Even the most fanatical pro-Brexiteer will admit that Brexit is likely to hit inward investment until the position clarifies. Whether this leads to a recession or not will depend on how much consumers spending can hold up and the extent to which the government tries to offset the inevitable higher borrowing with tighter fiscal policy.

 

I’ve argued that now is not the time to tighten fiscal policy provided borrowing can be kept below the psychologically important £100 billion level. Indeed there is now a strong case for looking at those tax cuts that would encourage inward investment to offset the hit to confidence caused by Brexit even at the risk of some temporary extra borrowing.

 

A number of commentators including the current Chancellor have talked of lowering the main rate of Corporation Tax to 15%. This is not as big a deal as it may look because the UK rate is already set to fall to 17% anyway in 2020.

 

We have run the impact of cutting the rate to 15% in April 2017 instead of to the 19% rate currently planned for that year on the dynamic model that we developed a few years ago for TaxPayers’ Alliance. The results are fascinating. Borrowing in 2017/18 is £3.2 billion more; by 2020/21 it is £1.8 billion less and by 2025/26 it is £5.2 billion less. Investment is boosted by 10.7% after 10 years and GDP by 1.5% after the same time. Both are in line with the medium term calculation of initial loss caused by Brexit. So in practice lower corporate taxes would offset the losses from Brexit though the timings are different.

 

Indeed there is an argument for moving to a system where corporates are taxed at an ultra low rate and taxes only charged on distributions through diivdends and corporate pay. A 10% corporate tax rate could – according to the model, boost GDP by nearly 5% additionally and would pay for itself in 5 years.

 

And even the IFS, who are not normally in favour of lower tax rates, have calculated that the optimal top tax rate simply from the point of view of revenue raising is 36%. Why have a tax higher than that which is simply losing money? Over time a tax rate as low as that might even generate enough revenue to provide the extra £350 million a week promised for the NHS on the Vote Leave battlebus!

 

Countries need to be careful about going too far in using low corporate taxes alone as ways of incentivising business. As might be expected (and this is supported by the Irish experience) this approach tends to be most attractive to capital intensive businesses in sectors like pharmaceuticals and microchip production, which create more jobs in their startup period in the construction sector than they do once up and running. So the optimal strategy to get the economy moving again might be a mix of lower top rate personal taxes and lower corporate taxes.

 

And it is important that a tax cutting strategy is well communicated. The last two times the Chancellor has cut taxes his budgets have come unstuck. This time it needs to be better prepared and explained.

 

Douglas McWilliams, President