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Postponing tax rises doesn’t help

Summary:
There is a scene in Yes Minister where Sir Humphrey, goaded by Hacker into giving a straight answer for once, blurts out:“If you’re going to do this damn silly thing, don’t do it this damn silly way.”The Chancellor could have done with that sort of straight talking before today’s Budget speech - it might have stopped the announcement that corporation tax will be increased from 19% to 25%, but only from April 2023.  It fits perfectly – not only the wrong thing to do, but done in the wrong way, making it even worseI wrote just before the Budget about what a bad idea tax rises would be and that applies especially to business taxes.  Taxing companies sounds like a free ride for the government - more money for the Treasury without taking it from voters. But it is voters – especially people

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There is a scene in Yes Minister where Sir Humphrey, goaded by Hacker into giving a straight answer for once, blurts out:

“If you’re going to do this damn silly thing, don’t do it this damn silly way.”

The Chancellor could have done with that sort of straight talking before today’s Budget speech - it might have stopped the announcement that corporation tax will be increased from 19% to 25%, but only from April 2023.  It fits perfectly – not only the wrong thing to do, but done in the wrong way, making it even worse

I wrote just before the Budget about what a bad idea tax rises would be and that applies especially to business taxes.  

Taxing companies sounds like a free ride for the government - more money for the Treasury without taking it from voters. But it is voters – especially people looking for work – who actually bear the burden of corporation tax.

A company is just a legal structure, so whenever a company pays tax, the cost has to fall on real people:

  • either the company has less money, so the shareholders become less wealthy;

  • or the company puts up its prices to maintain its after-tax income, meaning its customers have to pay more;

  • or the company cuts its staff costs, perhaps freezing wages, hiring fewer staff or automating more, so that the workforce suffers.

The bad news for the Chancellor is that most of the pain of corporation tax rises falls on workers. This is one of the things about tax economics that we are fairly certain about. A huge study by Oxford University found that, for each extra £100 that the Chancellor taxes from business, the workforce will lose £75.  Few economists think that estimate is excessive; many would put it even higher.

This does not usually mean direct wage cuts – those are rare. More likely is a hiring freeze – not replacing staff when they leave. But most damaging are the jobs that are lost because they were never created – the new businesses that were not formed, the expansion plans that were shelved, because the higher taxes meant that investment plans were no longer viable.

This means that corporation tax rises are very unfair, because the burden of the tax falls in an uneven, random manner.  Increasing income tax might cause problems, but at least we have a rough idea of who will pay what. But as corporation tax causes staff to be laid off, or new staff not to be hired, its effect is random. Worse, it tends to hit hardest those who are looking for work – the unemployed, or young people looking for their first job – or those in marginal jobs.

That is not a sensible or equitable tax policy, especially as we try to recover from the already unequal effects of lockdown.

Neither does it help to postpone the tax rise. Does the Chancellor really think that businesses only do their planning based on today’s tax rates? Of course they don’t. Potential investments are judged by looking at the future returns that they will generate — the after-tax profits — and any significant investment will be looking years into the future to judge whether it is worthwhile. Of course those projections will take account of planned tax rises – it would be negligent not to.

So the announced 2023 tax rise is already going to cause its damage, because any business considering investment will already be factoring it in.

The Chancellor has chosen the worst of all worlds – damaging jobs now and putting the post-lockdown recovery at risk - doing so in a way that harms the young and the unemployed, those least able to bear the burden - but not even collecting any money from his tax rise for over two years.  

Don’t do this damn silly thing.  But if you must, don’t do it this damn silly way.

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