We must all be wary of tax hikes on businesses

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Britain's Chancellor of the Exchequer Osborne samples chocolate during a tour of Small Business Saturday Christmas Fair at the Treasury in London
George Osborne has a bit of a penchant for industry-targeted tax hikes (Source: Getty)

It's easy to see why politicians levy taxes on companies, especially big multinationals. No one sheds a tear for any large firm that suddenly has to cough up a bit of extra cash for the Treasury.

By aiming tax at firms, a government can limit taxes on individuals while resisting spending cuts – a tried and tested formula for keeping the electorate on your side.

The problem, as we’ve explained previously in this column, is that every tax, at the end of the day, is paid for by individuals. Whether it’s staff, customers, shareholders, or a mix of all three, a big group of people will find themselves worse off whenever the chancellor decides to rake in more money.

And that’s not to mention the knock-on effects that people suffer when business activity is taxed – through fewer jobs, lower wages, slower economic growth, et cetera.

Nonetheless, these consequences are typically “unseen”, and not experienced in the same way as taxes imposed directly on voters. As 19th century French economist Frederic Bastiat wrote, people react far more strongly to economic effects that they can directly observe, and usually ignore “unseen” activity.

The current chancellor, renowned by some commentators as a shrewd political operator, has a bit of a penchant for industry-targeted tax hikes.

His second Budget, back in 2011, sought to raise an extra £2bn a year by hammering North Sea oil revenues, while the bank levy was introduced a year earlier and utilised to raise an increasing amount of cash throughout the parliament.

Recent figures show that just a handful of the many taxes aimed at British firms (the new “apprenticeship levy”, the bank taxes, corporation tax, business rates) will raise £86bn a year by the end of this parliament, up from £73bn in 2014-15.

Little surprise, then, that new CBI boss Carolyn Fairbairn was moved to complain about the measures this morning. “The government must be careful not to sacrifice prosperity for political expediency by saddling businesses with costs that could harm investment,” she said.

And it’s not just business groups that should be critical. When the next Budget comes around in March, we’d all do well to remember that a tax hike is a tax hike – even when it doesn’t show up on a payslip or tax return.

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