Rishi Sunak’s Budget illustrates the need for a global corporation tax

In his budget Rishi Sunak announced that corporation tax will be increased in 2023. A chorus of voices warn that there will be an exodus of companies from the UK as a result. There is only one fix: a global corporation tax.

Rishi Sunak, the UK chancellor of the exchequer, announced today that corporation tax in the UK will be increased from 19 to 25 per cent in 2023.

Nigel Green, chief executive and founder of deVere Group was not impressed. “Lower corporation tax helps job and wealth-creating business to survive and thrive. It also helps attract business to move and invest in the country.

“Instead of increasing taxes, Mr Sunak should have relentlessly focussed on growth and stimulus policies for businesses.  This would have been of greater help to firms, the economy, jobs and, ultimately, the Treasury’s coffers.” He added: “Again, this corporation tax hike is likely to serve as a prompt for businesses to consider their overseas financial options.”

But there is another way of looking at this.  In 2012, in the US, the ratio of corporate profits to GDP hit an all time high— with data going back to the late 1940s. https://fred.stlouisfed.org/graph/?g=1Pik Although the ratio has fallen back since, right now the ratio is higher than at any point between 1946 and 2006. Besides, since the Covid crisis the ratio has been increasing again, the trajectory is upwards.

This matters because the flip side of profits to GDP is wages to GDP. In other words the share of the GDP cake handed out in the form of wages is exceptionally low.The economy needs consumers to spend more in order for it to keep growing. So, if the ratio. of wages to GDP is quite low, how do you get economic growth?The answer is that low interest rates have pushed up on asset prices, including house prices. Flushed with new wealth — obtained without earning more, or even by saving — households borrowed. In this way consumer spending could rise, and the economy grow. And we will get periodic financial crises, as a result.

This was the main hypothesis of Raghuram Rajan, former chief economist at the IMF and former governor of India’s central bank. Sometimes known as an economist with rock star status, in his book Fault Lines https://en.m.wikipedia.org/wiki/Fault_Lines:_How_Hidden_Fractures_Still_Threaten_the_World_Economy , Rajan wrote: “We have long understood that it is not income that matters but consumption. Stripped to its essentials, the argument is that if somehow the consumption of middle-class householders keeps up, if they can afford a new car every few years and the occasional exotic holiday, perhaps they will pay less attention to their stagnant monthly paychecks.”

He also wrote: “Nationalism, coupled with great faith in the power of the government to enact domestic bargains between labor and capital, has been seen before: it was called fascism then.”

Truth is, a 25 per cent corporation tax rate is not exceptional. It is a similar level in the US and higher in Germany. https://files.taxfoundation.org/20210125114405/2020-Corporate-Tax-Rates-Around-the-World.csv.xlsx

Corporation taxes probably should be higher, but a country that unilaterally increases the tax rate risks losing out to a mass exodus. To help fix the problem that Rajan refers to, corporation tax increases need to be an example of multilateral action.

In short, in an era when globalisation goes into reverse and nationism or nationalism is in the ascendance, we need the opposite— a global corporation tax rate.

Or, as Rajan said: “Cynical as it may seem, easy credit has been used as a palliative throughout history by governments that are unable to address the deeper anxieties of the middle class directly.”