Presentation from Robert Chote, director, Institute for Fiscal Studies at the CBI Tax Conference, 13 October 2008.

1. Corporate tax in context:
the Mirrlees Review and the fiscal backdrop
Robert Chote
Institute for Fiscal Studies

2. Outline
• The Mirrlees Review
• Overall approach
• Non-corporate elements
• Corporate tax
• The fiscal backdrop
• The Budget baseline
• The need for adjustment
• The politics of tax-raising

3. The Mirrlees review

4. 30 years after the Meade Report
“For too long, tax reforms have been
approached ad hoc, without regard to their
effects on the evolution of the tax structure as
a whole. As a result many parts of the system
seem to lack a rational base. Conflicting
objectives are pursued at random; and even
particular objectives are pursued in
contradictory ways”
Dick Taverne, 1978

5. Mirrlees review structure
• Overview report
• Studies and commentaries
• Taxation in the UK
• Means testing and tax rates on earnings
• Labour supply and taxes
• The base for direct taxation
• Taxation of wealth and wealth transfers
• Taxing corporate income
• International capital taxation
• Taxing small businesses
• The effects on consumption and saving of taxing asset returns
• Administration and compliance
• The political economy of tax policy
• Environmental taxes
• Value-added tax and excises
• www.ifs.org.uk/mirrleesreview

6. Objectives of the tax/welfare system
• Raising revenue to finance public services
• Influencing behaviour
• Redistributing resources
• Rich to poor
• Across the life-cycle
• While minimising economic damage
• Distorting behaviour
• Administration and compliance costs

7. Mirrlees goals
• NOT to recommend overall size of the state
• NOT to recommend amount of redistribution
• To come up with revenue and distribution
neutral package that improves efficiency
• Efficiency gains can be spent in different ways

8. Some emerging themes
• Income tax, NI and tax credits
• Taxation of savings
• VAT rates
• Environmental taxes

9. Some emerging themes
• Income tax, NI and tax credits
• Tax rates too high at low and middle incomes
• But do not want to extend means testing too far
• Tax rate on top 1% about right
• Taxation of savings
• VAT rates
• Environmental taxes

10. Some emerging themes
• Income tax, NI and tax credits
• Taxation of savings
• Neutrality regarding timing of consumption
• Neutrality regarding choice of asset
• Recognise role of self-control and impatience
• Do not encourage early retirement
• VAT rates
• Environmental taxes

11. Some emerging themes
• Income tax, NI and tax credits
• Taxation of savings
• VAT rates
• UK VAT base unusually narrow
• Zero and reduced rates distort spending…
• …and achieve distributional goals inefficiently
• Uniform rate desirable but politically difficult
• Environmental taxes

12. Some emerging themes
• Income tax, NI and tax credits
• Taxation of savings
• VAT rates
• Environmental taxes
• Double dividend illusory
• Only modest extra revenue available
• Tax on gas if not in ETS
• Greater differentiation of VED
• More congestion charging / lower fuel duties

13. Taxation of corporate profits
• Key questions
• What to tax?
• Where to tax it?
• How to link with personal tax for small business?
• Incidence
• Corporation tax borne by individuals –
shareholders, employees, customers
• But taxing “companies” more attractive politically

14. What should we tax?
• Most countries tax profits net of allowances
for depreciation and interest payments
• This favours debt over equity finance, but:
• Germany reducing interest deduction
• Belgium giving allowance for cost of equity
• Prefer not to tax normal return either way
• ACE worth considering
• Rate balances mobile and immobile rents

15. Where should we tax it?
• Devereux et al favour destination base
• Increase VAT and reduce NICs
• Not popular as a big bang, but a likely
direction of travel if revenue erodes
• Credit versus exemption choice balanced

16. Personal / corporate interaction
• CT backstops income tax
• Zero rate of CT was expensive mistake
• Combine ACE with RRA personal taxation of
dividends and capital gains
• Set rates to avoid distorting choice of legal form

17. The fiscal backdrop

18. Corporation tax revenues volatile
Revenue as share of national income, 1978=100
180
160 NICs
140
Corporation tax
120
100
VAT
80
Income tax
60
40
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

19. HMT current budget balance forecasts
Budget 01 Budget 02
Budget 03 Budget 04
2.5
Budget 05 Budget 06
Percentage of national income
2.0 Budget 07 Budget 08
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
99–00
00–01
01–02
02–03
03–04
04–05
05–06
06–07
07–08
08–09
09–10
10–11
11–12
12–13
Source: HM Treasury

20. Financial sector biggest source of CT
Corporation tax revenue by industry, 2005-06
Energy,
Other,
£8.0bn
£6.4bn
Distribution,
£4.7bn
Manufacturing,
£4.8bn
Business
services,
Banking &
£8.2bn
finance,
£11.7bn
Total: £43.7bn

21. The Treasury’s 2008 Budget forecasts
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Economic growth 3% 1.75% 2.5% 2.5% 2.5% 2.5%
Public sector 2.6% 2.9% 2.5% 2.0% 1.6% 1.3%
net borrowing
(share of GDP)
Public sector 37.1% 38.5% 39.4% 39.8% 39.7% 39.3%
net debt
(share of GDP)

22. % of national income
19
63
10
8
6
4
2
0
-2
-4
-6
4
19
68
-6
9
19
73
-7
4
19
78
-7
9
19
83
-8
4
19
88
-8
9
19
93
-9
4
19
98
-9
Public sector net borrowing
9
20
03
-0
4
20
08
-0
9

23. % of national income
19
74
0
10
20
30
40
50
60
-7
5
19
79
-8
0
19
84
-8
5
19
89
-9
0
19
Public sector net debt
94
-9
5
19
99
-0
0
20
04
-0
5
?

24. Policy response
• Possible further loosening in near term
• Fiscal rules to be rewritten
• Even tighter squeeze on spending
• Significant tax-raising measures