Lower Corporate Tax

Yesterday's Sunday Herald ran another scare story, this time about the EU not allowing an independent Scotland to set a low rate of corporation tax.

Salmond in 'fantasy land' over tax plans, says former adviser

Alex Salmond's vision of an independent Scotland attracting global investors with ultra-low corporation tax has been dismissed as "a fantasy" by one of his former economic advisers. Professor John Kay, who served on the First Minister's Council of Economic Advisers during the last Parliament, said the idea was a "non-starter" because the rest of the EU would block it.

He said it was inconceivable that other EU states, who want to end Ireland's 12.5% rate and who are now moving towards common tax rates, would allow Scotland to copy Ireland's example.

"No-one is going to allow Scotland to have a low corporation tax. That's just a fantasy," he said. "If Scotland's an independent country, the EU will not allow it. It's a non-starter. What has happened on corporation tax is Ireland has this low rate and everyone around the EU is determined that that should never happen again.

"So Scotland would have to negotiate EU membership – it wouldn't be difficult, everyone's going to have Scotland as a member – but you can be absolutely sure that one of the conditions is that you don't have a 12.5% corporation tax rate. Since a fuss has been made in Scotland about doing that, it would be inevitable that you would get the determination on the part of the Europeans that you do not have it."

Sunday Herald, 29 January 2012

It might well be true that certain countries in the EU don't like Ireland's rate of corporate tax, but the idea that they would be forced to change it is one of the myths about the EU that seems to have sprung up in recent years. Ireland's rate of 12.5% is by no means the lowest rate in the EU. No comparison is completely accurate because there is a whole range of other taxes on business (for example non-domestic rates and employers' NI contributions in the UK) but here are the lowest ... and highest:

Hungary ... 10.0%
Cyprus ... 10.0%
Bulgaria ... 10.0%
Ireland ... 12.5%

Italy ... 31.4%
Germany ... 15.8% federal + 14.4% - 17.5% regional = 30.2% - 33.3%
France ... 33.3%
Belgium ... 34.0%
Malta ... 35.0%


This table shows why the idea of "common tax rates" in the EU is highly unlikely. The average corporate tax rate in the EU is somewhere between 20 and 25%. So if the low tax countries are to be forced to increase their rates to get them closer to the average, then the high tax countries will similarly be required to lower them. But among the very highest taxing countries are France, Germany and Italy ... three of the EU giants. Does anyone think that they'll be persuaded to lower their rates just so that there can be an EU average?

A more likely scenario would be for EU member states to agree minimum rates of tax. The lowest standard rate of VAT that any EU member state can charge is 15%, although there can be lower rates (or a zero rate) applied to certain types of goods and services. So it might well be possible to in future set a minimum rate of corporate tax too. But if so, it would have to apply to every member, not just one particular member.


It's also interesting to note that there are two EU member states that have different rates of corporate taxation for different geographical regions. The German model has a roughly half-and-half split between a fixed rate of federal corporate tax and a variable component according to the region. And the four Basque provinces are free to set their own rate of corporate tax, which at 28% is currently 2% below that of Spain. So there is no reason for the UK as it currently exists not to allow Northern Ireland, Scotland and indeed Wales to be able to set our own rates of corporation tax in order to act as a counterbalance to the increasing inequality in wealth between the south east corner of England and everywhere else in the UK.

Well, no reason apart from the intransigence of successive governments at Westminster, that is, who obviously don't seem to regard this over-centralization as a problem.

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Anonymous said...

A common corporation tax in the EU won't happen. Never.

The only time it would've happened is when Ireland had the bail out - it could have been a condition. However they rejected.

How could Bulgaria, Ireland or even the UK for that matter compete with countries like France, Germany and Belgium (right in the centre of Europe) if we all had the same corporation tax. Companies need incentives to go to the periphery - to go to Ireland, to go to Cyprus.

The argument on now corporation tax to Wales/Scot/NI now is ridiculous. I've heard Torries saying "what and have different rates of tax in different parts of the country?" - yes that's exactly what it would mean!! Even their own party is allowing that in the park near the olympics. The only concern I have is that it would be a 'race to the bottom'. But only a foolish Government would take taxes down to silly levels.

I hear Carwyn favours the devolution of passenger duty. I've heard quite a lot slagging him off for this. I'm not so pessimistic. What should happen is he should get that devolved, buy out Cardiff Airport. Lower the taxes and I'm sure the new increase in flights will more than pay for the loss! (even if it was changed by 1% I can see airlines like Ryanair moving immediately to Cardiff- that's just how tough their profit margins are ran at!)

Unknown said...

I think it was MH who suggested having an EU formula that links corporation tax to GDP, so the poorer the area, the lower the tax can be. Seems sensible to me. Would prohibit the race to the bottom, but would provide incentives for firms to move to poor areas.

MH said...

Normally, if a region has the power to set a different rate of tax it must take the consequences of that decision, Siônnyn; so if it sets a lower rate, that gets reflected in its budget settlement (i.e in the case of the UK, a proportionately lower block grant). That is not prohibited under any EU regulation, and that was the main point I was making in this post.

What I said before was something a friend had told me (and it will appear in his submission to the Silk Commission) namely that setting a lower tax rate could be regarded as legitimate state aid, but only to the extent that the region was economically disadvantaged. If so, the budget settlement would not need to be adjusted. So, for example, if West Wales and the Valleys has a GDP that is 80% of the average GDP of the UK, a case could be made for corporation tax there to be 80% of the UK rate without the block grant to Wales being cut. I don't know if that argument could be won, but if it were applied to the nations and regions of the UK, it would be a self-adjusting mechanism that would do a lot to attract companies away from over-heated areas to the periphery.

Anonymous said...

Slightly off topic, but not by much, and worth a read:



Anonymous said...

Anon 15:44

The defecting Labour Glasgow city councillor is no 'Oscar', and kicks his fomer party in all the right places - Ouch!

Plaid please note, this kind of thing happens when you get your policies and leader right.

Unknown said...

Ann - 15:50, all the signs are that Plaid are going to do that. Dafyd Iwan has surprised us all by endorsing her, which will hurt Elin and DET, and boost Leanne to a sweeping victory.

Anonymous said...

30 January 2012 15:50
Siônnyn said...

You really should be careful what you wish for. Two years as leader would completely expose Leanne Wood, then we would have to start again.

Anonymous said...

Anon 15:50

Oh come on! How can you make a sweeping statement like that without giving an explanation?

Anonymous said...

Corporation tax is a silly tax - it obviously is in a death spiral as small countries encourage large company headquarters to relocate to avoid tax - thus depriving the country where that wealth is created the income. The sooner the world abolishes corporation tax and raises the revenue from the distribution of income to individuals (through dividend or CGT) the fairer it will be as the tax is much harder to avoid at the individual than the corporate level. Before anyone says this is a tax on individuals - no it would simply be taxing the same corporate profit at a point where it cannot be avoided.

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