Does low Corporation Tax benefit economies?

HMC Global are delighted to share with you the following insight article written by a leading industry consultant on his thoughts regarding the impact of corporation tax rates on FDI.

Does low Corporation Tax benefit economies?

It’s a perennial argument. 

Advocates of a low tax rate argue that it will boost any economy, producing greater wealth and jobs. Critics, including some economists are sceptical, claiming that lowering company taxes produces a “race to the bottom” – a kind of fiscal “Dutch Auction”. I think that neither view is entirely correct.

First of all, there is a difference between adopting a low tax regime and offering tax incentives – for example, introductory low rates, tax holidays, etc.

Reducing overall company tax means an immediate shortfall in government revenues which must be addressed – by raising the level of other taxes (such as income tax or VAT) or by cutting government spending and, thus, the level of public services.

Whether a government makes up the shortfall caused by reducing company tax through other tax increases or by cutting public spending, in either case the short-term effect on the economy will be negative. The counter-argument is that a lower company tax will produce more investment, profits and private sector jobs which will more than off-set the reduced company tax revenue. But will it?

With Brexit looming, it is clear that Britain is cutting tax rate for the tax year 2018/2019. By reducing tax rate to 19%, it is designed to attract inward investment to the UK, even with the Britain leaving the EU. 

What's your opinions on this topic - we would love to hear about them.

 


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