View from City Road: Case for another look at corporate taxation

The improvement in corporate balance sheets is one reason why the Treasury is proving reluctant to concede larger allowances against corporation tax for investment. Officials take the view that the Chancellor should not go back on his word. If he did, such clever timing devices as the year-long 40 per cent concession (which ran out on 31 October) would have less effect if introduced again. The object of the exercise, after all, was to persuade businesses to bring forward investment because the special allowance would end.

There is, though, a case for another look at corporate taxation. A key national objective must be to improve the competitiveness of our trading sectors, the most important of which is manufacturing. British business invests relatively little as a share of national income, and there are often social benefits from investment that justify tax incentives.

The recent work from the Institute of Fiscal Studies suggests that the impact of the temporary increase in capital allowances from 25 per cent may have boosted investment by about 6.5 per cent compared with what it would otherwise have been. But it also suggests that a permanent change to a 40 per cent allowance would raise investment by about 5 per cent a year, an enticing gain.