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Would ‘full expensing’ be worth a permanent hike in Corporation Tax?

As our editor pointed out this morning, there are plenty of grounds to be cynical about Rishi Sunak’s solemn warnings of steep taxes, especially Corporation Tax (CT) two years from now.

With the Government committed to repealing the Fixed-term Parliaments Act, there will be no legal impediment to the Chancellor using good economic news to abandon the proposed increases – just in time to sweeten an election campaign in 2023.

Besides which, did he not throw the free-market wing of the party a big slice of red meat with his ‘super-deduction’, which will allow companies a 130 per cent tax deducation for “qualifying plant and machinery assets”?

However, it would be discourteous to the Chancellor not to even entertain the notion that he might introduce the taxes he tells the House of Commons he plans to introduce. Which raises the obvious question: is the above trade-off worth it?

On the face of it, obviously not. As it stands the super-deduction window will likely accelerate qualifying investment in the short term, but do nothing for the long term. Meanwhile a serious increase in (CT) would have the predictable effect on corporate behaviour.

But it seems unlikely the Government would, having conceded the logic behind the super deduction, completely abandon it in two years. More sensible would be a move to put it on a permanent basis in a slightly less dramatic form – i.e. by cutting the rate to the 100 per cent envisioned by ‘full expensing’ – along with broadening its scope so that it compasses investments in buildings and ‘intangibles’ (such as websites) as well as plant.

Would that be worth it? According to Sam Dumitriu, who co-authored the Adam Smith Institute’s paper on ‘scrapping the factory tax’, it would be a finely-balanced argument.

Full expensing would help to rebalance the economy by supporting manufacturing businesses which are more likely to be in the parts of the UK targeted by the ‘levelling up’ agenda, and continue to stimulate domestic investment by cutting the effective marginal tax rate on it to zero.

But by imposing a higher tax rate on companies’ day-to-day operations through a higher headline CT level, the Government would be strongly discouraging inward investment from outside the UK. Michael Devereux, Professor of Business Taxation at the University of Oxford’s Saïd Business School, puts it thus:

“There has been a wealth of academic research on the question of how differences in effective tax rates affect flows of foreign direct investment – and the evidence suggests a sizable impact. A consensus estimate is that inward foreign direct investment falls by 2.5 per cent for every one percentage point increase in the corporation tax rate. Roughly, then a 4 percentage point rise in the tax rate would reduce inward investment by 10 per cent.”

This would obviously be a strange move to make when ‘global Britain’ is meant to be doing everything it can to chart an independent economic destiny outside the European Union. All the more reason to suspect, perhaps, that we won’t end up seeing this CT increase after all.

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