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Business Comment

Ben Chu: The Chancellor's corporation tax con

Economic View

George Osborne was full of tough talk on multinational tax avoidance in the Autumn Statement last month. The Chancellor stood at the Despatch Box and pledged more resources for the taxman to clamp down on abuse by the likes of Starbucks, Google and Amazon. He set Her Majesty's Revenue and Customs (HMRC) a target of raising a further £2bn from such avoiders every year.

Mr Osborne added that he would a clampdown on the use of tax havens an "important priority" when the UK assumed the G8 presidency later this year. What the Chancellor wanted was "a tax system where the richest pay their fair share".

One would be forgiven for assuming on the basis of this rallying battle cry that corporation tax receipts will be rising in the coming years, as Mr Osborne rolls up his sleeves and gets stuck into the tax avoiders of the big business world. But think again.

The predictions from the Chancellor's forecaster, the Office for Budget Responsibility, show the corporation tax take is set to fall in cash terms over the next five years. As the small chart shows, income tax receipts will rise by 35 per cent, from £152.7bn in 2011/12 to £206.5bn in 2017/18.

VAT receipts will rise by 23 per cent, from £98.1bn to £121.5bn. But corporation tax receipts are projected to fall by 0.7 per cent, declining from £43.1bn to £42.8bn between now and 2017/18. As a share of total tax revenues, corporation tax receipts will decline from 7.5 per cent in the present financial year to 5.8 per cent in 2017-18.

Whyis this? There was a clue in the Chancellor's statement when he said: "We want the most competitive corporate tax system of any major economy." Let's drain out the bromide here. What Mr Osborne means is that he wants businesses to pay less in profit taxes here than in any other major economy. And he's delivering on that.

The Chancellor has cut the main rate of corporation tax from 28 per cent in 2010 to 24 per cent. It will fall to 23 per cent this year, dropping to 21 per cent by 2014. That's not all. A "patent box" goes active in April, which will slash to 10 per cent the corporation tax payable by businesses on income derived from intellectual property registered in the UK.

So what's going on? Why is our crusading Chancellor, who claims to have zero tolerance for multinational tax avoidance, cutting rates and hosing down cross-border firms with allowances? The patent box is a particularly strange move because, as the Institute for Fiscal Studies has pointed out, it will do nothing to encourage research to take place in Britain. It's merely a chunky tax break for multinational activity that would have taken place here anyway.

The fact is that the Chancellor, long ago, swallowed the argument of the multinationals and their indefatigable minions in the international accountancy firms that the UK's corporation tax regime under Labour was "uncompetitive" and needed urgent reform. This was always balderdash.

When Mr Osborne entered the Treasury in 2010, the UK's main corporation tax rate was already the lowest of all G7 nations. We were "uncompetitive" in the same way that Usain Bolt is uncompetitive in the 100 metres. And as the left-hand chart above shows we're now opening up a vast gap with our peers.

A number of multinationals including WPP, Shire and United Business Media moved their corporate headquarters overseas in 2008 complaining that they were at risk of "double taxation" on their overseas profits. This was high-grade spin. The truth is that Labour was giving the multinationals precisely what they wanted by moving to a territorial regime, in which only their UK profits, and not profits transferred back to HQ from foreign subsidiaries, would be subject to British corporation tax. These companies left because they were affronted that the previous government was reserving the right to tax multinationals' overseas profits if the taxman determined they had deviously shuffled their UK profits offshore to tax havens. Labour panicked and withdrew the plan. And Mr Osborne, ever eager to curry favour with the multinationals, drove a stake through the heart of the entirely sensible proposal to make sure it was dead.

Actions speak louder than words when it comes to tax. Despite Mr Osborne's anti-avoidance posturing, HMRC staffing levels are being cut under his watch. By 2015 jobs will be down some 44 per cent on 2005 levels. Meanwhile, corporation tax rates are falling and the Treasury is expecting less income. The tax strain of closing the deficit will be borne by labour (income tax) and consumption (VAT) rather than capital.

We should be under no illusions about what the Chancellor is doing. He is trying to attract multinationals to Britain through tax breaks and lower headline rates. This is classic beggar-thy-neighbour behaviour. Tax competition puts downward pressure on corporate profit levies around the world by forcing other nations to match the lowest outliers. If the Chancellor were serious, as he claims to be, about global co-operation to curb tax avoidance he would be pushing for global harmonisation on corporate tax rates and investment allowances, not trying to poach multinationals through lower rates and patent boxes. These are all moves which, in effect, turn the UK into a giant tax haven.

This Government has a strategy on corporate taxation. But let's be perfectly clear. It is not to make multinationals pay more tax, but to participate enthusiastically in a global race to the bottom.

The real economics of the Christmas tree

The economics of Christmas have been a talking point among academics for a while. What utility do we derive from exchanging gifts that recipients often don't want? Would people be better off exchanging cash? Or would that eradicate the intangible emotional benefits of the ritual transfer of wrapped boxes?

But it was the annual disposal of the tree that taught me a valuable economic lesson.

In Christmas 2011 we bought a needle-drop version for what seemed a splendidly reasonable £20 from Homebase. But last year, having left it rather late, we had to fork out for a non-needle drop tree for £35 from one of those men in grubby Santa hats who stand on street corners hawking overpriced stacks of festive timber.

Cue lots of grumbling about inflation and the irksome absence of garden centres in my corner of south London. But I now see I was wrong to complain.

My dominant memory of 5 January 2012 was the hour I spent on my hands and knees vacuuming up the heaps of pine needles that the spindly green monster had shed all over the carpet and hall.

This year, by contrast, we put the tree out for the council without having to break out the dust pan and shovel, so firmly did the needles of our verdant totem cling to the branches.

If someone had offered me £15 to scrabble around for an hour sucking up foliage I wouldn't have taken it. Yet this was the entire "saving" from the previous year's moulting tree.

So what's the economic lesson? Don't just look at the headline costs when making a purchase and be wary of false economies. Either that, or make life even easier by buying a plastic tree.