UK Competitiveness, Sustainable Development and Corporate Taxation: Using the Corporation Tax to Promote Increased Resource Productivity in line with the Law and Policy of the European Union

Abstract

While tax lawyers tend to deal with questions of equity, economists, when considering matters of taxation, tend to focus on efficiency. This division of labour has meant missed opportunities both in considering the optimal and practicable scope of individual taxes from first principles and in informing the subsequent task of detailing the law by reference to the economics literature. Without a principled approach, a rational taxpayer may never be in the position that he can expect prosperity, as well as fairness, from tax law. The thesis starts from the normative proposition that the tax system, while not uniquely, should be exclusively concerned with the redistribution and maximisation of wealth. However, due to the effective incidence ambiguity of the corporate income tax, it is prudent to assume that direct taxes on corporations, in general, do not lend themselves to the redistribution of wealth. The underlying reasoning is that the effective incidence of a tax is fundamental to tax equity and without a clear understanding of the equity of a particular tax, it is impossible to assess the redistributional effects of that tax. In sum, incidence ambiguity means that it is not possible to determine the redistributional effects of the corporate income tax and this might also be true of other forms of direct corporate taxation. Moreover, the corporate income tax might, in fact, be regressive. Accordingly, corporate taxation should focus on the objective of wealth maximisation. However, the corporate income tax is not wealth maximising for broadly two reasons. First, it taxes undistributed profits (potential investment capital), which militates against the core societal function of the corporation - the pooling of resources towards the creation of wealth. Secondly, it is hidebound by the doctrine of tax neutrality, which prevents it from becoming a more effective tool of government policy. Despite the failure of the corporate income tax, a wealth maximising corporation tax does become possible when efficiency is understood as the optimal - rather than the ‘market’ - allocation of resources. This restatement of efficiency frees corporate 4 taxation from the constraints of tax neutrality and allows it to explore its functionality as a mechanism of, albeit carefully focused, 'operant conditioning' (voluntary behaviour modification). This functionality allows corporate taxation to proactively embrace the competitiveness policy agenda in accord with the 'new' Lisbon Strategy and Article 2 of the Treaty Establishing the European Community. These considerations motivate this thesis to outline a new idea for a wealth maximising corporation tax. The 'European Competitiveness Tax' is designed so as to promote both the productivity of large European domiciled corporations and the competitiveness of Member States and it exists within a framework of democratic subsidiarity and controlled tax competition. The literature on corporate and national competitiveness informs the definition of the tax base, as well as the formulation of a tax credit, which taken together, reward directly the voluntary competitive behaviour of both corporations and municipalities. In Part II, the thesis explores why neither the corporate income tax (with a particular focus on the UK Corporation Tax) nor European corporate tax law maximises wealth or promotes competitiveness and why both, therefore, are at odds with the taxation of large European corporations. Not only are some of the major elements of the corporate income tax put under a microscope and found wanting, but also more general justifications for the tax as a whole are analysed for any promise of wealth maximisation. In respect of European tax law, the main focus is on a path dependent development of the law in the absence of any kind of purpose-built European corporate tax regime. Consideration is also given, as it is at the start of the thesis, to the wealth maximising credentials of corporate tax law harmonisation.