The myth of the corporate tax “race to the bottom”

It’s often said there’s been a race to the bottom in corporate tax, with tax competition resulting in corporations paying less and less over the last few decades. The most recent claim was by the IPPR, which I commented on here.

These claims are wrong, at least when it comes to the UK: the UK corporate tax rate plummeted over the last 20 years, but the actual tax collected, as a percentage of GDP, stayed broadly the same. See the chart above or the OBR piece here.

Why? Because a company’s corporate tax liability is the tax rate multiplied by its taxable profit. The UK definition of “taxable profit” – often termed the “tax base” – has expanded over the same period that the rate fell. Either by accident or design, the two effects broadly countered each other.¹With some noise from “incorporation” – sole traders establishing companies to save tax, which tends to reduce income tax/national insurance and boost corporation tax – but not enough to make a difference to this analysis. This means that the average effective tax rate (i.e. tax paid divided by profits) is largely unchanged:²This comes from the excellent OBR piece. Well worth a read

Unfortunately, the ONS doesn’t publish that chart going back further than 2010 – but we can calculate a reasonable proxy for effective tax rate using the ONS data for corporate gross operating surplus. That results in this chart, which needs to be read with many many caveats,³The two big ones: (1) GOS is not the same as accounting profit, and in particular excludes depreciation (so the chart understates ETR), (2) the tax stats are for cash collected by HMRC in a tax year, which used to lag profits by around a year, and now mainly doesn’t – neither factor should affect the overall trend, but both will create/mask considerable noise. With some work they could be corrected. but nevertheless is a good indication that the long-term trend is indeed that the headline rate (purple) plummets, but the effective tax rate (yellow) does nothing much at all.

So the stories people tell of [brave tax-cutting Chancellors][evil tax-cutting Tories] are all wrong, and are because people are looking at the (mostly irrelevant) purple line. The yellow line – reflecting the tax actually paid – tells us that corporate tax wasn’t cut at all – it just changed in lots of very complicated and opaque ways. Great.

What about other countries?

I’ve quickly pulled together some data from the OECD’s fantastic corporate tax database, and have made an interactive chart that lets us compare corporate tax rates and revenue across the OECD. Click this image:

The OECD sadly only has tax rate data going back to 2000 – I added the earlier UK tax rate data myself. But you can zoom and focus on 2000-2020, then click on the right hand side to select/deselect individual countries.⁴If anyone can point me towards pre-2000 tax rate data I’d be most obliged.

The code and underlying spreadsheet is here.⁵If you have feedback on the quality of my incredibly amateurish coding then please do add comments on our official code feedback page here.

Unfortunately, I can’t find useful international gross operating surplus data, so can’t compare effective tax rates across the OECD.⁶The OECD data only goes back to 2008 If anyone can find that data, please let me know.

So what?

I can play with the interactive chart all day but – fun as it is – it’s just cherry-picking.⁷Just promise me you won’t look at the US chart, because pass-through taxation (company profits taxed in the hands of owners/shareholders) means US corporate tax statistics can’t easily be compared with other countries’.

The question we really want to answer is: is there evidence across the OECD that falling rates drove falling revenues over the period 2000-2018?

I’ll post more on this soon.

• 1
  With some noise from “incorporation” – sole traders establishing companies to save tax, which tends to reduce income tax/national insurance and boost corporation tax – but not enough to make a difference to this analysis.
• 2
  This comes from the excellent OBR piece. Well worth a read
• 3
  The two big ones: (1) GOS is not the same as accounting profit, and in particular excludes depreciation (so the chart understates ETR), (2) the tax stats are for cash collected by HMRC in a tax year, which used to lag profits by around a year, and now mainly doesn’t – neither factor should affect the overall trend, but both will create/mask considerable noise. With some work they could be corrected.
• 4
  If anyone can point me towards pre-2000 tax rate data I’d be most obliged.
• 5
  If you have feedback on the quality of my incredibly amateurish coding then please do add comments on our official code feedback page here
• 6
  The OECD data only goes back to 2008
• 7
  Just promise me you won’t look at the US chart, because pass-through taxation (company profits taxed in the hands of owners/shareholders) means US corporate tax statistics can’t easily be compared with other countries’.