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So, to summarise, it will be necessary to increase tax revenue, it is reasonable to make a careful start on that process now (albeit in a way that does not tighten fiscal policy in the short term) and that increasing the corporation tax rate will bring in additional revenue.
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To put it another way, increasing corporation tax rates really will bring in more revenue. In addition, lower corporation tax rates have unintended behavioural changes in that more people pay themselves through companies (diverting tax revenues from income tax and national insurance contributions). Furthermore, the post-2010 reforms were Lawsonian in their approach in broadening the base at the same time as lowering the rate (so these were not simply cuts). Yes, rates have fallen and revenue has increased but corporation tax receipts reflects where we are on the economic cycle (in 2010, businesses were not making much by way of profits and if they were they had big losses to offset). Sadly, life is more complicated than that. Look at how corporation tax revenues have increased since 2010, the argument goes. The third unconvincing argument is that cutting corporation tax has not cost us any money and increasing it will not raise you any money. Now might be the last chance to take action. Leave it a year or so and the Chancellor might find that his Parliamentary colleagues – not least the Right Honourable Member for the marginal seat of Uxbridge and South Ruislip – might become rather resistant. Delaying action on fiscal consolidation might make economic sense but it would push tax increases into the last years of a Parliament. So one can announce and even implement tax rises without engaging in an immediate fiscal tightening. Nonetheless, the Government could increase some taxes without engaging in a fiscal tightening if long term tax increases are accompanied by short term tax cuts or spending rises. The markets are not jittery so there is less of a pressing need to take action. The economy is currently shrinking and unemployment is likely to increase substantially in the months ahead. I would agree that now is not the time for a fiscal tightening. The second argument is that now is not the time. Given these forecasts assume tight control over public spending that will be hard to deliver and the significant demographic challenges that face the country in the 2030s, some kind of fiscal tightening in the form of tax rises will be necessary eventually. Our debt to GDP ratio would continue growing. Even after we are put the economic consequences of Covid-19 behind us, the OBR forecasts a deficit of £100 billion or 4 per cent of GDP. In short, we needn’t be in a hurry to pay off the Covid-19 debt.Įven accepting all of this – that ‘this time is different’ – there is still an issue. The Covid crisis is the type of event in which governments should be willing to borrow and the consequences can and should be dealt with over a long period of time. The markets are happy to lend to us, the risk of a sovereign debt crisis is remote. Even if they increase, the long dated maturity of our debt gives us a chance to respond. Interest rates are low and likely to remain so. It is true to say that we can live with higher levels of debt than was the case in the past. I wish that this was true but sadly this is unrealistic. The first argument that will be made is that we might not need tax rises at all. But it is worth examining the arguments for and against such an approach.
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Is this a good idea? My view – as the Minister of Tax throughout the Osborne Chancellorship – is that it is not. In contrast to George Osborne’s time as Chancellor – when reductions from 28 per cent to 17 per cent were announced – Rishi Sunak is expected to announce a Corporation Tax rate in the region of 23 to 25 per cent.
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Speculation that the corporation tax rate is going to rise has been running for months and if the Treasury wanted to dispel such speculation it could have done so. If there is one tax that the Chancellor is likely to increase when he stands up to deliver his Budget on Wednesday, it is corporation tax.