Tory Policy Group Calls For Deep Corporate Tax Cuts

by Robert Lee, Tax-News.com, London

20 August 2007

The UK Conservative Party's economic review group has suggested that a future Tory government should make deep cuts in corporate tax for both large and small firms, pointing to the success of similar policies in other countries, such as Ireland.

The review group, headed by former Cabinet minister John Redwood and Simon Wolfson, the chief executive of retail group Next, has proposed that the headline rate of corporation tax should fall to 25%.

While Prime Minister Gordon Brown, in his last budget speech as Chancellor earlier this year, announced a 2% cut in corporate tax to 28% in 2008, the review group says this does not go far enough to address concerns that the UK tax system is eroding the country's international competitiveness, especially as governments across the EU are racing to cut their corporate taxes in order to attract investment. They argue that a 5% cut in corporate tax would not endangerpublic finances since there is evidence in other countries which have lowered business taxes that tax revenues increase, because the cuts encourage higher levels of growth and investment.

The review group has also called for corporate tax to be cut for small firms to 20%, partially reversing an increase in tax from 19% to 22% for small companies announced by Brown this year in an effort to reduce tax motivated incorporations.

"The evidence in favour of lower marginal rates of tax on income and profits is overwhelming," the report argued. "Countries with very low corporation tax rates have seen businesses grow especially quickly. Far from sacrificing revenue, a substantial marginal tax rate cut can, as a result of business and economic growth, lead to an increase in overall revenue after a year or so."

The report also calls for an overhaul of the capital gains tax system, which would see the tax abolished on assets held for longer than ten years. This would also apply to inheritance tax, thus dramatically reducing the scope of the levy. Furthermore, Redwood and Wolfson said that a future Tory government should take "early action" to abolish or reduce stamp duty on both shares and house purchases, although the report concedes that there may be little fiscal leeway to bring about many cuts in the first few years of a new government.

The new proposals come on top of Redwood's plan for a massive round of deregulation, which he has said would save businesses GBP13 billion, and would be a tax cut by another name. However, the Tory leadership, which has stuck to a cautious line on tax, has stressed that none of the review group's radical proposals are binding on the party, and has stated that it would cherry pick the most suitable proposals.

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