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UK Dropping Corporate Rate to 20 Percent, Half the US Rate

3 min readBy: William McBride

While the U.S. maintains the developed world’s highest corporate rate at 40 percent, and frets about how to “pay for” a rate cut even when it would likely pay for itself, the rest of the world continues to pass us by. According to tax-news, the U.K. is reducing their corporate rate from 23 percent currently to 20 percent in 2015 and making some other pro-growth reforms:

UK Chancellor George Osborne has unveiled his 2013 budget, introducing taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. measures that he claims puts the UK on the path to having the "most competitive business tax system of any major economy in the world" while promising action against tax avoidance.

In his Budget Speech, delivered in the House of Commons, Osborne announced that corporation tax will be reduced to 20% from April 2015. The rate will not only be the lowest in a large economy and in the UK's history, he explained, but will unify the small company and main rates and therefore abolish the need to make complex marginal relief calculations. Businesses will also benefit from a new Employment Allowance from April 2014, which will reduce the National Insurance bill of each business by GBP2,000; companies, charities, and community sports clubs will be able to hire someone on GBP22,000, or four people on the minimum wage, without paying anything in what Osborne referred to as "jobs tax."

Other measures for business include an extension of the Capital Gains TaxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. holiday, as well as CGT relief for sales of businesses to employees. Above the line Research and Development credit will rise to 10%, and Osborne also reminded the House about the 10% corporation tax rate for profits on patents, which will come in from next month. Also, the amount that employers can loan to employees tax-free for the purchase of items such as season tickets will be doubled, to GBP10,000.

In relation to financial services, Osborne announced the abolition of the Schedule 19 Stamp Duty Reserve Tax, which is charged on UK domiciled unit trusts and open-ended investment companies, and of Stamp Duty on shares traded on growth markets such as the Alternative Investment Market. He quipped: "In parts of Europe they're introducing a financial transaction tax; here in Britain we're getting rid of one."

By the way, Citizens for Tax Justice doubts that a corporate rate cut would pay for itself:

Of course, if there was any possibility that we could actually get more revenue by paying less in taxes, we would all support that. The idea is so appealing that many lawmakers cling to it despite overwhelming evidence that it’s wrong.

Well, the evidence in the U.K. indicates 30 years of rate cuts have not put a dent in corporate tax collections or total tax collections as a share of GDP. The following charts show corporate and total tax revenue today is about where it was in 1981, when the corporate rate was more than double its current rate.

Follow William McBride on Twitter @EconoWill