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Sustainable Economy > Published by Rayhan Haque, June 3rd 2010 at 1:05 pm

Osborne’s corporation tax cut will not boost private sector output

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Additional reporting by Aaron Peters, writer on public policy, social media and social networks; he works as a researcher at Tomorrow’s Company

With only a few weeks remaining till the emergency budget is delivered by the new Chancellor of the Exchequer George Osborne, closer scrutiny of one of his key policy positions to date, a more competitive business environment founded on a reduced rate of corporate tax, is now necessary.

Mr Osborne recently declared in his first major speech to the CBI that he had a five year ‘roadmap’ to comprehensive corporate tax reform and that the coalition government would:

“Reform the corporate tax system by simplifying reliefs and allowances, and tackling avoidance, in order to reduce headline rates… our aim is to create the most competitive corporate tax regime in the G20, while protecting manufacturing industries.”

What is all too infrequently overlooked however is that when one looks at international examples there is very little correlation between comparatively lower rates of corporate tax and a successful private sector, specifically when it comes to success in export-oriented manufacturing.

G7-combined-corporate-income-tax-rates

Indeed the current rate of corporate tax (27 per cent) that we have in the UK is already the lowest among the G7 and among the lowest in the G20 – it is much lower than in Brazil or India, both of whom have a levy of 34 per cent.

Importantly of those countries that record greater levels of exports than the United Kingdom (and there are nine of them) only three – China, South Korea and the Netherlands – have lower corporate tax rates, leaving countries with truly innovative and world class private sectors such as Germany, Japan and the USA, second, third, and fouth in exporters after China, with less ‘competitive’ business tax regimes at present than the United Kingdom – the rate of corporate tax in Japan, the great success story of 20th-century enterprise and innovation economics, is a somewhat staggering 40 per cent.

The evidence is overwhelming – while lower rates of corporate tax serve to attract overseas companies to relocate (as was the case with Google going from London to Dublin) indulging in a race towards the bottom is hardly the way to build a more export-oriented, high-tech economy that Messieurs Clegg, Osborne and Cameron have consistently strived for.

According to the Geneva-based World Economic Forum, Sweden, followed by Finland and Denmark, is Europe’s most competitive economy. The organisation points this out in its Lisbon review 2010:

“The Nordic countries are the strongest European performers in the area of innovation, attributable to their companies’ aggressiveness in adopting new technologies and their level of spending on research and development, and the high degree of collaboration between universities and the private sector in research.”

Britain is languishing in ninth place, behind both France and Germany. The key is not in reducing headline rates of corporation tax, but incentivising long-term strategic and sustainable investment and innovation.

Osborne should be focusing on how capital allowances can be made more effective, and in particular, how the government can conjure a more inventive manufacturing culture in Britain. As the WEF explains, the key to Sweden’s success was their dynamic and creative investment culture:

“In terms of innovation ‘output’, they register among the highest rates of patenting per capita internationally.”

We need a government that will rebalance our economic base, not one that shifts the tax burden from the city to the manufacturing world.

The examples of Japan, Germany, France and even the US serve well to remind us that what is the cornerstone to an innovative and dynamic private sector can never be simplistically reduced to just lowering taxes but must also include a strategy founded upon a capability-formation approach that centres on building the skills of citizens and adds to our nation’s aggregate human capital. In his book ‘Development as Freedom’, Amartya Sen points out how history tells us that it is this key factor, human capital and the formation of skills, that is the single most crucial variable in creating dynamic and enterprising private sectors.

For a progressive it makes far more sense to retain the present level of corporate tax or even slightly increase it in order to foment greater capability formation among the population focusing particularly on the long term unemployed and low skilled. Of greater importance to creating a dynamic 21st-century British economy than a low tax framework for businesses is offering companies a British population that is highly skilled, competent and self-reliant.

Much crossover exists in this area with the issue of long-term unemployment, NEETs and the historic proclivity of the UK to fill shortages in the labour market with better qualified economic immigrants. Progressives should stand against the reduction in corporate tax and argue for the point that a dynamic, highly skilled economy that adds high end value in global commodity chains needs a dynamic and highly skilled citizenry. The latter can only be paid for through general taxation and if companies are to benefit from British talent they should seek to adequately contribute to its formation.

  • http://twitter.com/mr_onions/status/15320477502 Richard Johnson

    RT @leftfootfwd: Osborne’s corporation tax cut will not boost private sector output: http://bit.ly/9En1vp

  • http://twitter.com/tugsandtost/status/15321103869 matthew bond

    RT @ralasdair: Glad to see @LeftFootFwd demolish the idea we need to slash taxes for corporations. http://bit.ly/9xosH2

  • http://twitter.com/aaronjohnpeters/status/15322784883 aaron peters

    RT @leftfootfwd: Osborne’s corporation tax cut will not boost private sector output: http://bit.ly/9En1vp

  • http://twitter.com/aaronjohnpeters/status/15322784883 aaron peters

    RT @leftfootfwd: Osborne’s corporation tax cut will not boost private sector output: http://bit.ly/9En1vp

  • http://twitter.com/pollybooth/status/15323260415 Polly Booth

    @DMiliband pls mention how much of a 'schoolboy' Osbourne is when it comes to economics. http://bit.ly/9En1vp & he's my local MP for shame!

  • http://twitter.com/ralasdair/status/15320993571 ralasdair

    Glad to see @LeftFootFwd demolish the idea we need to slash taxes for corporations. http://bit.ly/9xosH2

  • http://twitter.com/hitchineng/status/15327631207 Hitchin England

    Osbornes corporation tax cut will not boost private sector output: http://bit.ly/9En1vp via @leftfootfwd

  • Tom Parkinson

    Peters from Ray I’d expect that – but you try and use competition and innovation interchangably? What…? and also you make the ludicrous claim that aggregate human capital can only be raised by the state – this confuses human capital with education (which I assume you are taking for granted can only be provided by the state). You know better Peters – privately financed social innovations…? Employer led programmes – McDonalds offers its own apprenticeships – not the greatest example sure but it was Labour’s idea to raise human capital at cost neutrality. You also assume raising the aggregate level of human capital costs for money (always with the left) when in reality a restructuring of educational focus making it more correlative to skill shortages and business needs (i.e. no more photography courses at university ) would argubaly be cost neutral. Its about a framework – NOT MORE MONEY. I fail to see why corporate tax should be juxtaposed in this way against the export market. Lower corporate tax isn’t going to lower exports so it seems you’ve picked a bad guy and tryed to say the cost prevents a good guy and IMO done it badly. The two paragraphs which precede the final one are ok though.

  • http://bestblogs.labourhome.org/2010/06/03/osborne%e2%80%99s-corporation-tax-cut-will-not-boost-private-sector-output/ Osborne’s corporation tax cut will not boost private sector output « The best Labour blogs

    [...] More… [...]

  • Aaron Peters

    Hi Tom. The main point is that the tories have picked a very unnuanced and simplistic solution to solving the major problems of the private sector in the UK. The facts are we already have an incredibly effective corporate tax regime (more so for a Hayekian like yourself!) Indeed it is, after what will happen to capital gains tax, one of the few taxes that would be judged to be already appropriate for a market liberal (given the parlous state of the public finances) unlike say the 50% tax rate for example.

    The undoubted problem we have, and we all most recognise it, is a deficit in human capital and infrastructure vis-a-vis our main economic competitors and it is imperative we invest in these areas with both public and private capital. South Korea has 80% of under thirties going to university (doing proper subjects btw), Brazil is developing high speed, China has Maglev and what do we do? Engage in a race to the bottom.

    These are the key areas; high speed rail, an ultra highspeed broadband network, universal literacy, universal digital inclusion, much, much more investment in science and hi tech (the scrapping of the Semantic web institute at the BIS for £30 million was profoundly myopic) and accomodating much more high-tech venture capital in the UK (there is more of this in California than in the whole of Europe).

    Regarding your comment “the ludicrous claim that aggregate human capital can only be raised by the state” – it is fair to say that universal literacy, numeracy and widespread good health only occur in the developed world with the rise of state intervention in the latter half of the nineteenth and twentieth centuries. I would suggest a good dose of Galbraith and Sen for your Thatcherite fever!

  • Anon E Mouse

    Aaron Peters – The economic output of California is huge and their personal tax rate is 10.66% – surely it follows that lower taxes stimulate growth?

  • Aaron Peters

    California is also bankrupt. What stimulates growth in California is incredibly talented, dynamic individuals – sufficiently capitalized through high risk venture capital to pursue their start up dreams. If you look at the 2010 Global Innovation index South Korea and Sweden are as innovative as America (if not more so) with higher tax economies. Key difference is that their total external debts (public + private debt owed to non-national creditors) is also comparatively v. low.

    California’s performance is all about venture capital funds possesing investor cultures that aren’t incredibly short termist as they are over here – thats why Berners-Lee and Wolfram made their mark in the States and not the UK – very little to do with tax all to do with an abundance of seed capital for great ideas and a risk-loving culture.

    FYI – between 1979-1997 under ‘low tax’ Tories gdp growth averaged 2% in the UK per annum. Indeed the economy was 5% smaller in 1983 than it was 1979. Cross-verify if you wish.

    If we can combine the high risk venture capital and can-do culture of California with European levels of human capital and infrastructural investment. We will enjoy extraordinary growth.

    Low tax in isolation is nowhere near enough. If only it were that simple.

  • http://twitter.com/jruddy99/status/15344125472 John Ruddy

    RT @leftfootfwd: Osborne’s corporation tax cut will not boost private sector output http://bit.ly/9En1vp

  • http://twitter.com/oranjd/status/15515796190 James Doran

    RT @leftfootfwd: Osborne’s corporation tax cut will not boost private sector output http://bit.ly/9En1vp

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  • http://twitter.com/aaronjohnpeters/status/32227120121913345 aaronjohnpeters

    A short piece that disputes some of the thinking implicit in the Institute of Directors position on tax http://bit.ly/bjN8PS #ukuncut

  • http://twitter.com/lisaansell/status/32229132087599104 lisaansell
  • http://twitter.com/boredlondongurl/status/32230580158472192 boredlondongurl
  • http://twitter.com/aaronjohnpeters/status/96532069496258560 Aaron Peters

    @Rolo_Tamasi if you listen to facts, evidence rather than hubris read this http://bit.ly/qdsx1x