New study shows Britain has relatively high effective corporate tax rates

September 24, 2012 3:20 PM

Headline rates of corporation tax matter because they are the most obvious measure of how heavily investments in a given country will be taxed. They are the first place a firm will look in assessing whether a given tax system is competitive. It also is normally more efficient to have a low headline rate rather than lots of tax breaks for companies that behave in specific ways, in specific sectors, as those tax breaks distort investment decisions. The Government is cutting headline rates, though it could go further.

It isn’t only headline rates that matter though. The effective rate that companies actually pay on the returns on their investments is critical. The Cato Institute in Washington DC released a study last week with estimates of the marginal effective tax rate (METR) on new business investments in ninety countries. Their study shows that there is still a lot of work to do before Britain’s tax system is really the attractive place to invest that it should be given some of our other advantages.

Across all of those ninety countries, the METR on new business investment was 18.2 per cent in 2012, down from 21.5 per cent in 2005. In the developed economies which are more like Britain, and which can probably get away with higher rates on average with their more established economies, the average rate was 19.4 per cent, down from 22.2 per cent.

Britain did not compare well. Our overall marginal effective tax rate on business investments was 26.7 per cent. That is 7.3 per cent higher than the developed country average, let alone the average across all of the economies studied. It is expensive to invest in Britain. Given how important business investment is to put new innovations into practice and create more jobs and higher wages over time, those high tax rates are very bad news for all of us.

In the end, businesses don’t pay taxes any more than toasters play tennis. The taxes are paid by shareholders in lower revenues, customers in higher prices and workers in lower wages. With lower effective corporate taxes we can attract the investment that will bring higher wages with it.Headline rates of corporation tax matter because they are the most obvious measure of how heavily investments in a given country will be taxed. They are the first place a firm will look in assessing whether a given tax system is competitive. It also is normally more efficient to have a low headline rate rather than lots of tax breaks for companies that behave in specific ways, in specific sectors, as those tax breaks distort investment decisions. The Government is cutting headline rates, though it could go further.

It isn’t only headline rates that matter though. The effective rate that companies actually pay on the returns on their investments is critical. The Cato Institute in Washington DC released a study last week with estimates of the marginal effective tax rate (METR) on new business investments in ninety countries. Their study shows that there is still a lot of work to do before Britain’s tax system is really the attractive place to invest that it should be given some of our other advantages.

Across all of those ninety countries, the METR on new business investment was 18.2 per cent in 2012, down from 21.5 per cent in 2005. In the developed economies which are more like Britain, and which can probably get away with higher rates on average with their more established economies, the average rate was 19.4 per cent, down from 22.2 per cent.

Britain did not compare well. Our overall marginal effective tax rate on business investments was 26.7 per cent. That is 7.3 per cent higher than the developed country average, let alone the average across all of the economies studied. It is expensive to invest in Britain. Given how important business investment is to put new innovations into practice and create more jobs and higher wages over time, those high tax rates are very bad news for all of us.

In the end, businesses don’t pay taxes any more than toasters play tennis. The taxes are paid by shareholders in lower revenues, customers in higher prices and workers in lower wages. With lower effective corporate taxes we can attract the investment that will bring higher wages with it.

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