The economics of policy, rhetoric and corporation tax

​Policy costing is playing a large role in the general election this year, in fact, this has been a key point throughout coverage of policy announcements. Labour’s policies are usually coming under-fire over the cost. Whereas Conservative policies have been afforded more leg room and less scrutiny over costing. The Conservatives gambled that Brexit was going to be the key issue throughout but that hasn’t come to fruition. 

Why is costing playing a key role in this general election more so than before. For years, the rhetoric has been ‘Conservatives are safer with the economy than Labour’ and ‘Labour will tax and spend until the country is bankrupted’.

Party policy and economic competency

These arguments are disprovable and an outright lie. On March 13th, 2016, Economist and University of London lecturer, Richard Murphy, wrote an article on his blog ‘Tax Research UK’  entitled ’The Conservatives have been the biggest borrowers over the last 70 years’.  He goes on to explain how fiscally Labour have consistently spent less and paid off more debt during their time in office.

It is also well noted by official government departments that since 2010, The Conservatives have spent more than all other Labour governments combined. So, why are the Conservatives still seen as more fiscally competent when evidence suggests otherwise? That will partly be down to media rhetoric which has largely been stacked against Labour and the global financial crisis that was caused by the collapsed of the American investment bank, Lehmann Brothers, Labour shouldered the blame for the UK’s recession and weren’t very good at defending themselves.

The Institute of Fiscal Studies (IFS) have penned a series of articles over policy costing since the election campaign and whilst they warn of the sudden rise in minimum wage could cause lower paid jobs losses, they fail to consider that the same warnings were given when Labour introduced the minimum wage, which saw an increase of jobs after it was implemented. The IFS only consider the direct impact on businesses, whilst this is their job, reading statistics from one perspective is often misleading.

The IFS are of course factually and statistically correct, but government is a complex socio-economic system with other factors to consider before jumping to conclusions. The IFS themselves also said that the impacts are not certain from either party policy. It can and has been proven that if you give more money to the poorest in society, it then gets invested into the local economy which boost productivity and businesses, leading to growth and more money from taxation through increase in profit for small to medium sized businesses.

Corporate tax in the UK

The Conservatives and Labour have polar opposite plans for corporation tax, Labour plan to raise it to 21% for small businesses and 26% for large corporations whilst the Conservatives plan to reduce it to 17% by 2020. Looking back at an IFS report, they say that both policies will leave the UK uncompetitive in terms of taxation on large corporations with other G7 nations. No matter who is in charge, corporate tax itself will remain the most competitive in the G7 and one of the most competitive in the world.

However, the IFS point out that the UK is still uncompetitive, due to the tax base having an ungenerous set of capital allowances. Meaning wider reform of the tax system is required and the rise in corporate tax has little to do with the UK’s uncompetitive corporate tax system.

The report says “the UK allows a smaller share of capital expenditure to be deducted from revenues each year. The Annual Investment Allowance (AIA) is an exception to this – it allows 100% of most plant and machinery costs up to £200,000 to be deducted from revenues in year 1”.

In short, this means that anything not covered by AIA makes the UK base uncompetitive, as can be seen in the chart below comparing Effective Marginal Tax Rate (EMTR) across countries. The UK’s ability to be competitive will rise and fall with the rates of corporation tax but the repot highlights that it isn’t the main problem, to be competitive would require a reform in capital allowances.

For the full IFS report visit https://www.ifs.org.uk/publications/9207

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