Tax tussles

Date: 15/11/03

Taxes on business have risen. But not as much as the CBI claims

WHO'S right? The Confederation of British Industry (CBI), in a broadside fired before its conference next week, claims that the business-tax burden in Britain is higher than in four of the country's top five trading partners. Only French companies have to shoulder a bigger load, it complains. Yet the government thinks companies are whingeing and exaggerating as usual.

The CBI's definition of the business-tax burden is certainly suspect. It includes not just corporate-income tax, but also three other taxes - on property, transport costs and employment. Most of the latter three are likely to be passed on respectively to landowners, consumers and workers, argues Stephen Bond of the Institute for Fiscal Studies. For example, this year's hike in employers' national-insurance contributions (in effect a payroll tax) may initially erode profitability, but in the long term employers will shift the cost on to workers through lower wage increases.

Ignoring these three taxes, the government's case looks stronger. Profits in Britain are more lightly taxed than in the Netherlands; the overall burden on companies is broadly comparable with France and Ireland. The apparently low tax take in Germany mainly reflects the temporary effects of fiscal reforms there as well as the fact that a high proportion of German businesses are unincorporated.

The CBI also claims that the business-tax burden has increased sharply since 1997 as a result of Gordon Brown's budgets. In making this claim it includes the chancellor's raid on pension funds in 1997, which has extracted about £5 billion a year from dividend income. The employers' organisation estimates that business has had to pay £5.6 billion a year more in taxes in the six years to 2002-03; and that it will pay an extra £6 billion ($10 billion) this financial year.

The Treasury retorts that the main corporation-tax rate in Britain has been cut from 33% to 30%, the lowest-ever level. Together with reductions in tax rates for small companies, these cuts are now costing the exchequer about £4 billion a year. Mr Brown has also helped businesses by introducing tax credits for research and development, worth £600m this year.

Who's right, then? The Institute for Fiscal Studies agrees that business taxes (including the higher taxes from dividend income) did indeed rise sharply in the past six years. Companies paid an average of £4.8 billion more a year, not far short of the CBI's estimate. But the IFS also says that the extra burden has fallen this year to £1.4 billion because the Treasury is no longer benefiting from the transitional effects of switching corporation-tax payments to quarterly instalments. This estimate is much less than the CBI's £6 billion claim, mainly because the IFS does not include this year's increase in employers' national-insurance contributions.

The CBI says that the tax burden is now set to rise in Britain, whereas in the country's other main trading partners it will not. However, this worry is based on the Treasury's projections in the April budget of a substantial upturn in corporation-tax revenues. Many economists think this prediction is unrealistic.

It is no accident that the business-tax estimates throw up such distorted and varying estimates. Ultimately, it is individuals that pay tax, as consumers, wage-earners, savers and so forth. But they complain more if the tax bill is presented directly, rather than disguised in higher prices, lower wages or whatever. The muddle over who really pays business taxes suits chancellors like Mr Brown who want to raise extra money without too much fuss. But he should not complain too loudly when businesses play equally fast and loose with the numbers.

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