IS A 25% CORPORATION TAX RATE REALLY AN ATTACK ON GROWTH?

 

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IS A 25% CORPORATION TAX RATE REALLY AN ATTACK ON GROWTH?

 

 Recently two articles on the 25% corporation tax rate crossed my desk.  The first by Phil Radford, who is described as a trade analyst and author of The Case for Corporate Taxation, claims that the decline in the UK pharma industry is wholly due to taxation.  As he puts it, “What caused this malady?  In a word: taxation.  In the Centre for Brexit Policy paper, we identified how corporate taxation levels appear to exert a dominating effect on where pharmaceutical companies locate their factories”.  More of that later.  For the moment I must admit I am not aware that the British Virgin Island, Cayman Islands and Bermuda (which the Tax Justice Network tell me are the three most wicked corporate tax havens) are major pharmaceutical hubs – which they surely must be if that theory is correct.

 

The second is by John Longworth, who tells us that, “A radical rise in corporation tax would be an attack on innovation, investment and growth”.  Mr Longworth is described as an entrepreneur, but his CV on Wikipedia inexplicably ignores the business or businesses that he created and tells me only that he was Director-General of the British Chambers of Commerce from September 2011 to March 2016, a Brexit Party MEP from July 2019 until December 2019 and a media commentator and writer since then.  He also seems to be involved with several think tanks.  He believes that “the psychological anti-profit, anti-growth signal of a radical increase [in corporation tax] could be much more damaging than is imagined.  If profitability is a prerequisite for innovation, investment and growth, raising corporation tax is an attack on all of them”.

 

Perhaps my problem is that I cannot see why profitability should be a prerequisite of any of those.  Pre-Trump, the US had a federal corporate tax rate of up to 38% with most States and many cities adding their own corporate tax rate on top.  That does not seem to have deterred Apple, Microsoft, Starbucks, Amazon and many others from innovating in the US.  Indeed, tax has little effect on profitability, as it only applies once profits have arisen.  It may affect investment decisions of profitable companies, but I doubt that even then it is a major factor.

 

Mr Longworth also tells me that “What the Chancellor does now with corporation tax could well determine the outcome of [that 2024] election”.  Personally, I doubt that corporation tax is even on the agenda of the bulk of the electorate.  They are much more worried about housing, inflation, childcare and employment!  I certainly agree that reducing corporation tax will determine the outcome of the election, although not in the way that Mr Longworth envisages; I think that most electors would see it as favouring business over working people, so it would virtually guarantee a Labour landslide!

 

Back to Mr Radford.  I looked up his Centre for Brexit Policy paper, “The Case for Low Corporate Taxation: Lessons from the International Pharmaceutical Industry”.  The thesis of this seems to be that Ireland’s pharma industry has grown rapidly whilst those of both the UK and the US have declined.  He notes that Ireland has had a 12.5% corporate tax rate since 2003 and seems to conclude from this that low Irish taxation is the reason for this change.

 

Statisticians warn that care needs to be taken not to confuse causation with correlation.  The fact that the Irish pharma industry has grown during a period of low taxation does not mean that the tax rate has caused the growth.  There is little or nothing in the paper to suggest that it has done so.  Indeed, it is illogical to suppose that it has.  If a businessman is deciding where to locate a factory, one would expect the dominant considerations to be the availability of labour, the general business environment and the ease of export to the EU.  Ireland scores highly on all of these.  It is only when faced with two countries that both meet all of those requirements that I would expect tax rates to come into the decision.  But Mr Radford seems to regard the rate of tax as the dominant consideration.

 

I am also not convinced that he actually understands the pharma industry, because he tells us that “A tax policy that encourages UK-based research but fails to encourage UK-based manufacturing risks seeing practically all the benefits of that research go offshore, including tax revenue from UK-based business.  Spending on research of itself only creates jobs in research: nothing else follows automatically”.  That is correct only if one sees the role of business as to create jobs.  Because what follows automatically from successful UK pharmaceutical research is UK patients.

 

One only needs to compare the prices of generic drugs (primarily drugs for which the patent has expired) with the price of branded drugs (those under patent or for which confidence in the brand has been created during the lifetime of the patent) to realise that the manufacturing profit is low.  The most significant return is from the exploitation of the patent.  In other words, where R & D is carried out in the UK, the bulk of the fruits of that R & D are taxable in the UK even though manufacturing might take place elsewhere.

 

I have also looked at the latest accounts of Astra-Zeneca and GSK, the two largest UK pharmaceutical companies.  Both seem happy to be based in the UK and neither suggest that UK corporation tax rates are a problem.  Of course, like any multi-national company, they do not manufacture solely in the UK.  Most major companies manufacture near where their customers are, so have a manufacturing facility in several parts of the world.

 

ROBERT MAAS