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Budget 2014: Can the government afford to cut corporation tax?

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As corporate tax goes down, tax on individuals goes up – but does it have to be this way?

The best way to help businesses is by lowering the burden of tax. So said George Osborne in his Autumn Statement speech last December – a theme he is likely to return to in the Budget next week.

But if reducing corporate tax is the goal, the Chancellor is left with only two options – one is taxing individuals more, the other is reducing the size of the state – which it’s worth remembering gobbles up a whopping 36 per cent of GDP.

The problem with option one is that there is a danger that the existing imbalance in the system will be further skewed. The government describes the current apportioning of the tax burden as “fair” but according to the Treasury’s own figures, over a quarter of all income tax is paid by just 1 per cent of taxpayers, with the top 5 per cent paying around half of all income tax.

This “fairness” in contributions is matched only by the “fairness” in spending. Analysis by the Centre for Policy Studies shows that the last three decades has seen an increasing proportion of the population of total households becoming overall net recipients of the state. The latest figures suggest that more than 53 per cent of total households receive more in benefits than they pay in taxes, a rise of almost 10 percentage points since 1979.

Ed Balls’ call this week for a further £6bn to be levied from bankers’ bonuses, a mansion tax, and a rise in the top rate of income tax from 45p to 50p is a stark reminder that the pressure to impose further tax rises on those who are already providing a disproportionate share of the tax take is far from over.

As it stands, with corporate taxes reducing and personal taxes increasing, there is a real risk that we will end up with a system that encourages businesses to come to the UK, but severely penalises their owners and executives, prompting comparisons with turkeys and Christmas.

On Wednesday next week, we will no doubt hear more about “discipline” in public finances, but will discipline be enough to tackle this conundrum or should the Chancellor take a more drastic approach?

Arguably, it is only by reducing the size of the state and keeping both business and personal taxes down that we can hope to provide real stimulus to the economy, and reintroduce some real fairness into the system.

George Bull is national chair of Baker Tilly’s professional practices group.

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