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Report's findings contradict key principle of Conservative economic policy
Lower corporate tax rates may not boost economic growth, a new report suggests, taking issue with a key principle at the heart of the Tories' economic policies.
The report, by chartered accountant Richard Murphy on behalf of the Trades Union Congress, suggests the correlation between lower corporate tax rates and higher economic growth is weak at best. "Low corporate tax rates reduce revenues, but fail to create jobs," the report says.
The conclusion is based on an analysis of the corporation tax rates of OECD countries between 1997 and 2010. "Analysis of the correlation between tax rates and growth in OECD countries (excluding the top and bottom outliers) finds that, at best, the relationship between the two variables is weak," Murphy concluded.
The coalition has cut the headline rate of corporation tax in order to boost growth. It was 28% when Labour left office and will reach 23% by 2013. In the last budget, the government said: "The reductions in the rate of corporation tax and healthy financial position of UK companies in aggregate should help support further investment growth."
Ministers say they want to make the UK competitive and attractive for multi-nationals. TUC general secretary Brendan Barber said: "The government has been seduced by employer calls for more corporate tax cuts. But while everyone wants to pay less tax, from multinational corporations to ordinary taxpayers, the argument that simply cutting corporation tax will fuel jobs and growth does not stand up to scrutiny."
Mike Devereux, director of the Oxford University Centre for Business Taxation, said the report did not take into account all the variables that might affect growth rates in order to establish whether corporation tax affected investment.
"The evidence for whether corporation tax affects growth in this report is weak, to say the least," he added. "As the report acknowledges, there are all kinds of things which may affect growth rates. Looking at a correlation means you are not controlling for any other differences. There are all kinds of reasons why growth rates might differ."
The TUC study contradicts a detailed analysis conducted by the OECD. Published in November 2010, it found that corporate taxes were the most harmful type of tax for economic growth.
Devereux suggested the research itself was not definitive, however, but added: "To say corporation tax does not affect growth is just ignoring quite a lot of academic literature."
A Treasury spokesman said: "The government's priority is securing sustainable growth. By cutting corporation tax to 23% by 2014 the government will reduce the cost of new investment and incentivise activity across the economy."
As well as challenging the government's corporation tax policy, the TUC report suggests that changes to anti-avoidance rules will see the tax base eroded, further reducing corporation tax revenues. New rules exempting dividends paid by foreign subsidiaries to UK parent companies, as well as more weakly controlled foreign company rules, would all make it easier for multinationals to dodge UK corporate taxation, the TUC said.
High-profile campaigns by activists UK Uncut against Vodafone, Boots, Fortnum & Mason and retail tycoon Sir Philip Green have raised the profile of corporate tax avoidance in recent months as critics suggest that without it there would not be a need for cuts to public services. Ministers reject the argument.
