An interesting report in the Financial Times today reveals that almost a third of the UK's 700 biggest businesses paid no corporation tax in the 2005-06 financial year, while another 30 per cent paid less than £10 million each. Overall, the National Audit Office report found that the 700 companies paid around half of all the corporation tax paid.
There are a number of reasons for this. For example, pension contributions reduce the tax bill in the year they are paid, while a number of international firms were able to take advantage of tax relief on debt interest payments by having large amounts of debt in the UK.
But overall, a complex corporation tax system with a relatively high rate (30 per cent falling to 28 per cent from next April) makes it worthwhile for firms to seek ways to reduce their tax liabilities. A lower rate with fewer exemptions and reliefs would operate far more effectively.
The Financial Times leader, however, argues against a radical reduction in the main corporation tax rate, saying:
"Let us not fool ourselves into thinking - as the more enthusiastic campaigners against corporation tax seem to - that a lower rate of corporation tax will suddenly deliver so much new investment as to pay for itself. There is a case for lowering corporation tax, but increased revenue will not slide up the Laffer curve into our laps."
In fact, the FT has got it wrong. The TPA commissioned the respected Centre for Economics and Business Research to build a dynamic model of the UK economy. Simulating a phased reduction in the main rate of corporation tax to the Irish rate of 12.5 per cent over 9 years revealed that such a cut would boost not only GDP, employment, fixed investment and household income, but after five years tax revenues would be higher - precisely the Laffer curve effect. These higher tax revenues would come in the form of increased income tax and VAT receipts, as more people would have better paying jobs, more than offsetting the reduction in corporation tax revenues. By the end of the 15-year simulation period, government borrowing would be almost £30 billion lower.
Across eastern Europe and a number of other countries, corporation tax rates have been drastically reduced, with the expected positive effects on growth, investment and tax revenue.