Britain’s shrinking corporate taxes puts pressure on US policy makers.
The UK will lower its key corporate tax rate by 1 percent on top of an already slated 7 percent reduction, according to Chancellor of the Exchequer George Osborne. This will put the country’s rate well below most developed countries and put more pressure on US tax-policy makers.
Mr. Osborne noted that the combined cuts represent the largest reduction in corporate taxes in the country’s history. Britain’s 20 percent corporate rate will be “the lowest business tax of any major economy in the world,” Mr. Osborne said in a March 20 briefing with reporters on the 2013 budget. “That’s a tax cut for jobs and growth.”
The initial 7 percent cut will occur next year, and the additional 1 percent in 2015. The move also serves to merge the country’s main corporate tax rate with the existing 20 percent rate for small businesses.
“Once you get the main corporate rate down to 21 percent, you have to ask what that 1 percent difference is accomplishing,” noted Clint Stretch, senior tax policy counsel at Tax Analyst.
Mr. Osborne noted that the average corporate tax rate for the 34 Organization for Economic Cooperation and Development (OECD) countries is 25 percent, and a third of those countries have rates at 20 percent or less. Among the larger economies, the corporate tax rate is 29 percent in Germany, 33 percent in France, and 40 percent in the US, including federal and state taxes.
Mr. Stretch called Britain’s move “terribly important” from a US perspective, because “we’re getting further and further away from anything that looks like a reasonable corporate tax rate compared to the rest of the world.” Mr. Stretch noted that Britain is pairing its corporate rate cut with measures to reduce tax avoidance – the General Anti-Abuse Rule (GAAR) – an issue the OECD has been pursuing.
“What Britain is doing is in the same line of thinking: Tighten up some of the tax planning aspects available under the current law and continue to march rates downward,” Mr. Stretch said.
Mr. Osborne called the measures to limit tax avoidance the largest ever presented with a budget. He pointed to recently reached agreements with tax safe-havens such as the Isle of Man to return over 1 billion pounds of unpaid taxes as well as new rules to stop the abuse of partnership rules, corporate tax losses and offshore employment intermediaries.
A few years ago, the Obama administration indicated an interest in similarly tightening up the tax code and lowering the federal rate to 28 percent without losing tax revenue. More recently, Republicans in Congress have suggested the rate could fall as far as 25 percent while still maintaining revenues.
Stretch said there is a consensus that corporate rates should be lowered, but even a reduction to 28 percent is only halfway to where the Britain is headed. A drop to 20 percent would likely face political hurdles when sole proprietors and other small business owners are still paying as much as 40 percent.
“That’s the political challenge: How do you put together a package to get rates that low, and at the same time not offend voters?” Mr. Stretch said.