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Scrap 'hugely inefficient' corporation tax, says IEA think-tank

Published 02/09/2016

Corporation tax should be taxed and replaced with a tax on earnings, the Institute of Economic Affairs has said
Corporation tax should be taxed and replaced with a tax on earnings, the Institute of Economic Affairs has said

Corporation tax should be scrapped and replaced with a tax on earnings distributed to shareholders because the current system is "hugely inefficient", according to a new think-tank report.

The report from the Institute of Economic Affairs (IEA) argues there is a "clear and straightforward case" for abolishing the tax in the UK.

It suggests that while corporations are legally required to pay the tax the economic burden actually falls largely on workers because it leads to lower wages - the result of lower productivity caused by lower capital investment by firms in response to the tax.

It argues that the current system is "hugely inefficient" and costly to administer, both for public authorities and companies, and that it undermines long-term economic growth.

Report author Diego Zuluaga, financial services research fellow at the IEA, said: "Economic theory and evidence have increasingly shown corporation tax to be one of the most inefficient ways of raising government revenue.

"Yet, partly due to the fiction that it is companies rather than people - workers, shareholders, consumers - who bear the tax, meaningful reform has proven elusive.

"At a time of great change for the British economy, bringing our tax code into the 21st century is more important than ever.

"A competitive and growth-prompting tax system will enable the UK to fully reap the benefits of globalisation and technological innovation."

The report suggests that replacing corporation tax with a tax on earnings distributed to shareholders would reduce the incentives and opportunities for tax avoidance.

Corporation tax was cut from 28% in 2010 to 20%, while plans are in place to drop it still further to 17%.

Former chancellor George Osborne pledged to cut the rate to 15% or lower in the wake of the UK's Brexit vote.

The Treasury is yet to commit to the cut proposed by Mr Osborne.

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