Indian Bicycle Marketing

The Red and Blue Armies have declared Phoney War and as their battleground have chosen a storm in a teacup over very minor tweaks to two of our relatively less bad taxes. (They steer well clear of even mentioning the worst ones, 20% VAT on gross profits; 25.8% National Insurance on wages; and income-based withdrawal of benefits of around two-thirds of all wages up to a median income.)

Take it away, Matthew Sinclair of The TaxCollectors' Alliance...

ED MILIBAND made two big new pledges in his speech yesterday: lower business rates for small businesses, paid for by higher corporation tax on larger firms; and a freeze in energy prices for 20 months from the date of the next election.(1)

Economic reality would quickly bite for any government that tried to introduce either policy. There is nothing wrong with cutting business rates.(2) Lower rates would be a relief for many – particularly small firms and retailers. They often effectively pay half as much again on top of rent.(3)

But higher corporation tax rates for larger firms would not raise government revenue, except maybe in the short term. Just as firms in competitive markets cannot increase profits by charging higher prices, governments cannot just hike taxes and expect more revenue in return. Higher corporation tax will drive away investment and mean fewer jobs, lower wages and – in short order – less revenue for the state.(4)

1) This is indeed a stupid idea, seeing as it is UK government policy to push up consumer prices with all sorts of bizarre green taxes and rules, many of which Mr Ed himself introduced himself a few years ago. Let's get rid of those first, think seriously about nuclear power, fracking, improving competition and so on and see what happens.

2) There is everything wrong with cutting Business Rates across the board. This only makes sense in very run down areas where the rates are in excess of the site-only rental value.

3) That's the whole point, you wanker. Business Rates are - officially - supposed to be 46% or 47% of the rent payable to the landlord. So if some are paying "half as much again" then that is not far off and within a reasonable margin of error anyway.

More to the point, it is a circular calculation and the tenant does not actually pay a penny in the long run - if he knows that a place has a total rental value of £14,600 then he works backward and decides that a fair rent is £10,000 because there will be £4,600 rates on top. So really, the rates are only 31% or 32%.

4) Oh do fuck off, Mr Sinclair. All Labour have suggested is pegging corporation tax at 21% for large businesses instead of reducing it to 20% a couple of years in the future (i.e. the current mainstream rate is 23% and the Lib-Cons have proposed reducing it in 1% steps all the way down to 20%, which certainly has the merit of simplicity).

If the Tories really thought that 21% is so terrible, why have they set the rate at 23% for the current year?

I am a devout believer in the Laffer Curve, and if corporation tax were the only tax, whether it is 20% or 21% is completely irrelevant, they are both on the upward slope of the Laffer Curve, the deadweight costs of such a low tax are negligible (1% of GDP?).

The effect he refers to only kicks in if taxes are above 60% or whatever the revenue-maximising rate is and are reduced to below 40% or something where there is a noticable reduction in deadweight costs.

But of course, corporation tax is not the only tax, and is a relatively minor tax in the grander scheme of things, it raises one-third as much as VAT and one-third as much as National Insurance, why not have a think about those first?