Cooking the Books 2
Tories increase tax on profits
One of the surprising measures announced by Rishi Sunak in his budget on 3 March was the increase of corporation tax from its current level of 19 percent to 25 percent in 2023. Corporation tax is a direct tax on profits, so not something to be expected from the traditional party of Big Business.
Rumours that this might be on the cards completely wrong-footed the Labour Party. Keith Starmer had asked Johnston at PMQs on 24 February whether he would not ‘agree with me today that now is not the time for tax increases for families and businesses’. This led to an article in The Times the following day headed ‘Tory rebels and Labour ready to block corporation tax increase’. To be fair, this brought protests from some Labour MPs who remembered that in its manifesto for the 2019 general election the Labour Party had proposed to increase corporation tax to 26 percent.
Starmer backed down but the fact that he was prepared to present Labour as a defender of Big Business and its profits showed the extent to which the Labour Party is committed to maintaining capitalism more or less as it is (as well as assuring the capitalist class that their interests will be in a safe pair of hands if he becomes Prime Minister). Given this, Starmer’s position was not without logic: if you support capitalism, driven as it is by the pursuit of profits, and wish to take on the responsibility of administering it, you have to accept that profits have to be allowed.
Sunak’s defence to business for raising the tax on their profits from 2023 was that in the intervening two years they could get a generous tax break on new investment in equipment and machinery. According to another cabinet minister, Oliver Dowden, businesses ‘are sitting on very large amounts of cash’ (Times, 11 March); in other words, on profits that have not been re-invested. The aim of the so-called ‘super-deduction’ is to get business to invest these, a recognition that what in the end drives growth is business investment rather than consumer spending. With the lifting of the anti-covid restrictions, consumer spending will grow next year but, as Philip Aldrick, the economics editor of The Times, pointed out very pertinently:
‘The rescue should ensure that the consumer, who accounts for two thirds of national output, is able to start up the economic engine. The more difficult bit is keeping it going. That requires business investment. There, the chancellor unveiled a big new policy – a temporary two-year capital ‘super-deduction’. For every pound spent on machinery or equipment, a company will be able to get 25p back in lower corporation taxes. Unlike any previous recession, businesses, in aggregate, have built up a £100 billion cash buffer. The government wants them to spend it’ (Times, 4 March).
No doubt they will spend some of it, but this ‘big new policy’ is yet another measure to try to get a horse to drink. Just as horses won’t drink unless they are thirsty so businesses won’t invest unless there’s a prospect of profit. The super-deduction might not work, any more than low interest rates or quantitative easing have. Business will invest but will it be more than they would have done anyway? That depends on the prospect of profit which no government can control.