The historic G7 deal to reform the international business tax system should be the start of a fundamental shift to a new British economic model where an active state does much more to promote business-led growth, a new paper from a think-tank says today.
The Social Market Foundation said that four decades of a laissez faire attitude to UK enterprise had “failed” and politicians must now double down on recent shifts on corporation tax.
G7 finance ministers this weekend backed a deal for a global minimum rate of at least 15% and plans to make large firms like Facebook and Google pay tax in markets where they have 10% profits, irrespective of whether they have a corporate presence there.
This year’s Budget saw the first hike in corporation tax in almost 50 years, with the main rate reaching 25% from April 2023.
But the cross-party think-tank warned corporation tax reform is only the start of ensuring the UK becomes more pro-enterprise after COVID-19.
Politicians have too often overlooked other aspects of the pro-business agenda, including levels of investment in education, skills and training, business culture, and the regulatory environment.
The impact of corporation tax levels has been overplayed, the paper said, pointing to data from the Department for Business, Energy and Industrial Strategy which show just 16% of businesses report the level of taxation as the greatest challenge they face, falling to 2% for larger businesses (250+ employees).
The SMF said being “pro-business” did not necessitate ever lower corporate taxes, and there is little evidence that cuts to corporation tax correlate with an increase in business investment. In 1980 investment as measured by gross fixed capital formation was 22.8% of GDP compared with 17% in 2019.
Despite four decades of supposedly “business friendly” policies evidence indicates a significant proportion of UK businesses lack ambition to grow, are poorly managed and do not invest enough in human and physical capital. SMF said attempts at setting business “free” had not been successful.
The paper said the UK must jettison the “liberal market model” in favour of a “new social market economy”, one in which an activist state uses the revenue from higher corporation tax to make Britain the best place in the world to do business in.
The paper identifies several recommendations for ministers to help create a pro-business environment. These include:
- Designating an annual GDP per capita growth target and setting out multi-year economic plans for how this target will be reached
- Overhauling the UK’s National Innovation System
- Establish a share-holding democracy of economic stakeholders
- Making Britain’s markets the most competitive in the world
“Continuing with the flawed analysis and simplified prescriptions of the advocates of laissez faire approaches, as typified by the UK’s recent history of Corporation Tax reform, would only result in more of the same of what the UK had before the COVID crisis and Brexit”, the paper said.
Richard Hyde, Senior Researcher at the Social Market Foundation, said:
“The mood music on corporation tax is finally starting to change: politicians must jettison once and for all the idea that low taxation leads to a thriving private sector. Four decades of supposedly business friendly policies has left the UK economy stagnating and too many businesses not looking to grow.
“A social market economy – driven by an activist state facilitating a strong private sector – can secure a strong recovery from COVID-19 and make a success of Brexit. That means higher rates of business taxation, but also much more money for investment skills and innovation and opening up the economy so more workers can have a stake in future growth.”
