Scrap Inefficient U.K. Company Tax, Thatcherite Think Tank Says

  • IEA urges replacement by a levy on distributed earnings
  • EU’s Apple tax ruling cited by research group in report

The U.K. government should abolish “hugely inefficient” corporation tax on profits and replace it with a levy on earnings distributed to shareholders, a free-market research group recommended.

The current company-tax system has “damaging unintended consequences for growth, investment and worker productivity,” involves high compliance costs and provides incentives for tax avoidance by multinationals, the Institute of Economic Affairs said in a report published in London on Friday. The IEA is closely linked with the policies of former Conservative Prime Minister Margaret Thatcher.

A move to a levy on distributed income would shift the tax base from relatively mobile corporations to less mobile individuals, reducing the opportunities for avoidance, the IEA argued. It said that such an arrangement is in operation in Estonia, which is recognized as having the most competitive tax system among Organization for Economic Cooperation and Development countries.

“Economic theory and evidence have increasingly shown corporation tax to be one of the most inefficient ways of raising government revenue,” Diego Zuluaga, a research fellow at the institute, said in an e-mailed statement. “At a time of great change for the British economy, bringing our tax code into the 21st century is more important than ever.”

‘Had Its Day’

The report comes amid growing public disquiet over the amount of tax companies such as Google Inc. pay in Britain. In January, Nigel Lawson, Thatcher’s finance minister in the late 1980s, said that corporation tax had “had its day.” The levy brought in more than 44 billion pounds ($58 billion) in the 2015-16 fiscal year, almost a tenth of total tax revenue.

This week’s European Commission ruling that Apple Inc. must pay as much as 13 billion euros ($15 billion) plus interest after Ireland illegally slashed the company’s tax bill showed how globalization is debasing the rationale for company tax, the IEA said.

After Britain voted to leave the European Union in June, the then chancellor of the exchequer, George Osborne, floated the idea of cutting the corporate-tax rate to 15 percent to maintain investment. The current 20 percent rate is scheduled to fall to 19 percent in April and to 17 percent in 2020. Ireland levies company tax at 12.5 percent. Osborne’s successor, Philip Hammond, has pledged to “reset” fiscal policy but says he won’t announce details of his plans until his Autumn Statement to Parliament toward the end of the year.