UK Elections Topic #3: Corporation Tax

Have you decided whom to vote in this General election?

Hope you were able to watch today’s TV debate.  It was a good eye-opener, which provided clear choice on whom to vote on 8th June.

On one side you have Labour that is standing for the many with a fully costed manifesto.  Its leader was democratically elected within the party with a very high grass-root majority, and also have a honest, sincere image.

On other side, you have the austerity party, which threatens the country with more cuts in all sectors including education, public services and NHS.  They also offer a leader who won the party leadership via walk-over, has been called a “weak and wobbly leader” who don’t even have the courage to meet common public on a national debate on serious issues.

This post is on Corporation Tax.

Here as well – there are clear choices between the main two parties.  Labour is asking for your vote to increase the corporate tax, while Tories promise to further reduce it.

Before proceeding, let me clarify:  I am not an economist and do not claim expertise on the subject.  I use the data available from government and independent organisations and apply common sense to arrive at conclusions.  If you have valid points to disagree with my deductions, let me know and I am happy to update this post.

 

So, what is this corporation tax?

To put in simple terms, it is the tax corporations pay on their profits.  That is, tax on real profit, AFTER all expenses (purchases, bills, salaries) have been paid, AFTER all tax credits have been consumed.

Let us compare this tax with income tax of an ordinary salaried person.  A salaried person pay tax on salary BEFORE his/her expenses.  I mean, the net salary they get in hand is after deducting tax at the source itself.  On top, they also pay VAT on purchases; in contrast, corporations pass on the VAT to consumers.

That is a real difference!

Now, let us compare the tax rates as well.  If you are lucky enough to be in the higher tax bracket (£45,000 – £150,000) in UK, you will pay 40% as income tax.  In contrast, current, single bracket, UK corporation tax is 19% – whatever be the profits!

Corporate (who enjoy other tax credits as well) pay flat 19% AFTER their profits (no limits), while you and me pay 40% tax on gross salary.

Do you think this is fair?

It is this rate that Tories want to reduce even further to 17%!

They justify that a reduced corporation tax rate will attract more investors.  Tories and their economists argue that if UK raises the corporation taxes, the businesses will look elsewhere to shift profit.

Is that argument true?  Is corporation tax the only way to attract businesses?

Independent, non-profit, World Economic Forum reported in Oct 2015 that the top 3 most attractive countries for investments were India, China and Brazil – with corporate taxes 34.61%, 25% and 34% respectively.

All of above mentioned countries have a higher corporate tax than UK’s 20% at 2015.

Here are the graphs on these statistics:

World Economic Forum report on world’s most attractive investment markets:

WEF-attractive investment markets

KPMG Corporate tax rates tool:

KPMG- corporate tax rates

In short, the statistics negate the Tory theory that by increasing corporate tax, businesses will leave the UK.

Instead, making UK a great place for investment is the key to attract corporations.

How can that be achieved?  By several factors, including by having:

  • talented workforce
  • educated youth
  • quality of life that educated and ambitious have come to expect
  • Attractive infrastructure investment
  • A strong industrial strategy

Labour manifesto have policies for each of above factors.

Will try to post on each of these topics in coming days.

Let me know your thoughts…..

 

 

 

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