Bowing to the pressure of tax competition, Gordon Brown announced that the corporate tax rate will be reduced by two percentage points. This is a very small cut, and it will be at least partially offset by other tax hikes (especially on manufacturers), so the United Kingdom is not exactly poised to become the next Estonia, Ireland, or Slovakia. Nonetheless, it is always amusing to see politicians who want higher tax rates being compelled to lower tax rates instead. Tax-news.com reports:
Chancellor of the Exchequer Gordon Brown surprised many yesterday by announcing a 2% reduction in the rate of corporation tax and a 2% cut in the basic rate of income tax, representing the first major cut in these taxes in many years. Brown has been on the receiving end of growing criticism of his handling of the public finances and his propensity to add complexity to an already unwieldy tax system, but many of the more cynical observers believe that the Chancellor’s generosity has more to do with securing his place as the next Prime Minster than it does with giving the UK’s tax competitiveness a much‐needed fillip. Taking centre‐stage in what is likely to be Brown’s last budget speech was the announcement that corporation tax would be cut by 2% to 28%. According to the Chancellor, this would bring the UK’s corporate tax rate below both the OECD and EU15 average. However, tax experts observe that while the Chancellor has given with one hand, he will claw back much of this lost revenue with the other through changes in capital allowances. …Paul Davies, UK Head of Tax at Ernst & Young noted that while the Chancellor appears to have finally woken up to the pleas of the business community for a tax cut, the overall result of the budget is a “mixed bag of changes that may affect different taxpayers in different ways.” “The cut in the main rate of Corporation Tax is welcome, showing that the UK is once again on a competitive path. This will reassure those companies thinking of moving offshore. However, the gain from the rate reduction will be more than clawed back by the change in plant and machinery capital allowances. As a result it is clear that the main beneficiaries of the rate cut will be in the service sector rather than the manufacturing sector,” he stated.