Independent Scotland intends to offer a low corporation tax rate but will this prove to be a good or a bad thing?
Having one of the world’s top economists join their advisory panel was undoubtedly a coup for the SNP. So having that same top boffin appear to criticise their flagship business policy was a huge embarrassment.
That’s what happened last week when Nobel laureate Joseph Stiglitz seemed to slate the policy of cutting corporation tax, suggesting it created a “race to the bottom”. He wasn’t talking about Scotland specifically, but critics seized on Stiglitz’s words as evidence the Scottish Government’s tax-cutting plans didn’t add up.
The Scotland’s Future blueprint promises that, in an independent Scotland, businesses would pay tax on their profits at a rate that was three percentage points lower than the rest of the UK. With the Treasury setting corporation tax at 20% from next spring, that would mean a 17% rate.
According to the Scottish Government, lowering corporation tax would tempt more firms to move to Scotland and free up cash for businesses to invest. New enterprises would mean new jobs and more investment would also boost productivity, both of which would lead to more taxes being paid into the Scottish exchequer.
On paper it sounds good.
The independent Institute for Fiscal Studies (IFS), which has a reputation for scotching George Osborne’s budgets just as fiercely as it fillets the Scottish Government’s sums, was even moved to say: “A lower rate of corporation tax in Scotland might be quite effective in attracting business from rUK” the remainder of the UK left behind should Scotland separate.
Scottish Government research estimates the policy would increase inward investment by 1.9%, boost employment by 1.1% and output by 1.4% over 20 years. The total cost of the policy is put at just shy of £400 million.
However, the IFS has warned those figure are “highly speculative”. And an increase in employment of 1.1% only adds up to 27,000 extra jobs. That’s not a lot over the course of two decades.
And there are questions about whether the money might be better spent. A £10 million inducement to tempt internet giant Amazon to set up in Fife created 1300 jobs at one fell swoop.
Scotland is already very good at attracting inward investment. Through Scottish Development International it has an effective tool to tempt foreign firms here allied with a strong international brand both advantages over English regions that lack an equivalent agency or reputation.
Does Scotland really need to cut corporation tax too?
Critics claim there are downsides to the policy, foremost among which is the “race to the bottom”. Stiglitz, who sits on the SNP’s Fiscal Commission, says lowering corporate taxes is a “bad idea”, echoing the main criticism from unionists that a fierce tax competition between an independent Scotland and its neighbour the UK would ensue. If, as promised, the SNP dropped corporation tax to 17% might the Treasury in Whitehall cut its rate to 16% and so on until businesses are paying nominal or no tax? Companies might welcome that, but it would be bad news for the national coffers.
The Tories at least are on a sticky wicket with this argument, given their man George Osborne keeps proudly proclaiming the latest cuts to corporation tax at every Budget. He’s lopped six percentage points off the rate since moving in to Number 11, Downing Street.
By the UK Government’s logic, Britain has already set off on a race to the bottom and Scotland is getting dragged along in the UK’s slipstream. The SNP argument is that Scotland always gets pulled in whatever direction London goes and that’s not always best.
For example, Scotland suffers from low productivity and fewer companies start up relative to the rest of the UK. That could be because Scots are lazy and lacking in initiative but the long list of Scottish inventions and businesses that drove the industrial revolution rather undermine that theory.
Compared with other small EU countries Scotland has, according to the Scottish Government’s Fiscal Commission, “underperformed”. It’s worth pointing out it would most likely fare even worse in comparison with the same countries if Scotland found itself outside the EU even for a short time, and for now there remains uncertainty about how and when Scotland would get into Europe.
All of this suggests the problem is indeed that there’s a need for more tailored solutions to the nation’s economic problems.
However, a recent report by Durham University expert Dr John Moffat queried whether slashing corporation tax was a “panacea for closing the productivity gap through encouraging more inward investment and/or business start-ups”.
As well as economic criticisms there have been political ones too.
Cutting corporation tax can be portrayed as a sop to fat cats. Green Party leader Patrick Harvie expressed doubts about the policy and the trades union body the STUC dubbed it “misguided, damaging and wrong”.
To counter these criticisms the SNP have a shining example of how the policy could work out.
Ireland has one of the lowest corporation tax rates in the world at just 12.5%. Huge multinationals like Google and Apple have established bases in Ireland along with a raft of less well-known but high-value pharmaceutical and tech companies, all benefiting from a reduced tax bill and creating thousands of jobs. If it has worked in Ireland and on balance it has why not Scotland?
Well, Scottish cities like Glasgow and Edinburgh would find themselves competing with Dublin to woo the multinationals. The Irish have already stolen a march and Dublin has a reputation as a trendy and techy centre though the Scots would be able to match the Irish in playing the ancestry card to appeal to American firms at least.
And if there was a lower corporation tax rate UK firms might also start thinking about headquartering their operations north of the Border to benefit. That would lead to all sorts of creative accounting as the tax authorities try to work out which bit of money was made where and therefore what rate of duty should be applied.
If London lost out because companies were up to jiggery pokery with their tax affairs it would at best sour relations and at worst Westminster might be inclined to object to the EU entry. Other EU countries would not be keen on new and stiff competition either.
On the other hand, the policy might not work. Firms weighing up where to move might prefer the markets, infrastructure and attractions offered by south-east England. Those for whom low tax rates are a priority might still plump for Ireland.
Like so much about the referendum the corporation tax conundrum is unprecedented and therefore the outcome unknown.