Claim
The shadow chancellor, John McDonnell, says it is not inevitable that when you increase corporation tax it lowers wages and increases prices.
Background
The biggest source of additional revenue under Labour party plans would come from an increase in corporation tax. By reversing cuts to the levy to reach 26% for the main rate, and reintroducing a small profits rate of 21%, the party expects to raise £23.7bn by 2023-24.
It would also raise £6.3bn through “unitary taxation of multinationals”, taxing multinational firms with operations in the UK based on total profits, rather than those generated solely within Britain.
The Institute for Fiscal Studies (IFS), an influential independent economic thinktank, said an increase in corporation tax would lead to lower wages for employees and higher prices for consumers.
McDonnell, defending the policy, said measures to put workers on boards and to boost collective bargaining – bolstering the power of unions – would mitigate the urge to lower wages.
Reality
It is difficult to draw a direct link between corporation tax and the costs and benefits for consumers, workers and shareholders, as tax levels are just one factor companies must take into account when considering pay and prices.
Firms must also consider commodity prices, distribution and marketing costs, competition, laws, regulations and borrowing costs. But tax changes would certainly have some impact, according to the Resolution Foundation thinktank and the IFS.
For pension schemes, the Resolution Foundation said higher corporation tax would have a material effect, as a fall in company profitability would affect investors – including pension funds.
Labour says its economic changes could protect workers and consumers from being squeezed. The party would raise the minimum wage, top-up benefits and expand the use of collective bargaining – trade union-led negotiations for pay deals – which it says would support wage levels. Giving workers seats on company boards and handing consumers more of a say in running companies could also have an impact.
Since the Conservatives entered government in 2010, the headline rate of corporation tax has been cut from 28% to 19%. However, average pay adjusted for inflation is still below its peak from before the financial crisis.
Critics say Labour’s plan would deter business investment, which is seen as vital for raising the productivity of the UK economy and increasing pay in the long run – as firms invest in new technologies, buildings and the skills of their workforce.
Despite cuts in corporation tax, business investment levels in the past decade have been relatively weak, lagging behind some other developed nations. Investment growth has stalled due to uncertainty over Brexit in the past three years. Government austerity could also have had an impact on productivity, economists say.
Labour argues its £400bn investment programme would help to bolster productivity and “crowd-in” private sector investment by giving companies confidence to invest, as the government is doing so. However, the party’s nationalisation plans could also deter investment, critics suggest.
Verdict
The impact of corporation tax is complex. Although Labour’s proposed revamp attempts to protect lower-income individuals, there could still potentially be an impact for a broader group of workers, customers and shareholders.
