost’ element of any business and are programmed to rise over the next two/three years, to where they will become a considerable element, so staff levels will again be under review.
    Additionally, the minimum wage and living wage levels will increase and whilst I personally don’t have an issue with that, it will also add to the cost of all business.
    You cannot have it both ways, you want firms to prosper, so that they employ people, but then using the Labour ideology, you want to put a bigger tax burden on their success, which will impinge directly on the level of staff retained, when times are not so good.

  3. I’d only say that if you want to tax the rich, there are simpler and better targeted ways of doing it than corporation tax. But the attraction for Labour is, I think, that corporation tax is invisible to voters even though it is economically damaging.

  4. Simpler and better ways such as raising income tax? That taxes high earners, but the wealthy? Surely to tax a cross section of the high earners and asset rich you need a combination of income tax (in the labour manifesto) and corporation tax / capital gains tax (surprised not to see increases in the latter in the manifesto)

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