TUC report on corporation tax

June 02, 2011 3:08 PM

Having recently written a policy briefing on corporation tax for the 2020 Tax Commission I was interested to see a new study by Richard Murphy for the TUC. Here are some thoughts on what I've seen so far:

• Murphy uses KPMG data to show that the UK rate of corporation tax is higher than the average rate of the EU, OECD, and non OECD countries. He caveats this by saying that it was lower than average in 1997 (so what?!) and that over 90% of UK companies pay the small company rate. But why is this important? Although small companies constitute a very large proportion of total companies, they only constitute about a third of total revenue. It's precisely because so much profit come from so few companies that the rate matters.

• Given the above it therefore seems odd that the executive summary reports that " UK mainstream corporation tax rates are currently comparable with other countries of similar size and economic profile to the UK" (note: "comparable" is being used to mean "higher"), and that the TUC press release turns this into "the effective corporate tax rate for large companies is currently estimated by PriceWaterhouseCoopers to be 23.2 per cent, far lower than the OECD average of 26.5 per cent." This figure comes from a  different section of the report, where Murphy relies on data relating to international obligations, relying on TUC analysis. It strikes me as a convoluted way to generate a desired conclusion, especially given that other studies calculating the effective corporate tax rate (finding that it is higher than most countries) are ignored.

• In my report I argue that corporation tax is volatile and revenues are hard to predict. So I'm surprised that Murphy pretends to know what they will be in 2016. We all know the poor track record of economists that make forecasts, and it is good practice to clearly label forecast data on any charts. The fact that he doesn't, is telling.

• In the executive summary Murphy claims to do the following "Reviews data on the relationship between corporation tax and growth in GDP and average employment rates in the EU15 states and selected other locations". The body of evidence that I survey in my paper seems to have been completely ignored. Instead Murphy provides his own analysis, and whilst there's nothing wrong with presenting new findings, this should be done with sufficient evidence. I find no account of his methodology or assumptions. The dataset does not seem to be available. If an economist does not make it easy to replicate his work, one should discount the strength of the findings accordingly.

In short I am disappointed by the quality of this report and the way the work is being presented. As I make clear in my study there is strong evidence that corporation tax burdens are passed on to employees though lower wages, and studies have focused on the impact this has on unionised labour. I say:

"Felix and Hines controlled for difficulties in comparing counterfactual wage estimates by focusing on union vs. non-union wages in comparable jobs, and across US states with varying rates of corporation tax. They find that union wage premiums are $1.88 per hour higher in low tax states, and that a 1 percentage point lower corporate tax rate is associated with a 0.36 percentage point increase in union wages. It makes intuitive sense that collective bargaining power will influence the extent to which reductions in CT are passed on to employees, but we are left with the curious finding that around 54 per cent of what might be paid as CT might otherwise be enjoyed as higher wages."


The fact that a report into corporation taxes by a trade union completely ignores this is regrettable. Corporation tax shouldn't be an ideological debate. It only takes a basic understanding of economics to realise that tax incidence matters, and it only takes a quick internet search to see that it falls on workers. Trade unions should be at the forefront of campaigns to help businesses survive and prosper, to employ more people and on better terms. Seeking to raise corporation tax is counter-productive and I urge people to see through reports like Murphy's.Having recently written a policy briefing on corporation tax for the 2020 Tax Commission I was interested to see a new study by Richard Murphy for the TUC. Here are some thoughts on what I've seen so far:

• Murphy uses KPMG data to show that the UK rate of corporation tax is higher than the average rate of the EU, OECD, and non OECD countries. He caveats this by saying that it was lower than average in 1997 (so what?!) and that over 90% of UK companies pay the small company rate. But why is this important? Although small companies constitute a very large proportion of total companies, they only constitute about a third of total revenue. It's precisely because so much profit come from so few companies that the rate matters.

• Given the above it therefore seems odd that the executive summary reports that " UK mainstream corporation tax rates are currently comparable with other countries of similar size and economic profile to the UK" (note: "comparable" is being used to mean "higher"), and that the TUC press release turns this into "the effective corporate tax rate for large companies is currently estimated by PriceWaterhouseCoopers to be 23.2 per cent, far lower than the OECD average of 26.5 per cent." This figure comes from a  different section of the report, where Murphy relies on data relating to international obligations, relying on TUC analysis. It strikes me as a convoluted way to generate a desired conclusion, especially given that other studies calculating the effective corporate tax rate (finding that it is higher than most countries) are ignored.

• In my report I argue that corporation tax is volatile and revenues are hard to predict. So I'm surprised that Murphy pretends to know what they will be in 2016. We all know the poor track record of economists that make forecasts, and it is good practice to clearly label forecast data on any charts. The fact that he doesn't, is telling.

• In the executive summary Murphy claims to do the following "Reviews data on the relationship between corporation tax and growth in GDP and average employment rates in the EU15 states and selected other locations". The body of evidence that I survey in my paper seems to have been completely ignored. Instead Murphy provides his own analysis, and whilst there's nothing wrong with presenting new findings, this should be done with sufficient evidence. I find no account of his methodology or assumptions. The dataset does not seem to be available. If an economist does not make it easy to replicate his work, one should discount the strength of the findings accordingly.

In short I am disappointed by the quality of this report and the way the work is being presented. As I make clear in my study there is strong evidence that corporation tax burdens are passed on to employees though lower wages, and studies have focused on the impact this has on unionised labour. I say:

"Felix and Hines controlled for difficulties in comparing counterfactual wage estimates by focusing on union vs. non-union wages in comparable jobs, and across US states with varying rates of corporation tax. They find that union wage premiums are $1.88 per hour higher in low tax states, and that a 1 percentage point lower corporate tax rate is associated with a 0.36 percentage point increase in union wages. It makes intuitive sense that collective bargaining power will influence the extent to which reductions in CT are passed on to employees, but we are left with the curious finding that around 54 per cent of what might be paid as CT might otherwise be enjoyed as higher wages."


The fact that a report into corporation taxes by a trade union completely ignores this is regrettable. Corporation tax shouldn't be an ideological debate. It only takes a basic understanding of economics to realise that tax incidence matters, and it only takes a quick internet search to see that it falls on workers. Trade unions should be at the forefront of campaigns to help businesses survive and prosper, to employ more people and on better terms. Seeking to raise corporation tax is counter-productive and I urge people to see through reports like Murphy's.

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