Philip Hammond should drop the misguided and unjust plan to cut corporation tax cut
Writing for PoliticsHome, Treasury Select Committee and Labour MP Rachel Reeves calls on the Chancellor to cancel the corporation tax cut outlined by George Osborne before the EU referendum.
The economic chaos left behind by George Osborne has clearly left the new Chancellor struggling to work out where to start.
Amid the volatility and uncertainty that gripped the City and the markets after the Brexit vote, Osborne promised there would be an Emergency Budget.
In his first days at the Treasury, his successor Philip Hammond has offered little reassurance about the perilous state of the economy. The new Chancellor’s first move was to ditch Osborne’s plan for an Emergency Budget, despite forecasts for growth being revised down and down for this year, next year and they year after that.
After the vote to leave the EU, Osborne also promised a cut in corporation tax to less than 15% - a move that would bring the UK within touching distance of Ireland’s 12.5% rate.
At the time, Osborne said the planned cut to less than 15% from the current 20% rate - beyond an already promised cut to 17% by 2020 - would boost business.
But it was a move born far more out of panic than prudence from a Chancellor just days away from the sack.
I would urge the new Chancellor to set out a more responsible set of financial priorities than his predecessor by immediately abandoning any plans to cut corporation tax. He should drop the misguided and unjust plan at the earliest opportunity.
As I told David Cameron at Prime Minister’s Questions this month, UK firms are worried if they will make any profit at all in the current climate – not how much tax they will pay on it.
With the prospect of a post-Brexit recession on the horizon, any plan by Hammond to go ahead with cuts like the one planned for corporation tax would show he has as much grip on financial reality as his predecessor.
Latest estimates from HMRC suggest a further cut in the headline rate of corporation tax from the 17% currently planned for 2020 to 15% would cost £4 billion a year.
French finance minister Michel Sapin has said he was “not persuaded” the proposed cut was a good idea, while Germany’s finance minister Wolfgang Schåuble has already criticised Britain’s fiscal “race to the bottom”.
Pascal Lamy, a former World Trade Organisation head, said cutting corporation tax was not the right way to prepare for Brexit negotiations.
Most of the benefit of these measures will go to the relatively small number of large multinationals that pay the vast majority of corporation tax.
According to the Oxford Centre for Business Taxation, 81% of corporation tax is paid by just 1% of all companies. The vast majority of Britain's five million small and medium-sized enterprises pay no corporation tax at all.
And, the head of tax at the OECD has reportedly already warned that a “more aggressive tax offer” from the UK following Brexit would “really turn the UK into a tax haven type of economy”. The average rate across the OECD is 25%.
The estimated £4 billion saved each year by dropping the corporation tax cut could be put to many far better uses.
The Chancellor could follow up the Government’s U-turn on tax credits by reversing the cuts to Universal Credit work allowances at an estimated cost of £3.4 billion.
Alternatively, Hammond could exempt plant and machinery from business rate calculations – something that would be a far bigger boost to many small and medium sized firms – at an estimated cost of £3 billion.
The new Chancellor needs to focus far less on the Tories’ flawed ideology of cutting taxes for big businesses and think about how he can protect people’s jobs and livelihoods.
He needs to get the nation’s finances under control and he should start by dumping plans to cut corporation tax.
He has much to do to get our economy back on track and that work cannot start quickly enough.
Rachel Reeves is a member of the Treasury Select Committee and Labour MP for Leeds West
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