Corporation Tax

Andrew Smithers
World Economics • Vol. 22 • No. 2 • April–June 2021, 1st July 2021


Key Points

• Corporation tax is a tax on investment. Current plans to increase the rate in the UK and the USA will, if implemented, severely damage their economies.

• That such self-destructive folly has met little opposition and is seldom even debated results from the weakness of current consensus economic theory - the neoclassical synthesis.

• The impact of corporation tax cannot be assessed without a command of financial economics. Except in the form of a few aprioristic and demonstrably false assumptions, finance is absent from the consensus model and this is widely accepted as its major fault.

• If implemented without offsetting policy measures, a rise in corporation tax will exacerbate two major economic problems. It will retard the already poor rate at which labour productivity and output grow and it will amplify the structural ex ante net investment deficit of the private sector.

• In the UK tax credits for tangible investment are planned for the next two years. The damage from a rise in corporation tax could be more than offset if these were made permanent and, in the USA, if similar credits were introduced.

Introduction

The tax receipts of government must reduce the income of the private sector and its consequent ability to consume or invest. Some of these revenues, including those attributed to corporation tax, VAT and some excise duties, are collected by companies but their burden must nonetheless reduce the private sector’s capacity to spend on consumption or investment. It is not collected from corporate interest payments nor, as I show later, can companies pass its burden on to them, so corporation tax can only fall on consumption if it reduces the income of shareholders, or employees. If it were to fall on shareholders, the return on equity would rise and fall with changes in corporation tax. If it fell on employees, their share of corporate output would respond to changes in the tax rate. As neither occurs, and corporation tax is not paid by company creditors, we know that the burden falls on investment.

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