The plans will be funded from the £ 19.4 billion raised by reversing Conservative Party’s corporate tax cuts.
A Labor Party press release on May 9, 2017 setting out how the party would fund its plans to increase school spending.
The Labor Party has cited its pledged corporate tax hike as a means of funding a number of manifesto commitments, including those related to education.
Labor’s claim that they can raise £ 19.4 billion is based on HMRC’s April 2017 estimate – known as the “Ready Reckoner” – that a 1% corporation tax rate increase in 2020-21 would add an additional 2, Would bring in £ 6bn per year (and £ 2.7bn in 2021-22 taking into account growth).
However, Labor plans to do more than just reverse the conservative plan to cut the main corporate tax rate from its current 19% to 17% by 2020. Instead, Labor would raise the key rate to 26% by 2020/21 and reintroduce a small profit rate for small businesses of 21% that same year.
This would mean that under a Labor government the corporate tax rate would be 9% higher than currently planned by the end of the next parliament and 4% higher for small businesses.
The split between the main rate revenue and the low profit rate was approximately 63% / 37%, according to the Institute for Fiscal Studies, last year when both rates existed. Applying this ratio to a calculation using HMRC’s £ 2.7 billion figure above would add an additional £ 4 billion for the 4% increase in small business profits and £ 15.3 billion for the 9% increase add the base rate. This would mean that in 2021-22 the additional revenue would be £ 19.3 billion.
Based on this information, the £ 19.4 billion figure seems reasonable. The increase in sales would, however, depend on the behavior of the companies, which do not change in the face of such a significant rate increase. Previous academic studies have shown how both individuals and organizations change their financial behavior when relevant taxes are introduced, abolished, or changed.
These behavior changes can take two main forms. Changes in tax planning could lead companies to minimize their UK taxable profits. While changes in strategy and investment could result in companies investing less in the UK, which would affect economic growth and corporate income tax returns.
This means that the amount levied through corporate income tax can be unpredictable and has no direct relation to the underlying tax rate. This can be seen in UK corporate tax revenues over the past few years. While the corporate tax rate has declined steadily since its inception in its current form in 1973, the revenues generated have generally remained positive.
There is no tax in a bubble. Even if a company does not take steps to counteract the change in tax rate and pays an increased amount of corporate tax, it reduces its after-tax profit, which affects either its customers (in the form of increased prices) or its employees (through lower wages) or shareholders (through lower dividends). A decrease in consumer spending, wages and dividends should then lead to a decrease in tax receipts from excise duties, sales tax, income tax and social security.
While Labor claims the Treasury Department will have to spend an additional £ 19.4 billion to raise corporate tax to 26% by 2022, it makes statistical sense. However, these headlines could only bear fruit if companies don’t change their behavior and there is no impact on other taxes. History teaches us that these are big assumptions and therefore no guarantees can be made as to future corporate tax revenues.
Eamonn Walsh, Professor of Accounting at University College Dublin
I agree with this judgment. If anything, it’s too reluctant. A change in corporate behavior is unlikely to be untenable – all the more so as new administrations in France, and particularly the US, are trying to bring corporate tax rates below 26%. International companies that can actively control the geography of their profits will inevitably rethink their internal regulations, which will erode the UK corporate tax base.