Tory handouts for the rich versus Labour’s way

Prem Sikka highlights the dividing line on taxation between Labour and Conservatives while setting out a sharper left course

The Conservatives have cut the rate of corporation tax from 28% in 2010 to 19% in 2019 in the vain belief that this will somehow increase investment in productive assets.

While Conservative tax cuts have failed to meet economic aims they have swelled corporate coffers and cash has been used to pay dividends. Compared to US, EU, Japan and emerging economies, UK companies pay out the highest proportion of corporate earnings in dividends. Investment in productive assets is low. On average EU countries put 20.1% of their gross domestic product (GDP) into long-term investment compared to 16.9% for the UK. The UK investment in research and development has fluctuated between 1.53% and 1.67% of GDP, way behind the EU average. Low investment in productive assets and research and development is translated into low productivity. Yet Prime Minister Boris Johnson has promised further cuts to the rate of corporation tax.

Any investment in the economy presupposes that people will have good purchasing power to buy goods and services. Conservatives have failed to address that and workers’ share of GDP in the form of wages is now at around 49.4% compared to 65.1% in 1976.

Labour is seeking to boost people’s purchasing power through a higher living wage, ending university tuition fees, empowering trade unions and public ownership of utilities and railway companies to alleviate pressures on household budgets. £500bn of investment in new industries, manufacturing and infrastructure is to be facilitated by the proposed National Investment Bank. Part of this is to be funded by reversing the corporation tax cuts and levying a 50% rate of tax on incomes over £123,000 and 45% for earnings above £80,000. This is to be supplemented by investment in HMRC which by its own admission is failing to collect £34bn-£35bn of tax revenues every year due to evasion, avoidance and errors. Some estimates put that at around $120bn a year. A war against tax avoidance is to be facilitated by public availability of the tax returns of large companies. A withholding tax is to be levied on interest and dividend payments routed through uncooperative tax havens.

Labour is also seeking to broaden the tax base. Its 2017 election manifesto promised to introduce a version of financial transaction tax. The party is also considering land value taxation and possibilities of taxing accumulated wealth.

Inequality Tax

Taxes on carbon emissions and consumption of sugar and tobacco products go some way towards penalising the offenders and raising revenues to cover the social costs. Labour should consider applying such policies to social pollution. A good example of this is the inequitable distribution of income as corporate executives grab huge pay packets whilst ordinary workers struggle. In just three working days, the UK’s top bosses make more than a typical full-time worker will earn in the entire year

Inequalities in the distribution of income have harmful consequences as they affect infant mortality, life expectancy, access to education, housing, healthcare, pension, food and security.

An inequality tax should be levied on companies and other entities responsible for inequitable distribution of income. Currently, all wages, salaries and benefits paid by employing organisations are treated as a tax deductible expense i.e. they reduce the taxable profit and tax liability of a company. Companies are rewarded for excessive executive pay because that reduces their liability to corporation tax.

An inequality tax does not prevent a company from paying higher amounts to executives but would place an upper limit on the amount of remuneration that it can deduct from its taxable profits. The cap could be a multiple of the national median pay, the national minimum wage or even a straight sum which could be say £1 million per executive. This principle can also be applied to the remuneration of any employee.

In 2017/2018, the CEO of Bet365 received remuneration of £265m and all of it was tax deductible. Under the proposals outlined above, only £1 million may be allowed as an expense in the company’s corporation tax liability calculation i.e. £264m would not be treated as a tax deductible expense.

The net result of this would be to increase the company’s taxable profits. At the prevailing rate of corporate tax rate of 19%, the company would be required to pay an additional tax of £50.2m (£264m x 19%) to compensate society for the negative consequences imposed upon it. Those revenues can be used for redistribution. Hopefully, Labour would consider this in its quest to build a fairer society.

Prem Sikka

Prem Sikka is professor of accounting at the University of Sheffield and emeritus professor of accounting at the University of Essex