The Scottish government can define the policy and legislate over a number of taxes. However, it does not have powers over the VAT, National Insurance, and corporation tax. In fact, following the Scottish referendum in 2014, David Cameron and the UK government refused to grant Scotland with the power to set its own corporation tax rate. Such a power has been denied to Scotland on the basis that it would create a ‘race to the bottom’ between Westminster and Hollyrood, which in their attempt to lure businesses with lower tax rates would end up with lower overall tax receipts.1
However, in a rather ironical way, the UK has been actually leading the global corporation tax race to the bottom. In March 2016, the UK government published a report according to which the corporation tax rate will be decreased by a further 1%, from 1 April 2020 to 17%.2 Currently, the UK corporation tax rate is 19%. It is the lowest among the G20 countries and significantly below the OECD average.
We believe that there is no need for further corporation tax cuts. It is a policy that in the long-run reduces tax revenues and it does not even seem to be increasing either the competitiveness of the UK economy or investment. Instead, we believe that Scotland should demand this power for a purpose that goes beyond micro-politics and short-term profits.
The rationale of the UK’s approach is that lower corporation tax rates make a country more competitive. This is a fundamental argument of the proponents of neoliberal economics, which defined the UK’s Conservative governments since at least Margaret Thatcher. However, the literature that exists about the link between corporation tax rates and competitiveness is inconclusive; there are studies that support the idea and other than reject it completely.
This creates a vague framework for policy-making. It is unclear why governments choose to follow the path of corporation tax cuts since the evidence in favour is not strong enough. There is the possibility that policy-makers are influenced by lobbying groups. This is due to the very nature of corporation tax being very complex and not something easily understandable by the public.3 Nonetheless, it may simply be because governments are themselves convinced that this is how they can increase competitiveness and by doing so they willy-nilly engage in a race.
With regards to that, we urge the Scottish government to demand powers over corporation taxation for a purpose that serves the whole of the economy rather than a few large corporations. For instance, instead of lowering further the rate, the Scottish government could incentivise lower corporation tax rates. This could be done by linking corporation tax rates to the Scottish Government’s Business Pledge; a ‘values-led partnership between Government and business. It is a shared ambition of boosting productivity, competitiveness, sustainable employment, and workforce engagement and development.’4
More information on this proposal is available in our forthcoming report ‘Benefit Corporation Tax Credits’. It needs to be said though that there is a negative relationship between corporation tax rates and income inequality; when corporation tax rates decrease, income inequality increases. At the same time, there is a negative relationship between income inequality and productivity growth.
This implies that there may be an indirect positive relationship between corporation tax rates and productivity growth; the lower the tax rates the lower the productivity. To elaborate, advances in income inequality, due to lower corporation tax rates, create an environment in which there is no motivation for workers to produce. This is because they logically feel that they do not receive a fair share from the economic growth they have largely made possible.
We argue then that Scotland should demand powers over corporation taxation in order to tackle income inequality and increase productivity. This demand should be made in relation to the devolution of this very power to the devolved government of Northern Ireland.5 Considering that this puts Northern Ireland into a favourable position or provides it with the competitive advantage of having the power to set its own rates, there is no logical justification in denying to Scotland the power over corporation taxation.
A recent report by the Fraser of Allander Institute suggests that ‘Scotland could close a large part of its productivity gap with the most productive OECD economies by raising its capital stock per worker. This could be achieved through higher public or private investment, or a combination of both.’6 Indeed, investing in new machinery and equipment has the potential to assist the per-worker productivity. However, this could be done more efficiently or in a more sustainable way if it is done in conjunction with policies that aim to decrease income inequality.
More research is required to prove whether there is actually a direct correlation between corporation tax rates and income inequality. However, based on the current research it appears that the UK’s ‘productivity puzzle’ may be related indirectly to the corporation tax rates and directly to income inequality. In other words, there is no need and not an economic justification for further corporation tax cuts. As Torsten Bell, director of the Resolution Foundation think tank, says, ‘there’s not even an argument for these tax cuts from a competitiveness point of view. When you’re already winning the race to the bottom you don’t need to speed up.’7
- The Telegarph (2014), David Cameron Rejects Giving Scotland Corporation Tax.
- HM Revenue & Customs (2016), Corporation Tax to 17% in 2020.
- Alt J. Et al (2008), The Political Economy of Tax Policy, p. 1245.
- Scottish Business Pledge.
- Parliament UK (2018), Corporation Tax in Northern Ireland.
- Mitchell M. & Zymek R. (2018), ‘Scotland’s “Middling” Productivity – An International Perspective,’ Fraser of Allander Institute.
- Partington R. (2019), UK corporation tax cut to cost billions more than thought, The Guardian.