Line chart comparing UK corporation tax as a percentage of GDP with the headline rate: While the headline corporation tax rate has fallen over time in a series of steps (purple line), corporation tax as a percentage of GDP has fluctuated substantially (red line) without following the downward trend of the headline rate. Title: Corporation tax as a % of GDP, compared with headline rate Axes and legend: None shown. The chart contains a grid with no visible axis labels, scales, dates, or legend. Visible series: - Purple line with dots: descends over time in step-like decreases. - Red line with orange dots: fluctuates cyclically with peaks and troughs.

Why the 25% corporation tax increase is a bad idea which I support

Corporation Tax
12 February 2023

10 Comments

Updated: raising corporation tax to 25% will take the effective rate to the highest it’s ever been in the UK, and one the highest in the developed world. That’s bad – but the alternatives are worse.

The Johnson government increased corporation tax from 19% to 25% from April 2023. The mini-Budget reversed this. Then Jeremy Hunt’s Autumn Statement reversed the reversal, taking the rate back to 25% from April. Not a hugely stable environment for business. But how should we assess the merits of the increase to 25%? Should we reverse the reversal of the reversal?

The standard argument for the increase goes something like this:

“We’ve been cutting corporate tax for 25 years, it’s gone too far, and it’s time to go back to 25%. After all, the rate was 33% in the 80s, and is now 19%, so 25% is still a pretty good deal.”

That argument is usually accompanied by this chart, showing the headline rate falling dramatically:

Line chart showing the UK corporation tax headline rate from 1978 to 2020: The UK headline corporation tax rate fell substantially over the four decades, declining from 52% in 1978–1983 to 19% by 2018–2020. Major periods of reduction occurred between 1983 and 1987 (falling from 52% to 35%) and between 2011 and 2018 (falling from 28% to 19%). UK corporation tax headline rate, 1978-2020 Y-axis: Corporation tax rate (0% to 60%, marked in 10% increments) X-axis: Year (1975 to 2020, marked in 5-year increments) Logo: TAX POLICY ASSOCIATES Data points: 1978: 52% 1979: 52% 1980: 52% 1981: 52% 1982: 52% 1983: 52% 1984: 50% 1985: 45% 1986: 40% 1987: 35% 1988: 35% 1989: 35% 1990: 35% 1991: 35% 1992: 33% 1993: 33% 1994: 33% 1995: 33% 1996: 33% 1997: 33% 1998: 33% 1999: 31% 2000: 30% 2001: 30% 2002: 30% 2003: 30% 2004: 30% 2005: 30% 2006: 30% 2007: 30% 2008: 30% 2009: 28% 2010: 28% 2011: 28% 2012: 26% 2013: 24% 2014: 23% 2015: 21% 2016: 20% 2017: 20% 2018: 19% 2019: 19% 2020: 19%

This is rather less persuasive if we look at the corporate tax actually paid – here’s an overlay showing UK corporation tax receipts (in red) as a % of GDP:

Line chart comparing UK corporation tax as a percentage of GDP with the headline corporation tax rate from 1978 to 2020: While the headline corporation tax rate fell substantially from 52% in the late 1970s to 19% by 2020, corporation tax revenues as a share of GDP remained largely steady, fluctuating between roughly 1.7% and 4.5% without a direct downward trend. Title: Corporation tax as a % of GDP, compared with headline rate Horizontal axis: 1975 to 2020 in 5-year intervals. Left vertical axis: Corporation tax as a % of GDP (labelled 0%, 1%, 1%, 2%, 2%, 3%, 3%, 4%, 4%, 5%). Right vertical axis: Headline rate of corporatino tax (0% to 60% in 10% intervals). Headline rate (purple line with purple circular markers): 1978-1983: 52% 1984: 50% 1985: 45% 1986: 40% 1987-1990: 35% 1991-1997: 33% 1998: 31% 1999-2007: 30% 2008-2010: 28% 2011: 26% 2012: 24% 2013: 23% 2014: 21% 2015: 20% 2016: 20% 2017-2020: 19% Corporation tax as a % of GDP (red line with yellow markers): 1978: ~2.4% 1979: ~2.1% 1980: ~1.7% 1981: ~1.9% 1982: ~1.8% 1983: ~2.1% 1984: ~2.5% 1985: ~3.1% 1986: ~3.2% 1987: ~3.4% 1988: ~4.5% 1989: ~3.1% 1990: ~2.6% 1991: ~1.9% 1992: ~1.7% 1993: ~2.0% 1994: ~2.3% 1995: ~2.6% 1996: ~3.2% 1997: ~3.3% 1998: ~3.1% 1999: ~3.3% 2000: ~3.2% 2001: ~2.8% 2002: ~2.5% 2003: ~2.4% 2004: ~2.9% 2005: ~3.2% 2006: ~3.1% 2007: ~3.0% 2008: ~2.4% 2009: ~2.6% 2010: ~2.7% 2011: ~2.5% 2012: ~2.4% 2013: ~2.3% 2014: ~2.4% 2015: ~2.3% 2016: ~2.7% 2017: ~2.7% 2018: ~2.6% 2019: ~2.2% 2020: ~2.2% Bottom right: TAX POLICY ASSOCIATES logo.

The rate fell. The revenues bounced around with the business cycle, but fundamentally didn’t change much, if at all.

Could it just be that corporate profits rose, so the declining rate multiplied by increased profits kept revenues broadly constant? We can test that by dividing corporation tax revenues by the corporate “gross operating surplus” in the national accounts, which gives us a reasonable proxy for the overall effective tax rate. Again we see that the plummeting headline rate does not lead to much, or perhaps any, reduction in the actual effective rate (particularly bearing in mind that the 2020 figures are depressed by Covid).:

Line chart comparing the approximate overall effective rate of UK tax on corporate profits with the headline corporation tax rate between 1978 and 2020: While the headline corporation tax rate fell substantially from 52% in 1978 to 19% by 2020, the approximate overall effective tax rate fluctuated between approximately 8% and 15% with a slight upward trend over the entire period. Approximate overall effective rate of UK tax on corporate profits compared with headline rate, 1978-2020 Left y-axis (yellow): Approx overall effective rate of tax on corporate profits (see notes), 0% to 16% Right y-axis (purple): Headline rate of corporatino tax, 0% to 60% x-axis: 1975 to 2020 Logo: TAX POLICY ASSOCIATES Data points (Year | Headline rate [purple] | Approx overall effective rate [yellow]): 1978 | 52% | ~10.2% 1979 | 52% | ~9.2% 1980 | 52% | ~8.7% 1981 | 52% | ~8.6% 1982 | 52% | ~7.9% 1983 | 52% | ~9.7% 1984 | 50% | ~10.8% 1985 | 45% | ~13.0% 1986 | 40% | ~12.7% 1987 | 35% | ~13.1% 1988 | 35% | ~13.6% 1989 | 35% | ~12.8% 1990 | 35% | ~11.1% 1991 | 35% | ~9.6% 1992 | 33% | ~8.1% 1993 | 33% | ~9.7% 1994 | 33% | ~11.4% 1995 | 33% | ~12.0% 1996 | 33% | ~12.9% 1997 | 33% | ~12.3% 1998 | 33% | ~14.9% 1999 | 31% | ~13.8% 2000 | 30% | ~13.6% 2001 | 30% | ~11.5% 2002 | 30% | ~10.2% 2003 | 30% | ~11.9% 2004 | 30% | ~13.6% 2005 | 30% | ~13.9% 2006 | 30% | ~14.2% 2007 | 30% | ~12.4% 2008 | 30% | ~10.6% 2009 | 28% | ~12.1% 2010 | 28% | ~11.5% 2011 | 28% | ~10.4% 2012 | 26% | ~9.8% 2013 | 24% | ~9.7% 2014 | 23% | ~10.1% 2015 | 21% | ~10.8% 2016 | 20% | ~11.5% 2017 | 20% | ~11.9% 2018 | 19% | ~13.2% 2019 | 19% | ~10.2% 2020 | 19% | ~8.0% A yellow dashed linear trendline for the approximate overall effective rate rises gradually from approximately 11% in 1978 to about 11.7% in 2020.

How can the tax take remain the same when the rate has fallen so dramatically? Because of a series of technical changes that meant that, at each stage when the rate went down, the tax base (the definition of “profits” to which the rate applies) expanded. Tax = rate x base. So, through accident or brilliant HM Treasury design, nothing much changed.

The rate increase to 25% is, by contrast, accompanied by nothing that reduces the tax base. It will therefore simply represent a 1/3 increase in the amount of tax companies pay, making our chart look like this:

Line chart comparing UK corporation tax receipts as a percentage of GDP with the headline corporation tax rate from 1978 to 2024: While the headline corporation tax rate dropped steadily from 52% in the late 1970s and early 1980s down to 19% between 2017 and 2022 before rising to 25%, corporation tax receipts as a share of GDP did not decline, fluctuating between roughly 1.7% and 4% throughout the period before rising steeply to around 4.4% in 2023. Corporation tax as a % of GDP, compared with headline rate Left vertical axis: Corporation tax as a % of GDP (labelled 0%, 1%, 1%, 2%, 2%, 3%, 3%, 4%, 4%, 5%) Right vertical axis: Headline rate of corporatino tax (0% to 60% in 10% increments) Horizontal axis: Year (1975 to 2025 in 5-year intervals) Logo: TAX POLICY ASSOCIATES Series 1: Headline rate of corporation tax (purple line with purple dots): - 1978 to 1983: 52% - 1984: 50% - 1985: 45% - 1986: 40% - 1987 to 1990: 35% - 1991 to 1997: 33% - 1998: 31% - 1999 to 2007: 30% - 2008 to 2010: 28% - 2011: 26% - 2012: 24% - 2013: 23% - 2014: 21% - 2015 to 2016: 20% - 2017 to 2022: 19% - 2023 to 2024: 25% Series 2: Corporation tax as a % of GDP (red line with yellow dots): - 1978: ~2.4% - 1979: ~2.1% - 1980: ~1.7% - 1981: ~1.9% - 1982: ~1.8% - 1983: ~2.1% - 1984: ~2.5% - 1985: ~3.1% - 1986: ~3.2% - 1987: ~3.4% - 1988: ~4.0% - 1989: ~3.1% - 1990: ~2.6% - 1991: ~1.9% - 1992: ~1.7% - 1993: ~2.0% - 1994: ~2.3% - 1995: ~2.6% - 1996: ~3.2% - 1997: ~3.3% - 1998: ~3.1% - 1999: ~3.3% - 2000: ~3.2% - 2001: ~2.8% - 2002: ~2.5% - 2003: ~2.4% - 2004: ~2.9% - 2005: ~3.2% - 2006: ~3.1% - 2007: ~3.0% - 2008: ~2.4% - 2009: ~2.6% - 2010: ~2.7% - 2011: ~2.5% - 2012: ~2.4% - 2013: ~2.3% - 2014: ~2.4% - 2015: ~2.3% - 2016: ~2.7% - 2017: ~2.7% - 2018: ~2.6% - 2019: ~2.2% - 2020: ~2.2% - 2021: ~1.8% - 2022: ~2.8% - 2023: ~4.4%

And UK corporate tax will, as a % of GDP, become one of the highest in the developed world – of large economies, only Japan and Canada’s would be higher:

Bar chart comparing corporate tax as a percentage of GDP across OECD countries, showing the projected impact of the UK increasing its rate to 25%: Increasing the UK corporation tax rate to 25% raises corporate tax revenue from approximately 2.8% of GDP to around 3.7% of GDP, lifting the UK from the middle of the OECD table to seventh highest, just behind Japan and above Mexico. Corporate tax as % of GDP, showing impact of UK increasing rate to 25% TAX POLICY ASSOCIATES Y-axis: 0%, 1%, 1%, 2%, 2%, 3%, 3%, 4%, 4%, 5%, 5% (representing 0.0% to 5.0% in 0.5% increments) Data by country (approximate values read against axis gridlines): Australia: ~4.7% Chile: ~4.7% New Zealand: ~4.6% Luxembourg: ~4.6% Canada: ~4.2% Japan: ~3.8% United Kingdom: baseline ~2.8% (blue), increased rate adds ~0.9% to total ~3.7% (red) Mexico: ~3.6% Korea: ~3.4% Belgium: ~3.3% Ireland: ~3.2% Netherlands: ~3.1% Switzerland: ~3.1% Czech Republic: ~2.9% Sweden: ~2.8% Israel: ~2.8% Portugal: ~2.7% Denmark: ~2.6% Slovak Republic: ~2.5% Norway: ~2.4% France: ~2.3% Poland: ~2.3% Greece: ~2.2% Iceland: ~2.2% Finland: ~2.1% Italy: ~2.1% Turkey: ~2.1% Austria: ~2.1% Spain: ~2.0% Estonia: ~1.7% Germany: ~1.6% Lithuania: ~1.6% Slovenia: ~1.3% United States: ~1.3% Hungary: ~1.0% Latvia: ~0.8%

So I am convinced that raising corporate tax is a bad idea. The problem, however, is that the 25% increase was “banked” in government accounts, and the cancellation of the increase in the mini-Budget was unfunded. The £16bn+ it costs would therefore have been distributed opaquely throughout society through inflation and/or higher interest rates. I don’t regard that as good tax policy.

Alternatively one could keep the rate at 19% by cutting spending, or raising taxes elsewhere – that would certainly be a rational position to take (whether you agree with it or not), but it’s an argument that I don’t hear anyone making.

And, finally, you could argue that increasing the rate to 25% will actually bring in no more revenue, because profits will drop – in other words, the 25% is past the “revenue maximising point”. The problem with this is that there’s no evidence for it in the response to previous rate reductions.

So taking the rate to 25% feels like the least bad of several bad ideas. I therefore unenthusiastically support it.

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Footnotes

  1. Two big caveats: (1) GOS is not the same as accounting profit, and in particular excludes depreciation (so the chart understates ETR), (2) the tax stats are for cash collected by HMRC in a tax year, which used to lag profits by around a year, and now mainly doesn’t – neither factor should affect the overall trend, but both will create/mask considerable noise. With some work they could be corrected, and I’d love it if someone did that. ↩︎

  2. I’ve added a trendline which shows a slight increase over time, but I’d be hesitant to draw too many conclusions given the large fluctuations across the business cycle ↩︎

  3. Another factor is that a wave of incorporation by small businesses has artificially inflated corporation tax revenues, but at the cost of (greater) reductions in income tax. This effect, however, is too small to impact the trends visible in the charts above – it’s about £1bn. ↩︎

  4. It would have gone higher than this, because this chart doesn’t include the effect of the bank surcharge, which at 8% would have meant banks would have been be paying 33% on their profits. However, controversially but sensibly, the increase to 25% was accompanied by a reduction in the surcharge to 3% ↩︎

  5. And Canada, like Australia, is driven by the high tax revenues from mining/oil/gas ↩︎

10 responses to “Why the 25% corporation tax increase is a bad idea which I support”

  1. Andrew avatar
    Andrew

    It is extraordinary the amount of attention that corporation tax gets, despite it being a relatively small part of the overall tax take – typically below 10%, and well behind any of the “big three”, income tax, NICs and VAT. But I suppose salience is not related to overall amounts, otherwise people would not be so worried about inheritance tax or fuel duties.

    Clearly the headline rate of corporate income taxes is an important signal, particularly for internationally mobile businesses that could be based in Rotterdam or anywhere, and it is one reason why multinational companies choose Dublin over London. But it is only one factor among many, and many businesses choose the UK or Luxembourg or the Netherlands over Jersey or Cayman.

    Broadening the base and lowering the rate is usually a good approach (one that our antiquated inheritance tax would benefit from) but I see corporation tax largely as an anti-avoidance measure, so it is odd that the headline rate of corporation tax should be lower than the basic rate of income tax, and much lower than the higher and additional rates or even the basic rate when NICs is added (I would make a similar argument for increasing the rates of capital gains tax, perhaps to a flat 30% but ideally aligning with income tax). In my experience, few businesses or advisers were demanding a 19% rate of corporation tax, and the OECD’s Pillar 2 proposals for a minimum 15% tax show the “race to the bottom” on rates may be arrested for some time. On balance, 25% feels like a sensible place to be.

    I understand why you might want to compare corporation tax revenues to GDP, but the rather odd way the latter is estimated (not just the enormous value of what is left out, but I learned today that around 10% of UK GDP is imputed rents on owner occupied properties) and the distortions caused by tax reliefs (losses, capital allowances, share options) and exemptions (dividends, branches, shareholdings) make the link rather less than direct. Is it so terrible for the UK to be in the same company as Australia, New Zealand, Luxembourg, and Canada, rather than Israel and Portugal?

    Reply
  2. roymichaeldean@yahoo.co.uk avatar
    [email protected]

    Less than £250,000 Profit it remains at 19%
    So I will configure my company to pay 19%

    Reply
    1. Dan avatar
      Dan

      that wouldn’t make sense. It’s not like VAT – exceed the threshold and everything pays tax at 25%. The rate smoothly curves. You are always better off making an additional £1 of profit

      Reply
  3. Paul avatar
    Paul

    It might be worth considering a lower rate for smaller businesses who see Corporation Tax as a big concern. They are not blessed with tax advisors and their salary/dividends are counted for Corporation Tax and then taxed as personal income.
    Removal of the CT element enables investment in people and equipment.

    Reply
    1. Dan avatar
      Dan

      When the rate goes up to 25%, they will be re-introducing the lower rate for small businesses. The problem with this is that you then need a series of fairly complex rules to prevent people from fragmenting a business across multiple separate companies, and claiming the small company rate for each one. That has historically led to significant uncertainty for normal companies, and avoidance by the usual suspects. Suffice to say, I am not a huge fan!

      Reply
      1. Peter Cooper avatar
        Peter Cooper

        I believe they’re going back to a pre-2014 style system to “associated companies” dividing up the allowance between them. This is going to be quite entertaining with an increasingly common setup of having two Ltd companies – one for trade, and one for investment/buy-to-let (that doesn’t qualify under the tight “passive” company rules), since the £50k taper band will get divided down to £25k and folks controlling companies with a lot of trade and relatively lower investment income (or vice versa) will end up paying even more corporation tax than expected. If folks own multiple Ltd companies, it gets divided down even more.

        Reply
  4. Thomas Lee Hutcheson avatar
    Thomas Lee Hutcheson

    Except as an admirative convenance to get at shareholders’ income that might not be reported, why tax busines income at all? At best (all business income is treated exactly the same except for timing of realization) we are taking shareholders with different marginal tax rate at the same rate. But more important, business tax codes are littered with special treatment for and endless variety of “good” uses of business income, especially investment is favored activities. Abolish it, impute business income to shareholders, raise personal income tax rates, and allow greater deductions for contribution to savings schemes (with the same rates being applied to withdrawals).

    Reply
    1. Dan avatar
      Dan

      several reasons: (1) taxing individual shareholders is hard, particularly if they are foreign; (2) it creates wonderful avoidance opportunities for individuals to shift their income into companies and either defer tax or pay no tax.

      Reply
      1. Call me Al avatar
        Call me Al

        A number of countries have a withholding tax on dividends paid to non-residents. It isn’t clear to me why the UK doesn’t. Non-residents can invest in UK companies, benefit from no UK tax on the dividends issued to them and no UK tax on any gains on sale of the shares. So the money relating to those shares ultimately vanishes offshore with no benefit to the UK exchequer.

        Reply
  5. Abhay Abhyankar avatar
    Abhay Abhyankar

    Can we see a graph of the amount of corporate tax raised in every financial year along with the tax rate?

    Reply

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