Bringing capital taxation into the 21st century

Summary:

  • Corporation tax is an inefficient way to raise government revenue. It has a negative impact on growth, investment and entrepreneurship. A 2014 review of the literature found that 57.6 per cent of the amount raised by corporation tax is borne by workers.

  • Since 1981, the average corporate tax rate in key OECD countries has dropped from 47 per cent to 29 per cent. However, corporate tax revenues as a share of all taxation have remained stable during this time. They have increased as a share of GDP, in line with growth in the tax burden.

  • Economic developments such as globalisation and the growing importance of intangible assets underscore the need for reform of the way in which capital income is taxed.

  • The OECD’s BEPS proposals are likely to entail new costs and uncertainty for multinational firms. Furthermore, their volume and complexity means that effective implementation will be difficult, especially for developing countries.

  • Radical proposals for reform include a tax on turnover, a sales-based corporation tax, and formulary apportionment of multination profits. While these reforms might curb opportunities for tax avoidance, they would have damaging side-effects of their own.

  • The only radical reform that would improve on the status quo without introducing new distortions would be to replace corporation tax with a tax on the income distributed to shareholders. Such a system would overcome the weaknesses of the current system, while also reducing incentives for avoidance, and raising revenue in a growth-friendly way.

  • This reform could be implemented in stages to ensure the UK’s international tax treaties are updated. Once fully implemented, the new system would see UK shareholders taxed on their worldwide capital income, while foreign shareholders in UK firms would be exempt.

  • It is important to recognise that this discussion is about tax structure, and not necessarily the overall level of taxation. Those who wish to maintain existing levels of taxation would be better served by the proposed reform than by the status quo.


IEA discussion paper No. 74 

This paper featured in The Times, City AM and on Bloomberg. Director General Mark Littlewood appeared on BBC Radio 5 Live and report author Diego Zuluaga appeared on BBC WorldService.

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Head of Financial Services and Tech Policy | Director, EPICENTER

Diego was educated at McGill University and Keble College, Oxford, from which he holds degrees in economics and finance. His policy interests are mainly in consumer finance and banking, capital markets regulation, and multi-sided markets. However, he has written on a range of economic issues including the taxation of capital income, the regulation of online platforms and the reform of electricity markets after Brexit. Diego’s articles have featured in UK and foreign outlets such as Newsweek, City AM, CapX and L’Opinion. He is also a frequent speaker on broadcast media and at public events, as well as a lecturer at the University of Buckingham.

1 thought on “Why corporation tax should be scrapped”

  1. Posted 03/09/2016 at 15:24 | Permalink

    A load of fallacies I’m afraid.

    I have posted a full reply on my blog.

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