Saturday, 11 May 2013

“…Perhaps I can find new ways to motivate them.” - the force of the tax incentive


The force is with us.

That is the force of tax incentives it seems:

Chancellor George Osborne met executives from Disney-owned Lucasfilm in London earlier this year to discuss the plans and the production is thought to be eligible for a tax break.

Now let's think a little more about what this means. Yes, folks, you've got it - reducing taxes on businesses increases business investment. So why is it does in this favour-mongering, no longer smoke-filled rooms inhabiting manner? Perhaps it's so the Chancellor of the Exchequer can tweet gleefully of his success or maybe it's just a consequence of the lunacy of over-taxing businesses.

It seems to be that the nation is privileging one sort of investment - making blockbuster feature films - over the totality of business choice and investment option. Are we to offer tax incentives to a company that wants to do something more prosaic, perhaps building a recycling plant or setting up a cleaning company?

I am delighted that the jobs and money from this production are to come to the UK. But let's learn the lesson - cutting business taxes helps investment and job creation - if it's good for Disney it's also good for some South Korean company you've never heard of or indeed for the wholly homegrown business. So cutting those taxes makes sense (and will make it a whole lot less likely that businesses will engage is complicated schemes to reduce liability - but that's another story) and it supported by evidence:

...we find that a higher provincial statutory corporate income tax rate is associated with lower private investment and slower economic growth. Our empirical estimates suggest that a 1 percentage point cut in the corporate tax rate is related to a 0.1–0.2 percentage point increase in the annual growth rate.

So George, rather than doing behind doors deals with favoured businesses, just cut corporation tax some more - perhaps, as some argue, to as low as 10%:

At the same time, he could also announce his intention to reduce it even further – to 15% or even 10% once the appropriate anti-avoidance measures are in place. Such a move would have numerous benefits. For one, it would boost business confidence, encourage new investment by businesses (as it would improve net returns) and would send a strong signal that the Coalition is taking the supply-side measures necessary to restore growth. It would also immediately fulfil the Coalition pledge to “create the most competitive corporate tax regime in the G20”.


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