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Chop corporation tax, Chancellor Hunt, to save the country


MANY are rejoicing that Chancellor Hunt’s reversal of his Prime Minister’s tax cuts appear to have stabilised the markets. If you’re one of them, enjoy it while it lasts. As I wrote in TCW on Monday, the UK’s problem is that for 20 years its governments have been spending more than they raise – even in the years when there are no financial crashes or national imprisonment. The only options available to the government are to spend less, tax more or grow the economy.

The latter is the least understood. It’s also the one that the government has least ability to ignite, although a massive ability to snuff out. Growth requires business to sell more stuff, which means they need more staff, stock and manufacturing capacity. Installing and obtaining that requires capital (money) which can come from only three places. Companies can borrow, but with rising interest rates that’s tricky and potentially toxic; they can use cash reserves (if they have any), or they can sell shares. In all these scenarios a key measure is the return on investment, which is measured post corporation tax. Reducing the rate immediately increases the return on investment, making it more attractive.

There’s precedent for this. Following the collapse of the Iron Curtain the EU started discussing the accession of former Warsaw Pact states, to complete in 2004. Ireland, then the weakest economy in the EU (and thus recipient of most aid), realised that they would lose EU funds and therefore needed to find another path to growth. So they aggressively dropped their corporation tax rates. The graphs below from Trading Economics show what happened.

Ireland was transformed from a remote, weak economy based on agriculture, horse racing and brewing to Singapore on the Liffey. Its government tax revenue went up too, for the simple reason that big economies generate more tax than small ones.

Some of the growth came from Irish companies investing and doing more. A fair bit more came from the likes of Amazon relocating to Ireland to pay less tax. (For the Irish that was new income – lost from other EU states and new employment, generating increased income and sales tax revenues).

Of course, the EU hated this and has been trying to dictate corporation tax rates ever since under the euphemism of ‘harmonisation’. So has the WEF. However we’re not in the EU and the WEF has no jurisdiction (yet). A growing economy and a balanced budget, to reduce a huge tax burden on my unborn grandchildren (which is what the deficit is) is the only moral as well as the only economically viable route. Had Kwarteng and Truss stuck to this, and this only, they would probably still be in control – albeit the Europhile establishment would be baying for their blood. The Brexit outcome most feared by the EU (and forgone by May and Johnson) was the creation of a low tax, vibrant economy on this side of the English Channel. That’s no reason not to do it.

In 2021/22 the government netted £66billion from corporation tax, then at a rate of 19 per cent. Cutting that to 12.5 per cent would reduce the corporation tax take by £22billion (ceteris paribus, which it never is), or about 2 per cent of the government’s total income. But it would increase the return on an investment by 8 per cent. The Sunak/Hunt rise reduces the return by 8 per cent. That’s a 16 per cent difference in investment return. It would not be hard to persuade the bond markets that the £22billion would likely be recovered through UK companies investing in the UK and overseas companies relocating here. After all, if it worked for a tiny economy like Ireland’s it would work for ours.

That’s not the only benefit. Dividends are payable only from post-tax profit, reducing tax increases the funds available for dividends – many of which go to pension funds. That would reduce their reliance on derivatives (which is what nearly crashed the markets last week). It would make the UK bond market more stable too.

Why have we not taken this approach? I can only assume it’s because the Europhile mandarins at the Treasury advise against it, preferring the magic money tree. Why hasn’t Mr Hunt, who was a successful businessman before he joined Parliament (he was the richest Cabinet minister at one stage, self-made, not inherited), imposed it? Not a clue, particularly as he advocated cutting corporation tax to 15 per cent in July this year when he joined the leadership race. 

The magic money tree is dead. The economy is on the brink of recession and desperately needs growth. It’s probably too late for anyone to save the Tories, but Mr Hunt needs to do the right thing to save the country.

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Patrick Benham-Crosswell
Patrick Benham-Crosswell
Patrick Benham-Crosswell is a former Army officer who has spent the last 30 years in commerce. He is the author of Net Zero: The Challenges, Costs and Consequences of the UK's Zero Emission Ambition. He has a substack here.

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