The beauty of low corporate tax

By Dominic Vis 

"Banknotes, money, cash" by Howard Lake 

An argument for why low corporate tax benefits both small and large businesses.

 

The theory around low tax rates has often been seen as controversial by the left. Often, I have been told what could be described as cynical conspiracy theories about how the Conservatives want more hoard more money and keep it out of reach of the poor. They are holding resources for ransom only satisfied by death of the average workers… Maybe the last bit is a tad exaggerated but my point remains. Low tax rates aren’t seen to many on the left as even an economic policy but rather selfishness of crooks and cronies in government. The left believes that lower rates of corporation tax benefit capitalists (exploiters) at the expense of workers (exploited). This is argued because it is believed that it would reduce the revenue available for public spending, including social security. 


As the rich and poor fluctuate over time, so do businesses. What makes low corporation tax important is it allows cash flow to the business for faster growth. This in turn allows for higher profits and higher revenue to the government in corporation tax. Companies that fail to use the money responsibly will become obsolete.

 

We can see this to be true with Woolworths no longer being on the highstreet and the introduction of Amazon, which was not around 30 years ago. Some businesses find success and others disappear into the anonymity of history, leaving little to remember them by. Leftists like Marx believed that there isn’t true competition either. They believe that big business has an advantage over small business and so wouldn’t need to use the tax help responsibly, but that isn’t necessarily true. Big businesses do have the advantage of economies of scale. However, if you have ever tried to mobilise a large amount of people, you will be aware smaller groups are more efficient and more easily able to adapt.

Big businesses are restricted by their ability to communicate effectively to everyone in their organisation. Another issue businesses face is people (particularly their employees) do not like change, retraining and not being confident with new equipment. An example is how Thatcher closed the mines, and even today many in the north hold a grudge. The mines provided terrible working conditions for the workers (many of these conditions leading to early deaths) and that excludes the importance of taking climate change seriously. A small group of people will have an easier time adapting to changes than a larger group of people. A smaller business can also ensure the effectiveness of the change and address any unforeseen issues that take place. 

 

A business must be adaptable in 2021 with the ever-changing technology. A business that seeks success should no longer be relying on Microsoft Excel for business data and redundant technology. Small businesses can implement these changes more effectively than big businesses as there is more understanding and less push back from the employees. An example of a group failing to adapt is the NHS – the UK’s biggest employer. In 2018 we found that the NHS was using (and purchasing) fax machines. Fax machines started to become redundant since the internet (1990s), where it became easier to simply email a document and print it, rather than have an entire machine dedicated to the process of faxing. The cost of a fax machine according to the top results on Amazon is roughly £200, whereas a laser printer would be approximately half the price as well as offering more functionality (top result on Amazon is £89.99).

Now, to quell any accusation about privatising the NHS, that is not what I am arguing in this article. This extends to private businesses including John Lewis (the largest private employer in the UK) who still use Excel. Do you remember Blockbuster? Films still exist and Blockbuster dominated the film market. Now it’s a distance memory to most people due to advancing technology – online streaming now dominates this market.

 

Furthermore, a small business does not necessarily have a disadvantage. We can therefore move onto the more direct point - businesses willing to adapt should be encouraged to do so. Many people are currently dissatisfied with Amazon for the bad working conditions we have heard about. Despite this grievance, next day delivery is massively convenient. Regardless of whether we should value it, we can all agree the public do value it. However, low tax rates can give small businesses the equity and cash injection it needs to upgrade its services to be able to compete with Amazon. Technology can provide the answer to allow smaller costs and faster services when used appropriately.

 

Some companies will use the cash injection from the Government to give out dividends to their shareholders. However, especially today, in the days of technology, paying dividends excessively will often either bankrupt the business or make it less competitive. Failing to adapt and use the cash injections will lead to companies being replaced by smaller companies that didn’t fail. Amazon have never paid dividends which is why not only is Jeff Bezos the richest man in the world, but his divorced wife is the richest woman in the world. Jeff Bezos only has a salary of $81,000 (£60,000 annually). He understands the importance of investment over dividends and cuts. AWS will continue to become even bigger because they are constantly injecting all the money they make into their products. Big businesses that pay dividends aren’t safe when they make this mistake. Small businesses that invest will replace big businesses that don’t.

 

Here we can see IBM paying dividends. These dividends increase dramatically from 85p per share to £1.60 per share from 2012 to 2020. Let’s take a look at the share price from the NYSE:

We can see the price share going down as they fail to stay competitive between 2011 and 2020.


Hypothetically businesses could group together and all decide not to invest and pay dividends. This is called anti-competitive activity and is illegal in the UK. It also would face the threat of a single person deciding to be greedy and snap up the market share (which is why capitalism works in a greed-centric society).

Your next question might be, ‘does it work in practise?’

This is the tax rate in the UK for corporate tax. We were near 55% in the early 1980s and we are now at around 19%.

The black line below demonstrates as a percentage of GDP, the orange demonstrates the revenue we are bringing in via corporation tax. The more investment we are seeing and more productivity sees an increase corporate revenue despite being a lower percentage of the money being made.

If we are to take into account inflation and apply it here.

Inflation from 1982 of £100 would be worth £305.64 today. So if we were to multiply the tax revenue from the previous graph of 1982. We would see that growth from low corporate tax has roughly doubled the real tax revenue.

 

A simple math example for more clarity is 50% of 10 is 5, whilst 20% of 100 is 20. So, although 50% is a higher percentage than 20%, 20>5. This is also not accounting for the VAT, as if you invest you will most likely do this via trading for better products which lead to more sales and more money by VAT being brought in.

The final thing we need to look at to see if people are investing is the UK productivity. If we invest then the productivity should increase as people can do more with better equipment.

This graph shows both the productivity and the damage caused by Covid-19. As expected, we can see a growth in productivity.

In conclusion this should demonstrate that lower corporate tax brings in more corporate tax revenue. It increases productivity in the UK. This not only makes the UK more competitive but allows more money for our public services and more importantly it allows businesses to expand faster and cope with the ever-changing market. Businesses that do so effectively , will see more of. Companies that fail to do so, will disappear with time. 


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