Labour’s plot to hike corporation tax is short-sighted nonsense

 
Allister Heath

WHAT, exactly, does the Labour party think it is doing? It wants to hike – yes, hike – corporation tax if it is elected in 2015, the latest of a long list of utterly destructive policies unveiled in recent days. The idea is that this will “pay” for a freeze in business rates on small firms, which means that the net burden on business will remain unchanged.

But this is a nonsensical idea on every level, not least because every sensible nation is reducing its tax rates on profits to try and woo globally mobile firms, and the UK’s efforts had started to be noticed internationally.

Yes, business rates – which are levied on premises – are an appalling, antiquated tax and are accelerating the demise of the high street. Rates favour online firms with more limited premises. Many retailers – such as Tesco or Sainsbury – pay far more in business rates than they do in corporation tax.

But freezing the levy for a couple of years will barely make any difference, and because the cut in business rates will apply only to businesses and commercial premises with an annual rental value of £50,000 or less, many large but ailing retail or leisure chains will continue to go out of business. It’s a trivial piece of tinkering, a drop in the ocean. It is also a deliberate attempt at creating yet more division: Labour wants to pit very small firms against larger ones. Why? We need all kinds of businesses, big or small, to expand and hire people.

Set against that, the main rate of corporation tax will go up, dealing a devastating blow to the UK’s international reputation. The coalition plans to cut it from 21 per cent in April 2014 to 20 per cent in April 2015; under Labour, it would go back up again to 21 per cent in May 2015. This would be deeply unfortunate. Years of trying to simplify the tax system by finally aligning the tax rate for small (already at 20 per cent) and big firms would be blown away. The long-term planning undertaken by firms hoping to expand in the UK will be disrupted, thus reducing their propensity to trust this country.

The real answer is to cut spending and use the money to slash business rates, not hike one tax to freeze another for a bit. Taxes on business are actually rarely paid by shareholders: in fact, the evidence suggests that the bulk of corporation tax is actually borne by employees, who over time are paid less. Cutting corporation tax, as the coalition has been doing, ought to eventually translate into higher wages; hiking it, as Labour wants to do, will actually reduce pay (and thus cut revenues from income tax and national insurance).

Yet there is one important issue on which Ed Balls is right. The shadow chancellor wants to scrap the daft HS2 high speed rail project. He spent yesterday downplaying the policy, and openly wondering whether there might be better ways to spend the £50bn it would supposedly cost.

On this issue, Balls is spot on and will hopefully win the battle within the Labour party to withdraw its support for the project. HS2 is a costly absurdity, a grandiose white elephant, a bizarre tribute to an intellectually bankrupt tradition of statist grand projets. It is madness to spend so much taxpayers’ money over such a long period of time – the high speed rail project is only meant to be ready in 2032 – for a project that will bring very few benefits.

These two moves ought to be an opportunity for the Tories. If Cameron has any sense, he will nip Labour in the bud and announce that he too no longer wants to keep HS2. This would eliminate much opposition from his own side – and ensure that high speed rail no longer remains one of the very few areas where Balls is being more sensible than the coalition. The Tories must also hold firm on corporation tax – and find a sensible way of cutting business rates that doesn’t involve robbing Peter to pay Paul.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath