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'Inefficient' corporation tax should be axed: New report

By Jack Maidment

Published 02/09/2016

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

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

Stormont plans to reduce corporation tax in Northern Ireland to 12.5% by 2018, in line with the rate in the Irish Republic.

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

It suggests that while corporations are 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 for companies - and that it significantly 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 and 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%, and 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 reduction proposed by Mr Osborne.

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