Why Corporation Tax Should Be Scrapped

36 Pages Posted: 5 Jun 2021

See all articles by Diego Zuluaga

Diego Zuluaga

Institute of Economic Affairs (IEA)

Date Written: September 2, 2016

Abstract

Corporation tax is an inefficient way to raise state revenue. It has a negative impact on growth, investment, and entrepreneurship. A 2014 review of the literature found that 57.6% of the amount raised by corporation tax is born by workers. Since 1981, the average corporate tax rate in key OECD countries has dropped from 47% to 29%. However, corporate tax revenues as a share of all taxation have remained stable during this time and even increased as a share of GDP. Economic developments, such as globalisation and the growing importance of intangible assets, underscore the need for reform of the way in which capital income is taxed. The only radical reform that would improve on the status quo without introducing new distortions would be to replace corporation tax with a tax on the income distributed to shareholders. Such a system would overcome the weaknesses of the current system, while reducing incentives for avoidance and raising revenue in a growth-friendly way. This reform could be implemented in stages to ensure the UK’s international tax treaties are updated. Once fully implemented, the new system would see UK shareholders taxed on their worldwide capital income, while foreign shareholders in UK firms would be exempt.

Keywords: UK, Britain, fiscal policy, corporation tax, corporate tax, government policy, globalisation, policy coordination, international institutions, international agreements

JEL Classification: E62, L51, L52, G38

Suggested Citation

Zuluaga, Diego, Why Corporation Tax Should Be Scrapped (September 2, 2016). Institute of Economic Affairs No. 74, Available at SSRN: https://ssrn.com/abstract=3852763 or http://dx.doi.org/10.2139/ssrn.3852763

Diego Zuluaga (Contact Author)

Institute of Economic Affairs (IEA) ( email )

2 Lord North Street, Westminster
London, SW1P 3LB
United Kingdom

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