The media wasn’t mild in its verdict of the Salzburg summit last week.
The EU dealt a big blow to Prime Minister Theresa May and her “Chequers Plan”.
In the run up to the summit, the PM had called this “the only plan” for Brexit. The alternative was no deal. EU leaders disagreed.
The PM’s first response was to blame the EU for creating an impasse in the talks and demanding more respect.
The second was to dig up an ace up her sleeve. That ace is corporate tax cuts.
“Whatever your business, investing in a post-Brexit Britain will give you the lowest rate of corporation tax in the G20,” May will tell business leaders in New York today.
It’s not the first time May and her Chancellor Philip Hammond have flirted with lower taxes for corporations.
But corporate tax cuts are not the economic miracle makers they’re made out to be.
What’s more, the policy would make a Corbyn-led Labour government all the more likely.
Last year Chancellor Philip Hammond threatened to play the corporate-tax-cut card in case the Brexit talks would be a bust.
When he floated the idea, Labour leader Jeremy Corbyn had a field day.
He said the Chancellor was prepared to turn the UK into a “bargain basement” economy. Hammond quickly put that ace back up his sleeve.
But with PM Theresa May hitting a wall in Europe, the idea has resurfaced.
May promises a UK that is “unequivocally pro-business” after Brexit with a “low tax and smart regulation” economy.
David Cameron cut the UK’s corporate tax rate from 26% to 19%. Still May insists it’ll be slashed even further to 17%, the lowest rate in the G20.
You can see why she’s being extra nice to business. Corporate Britain has criticised the PM repeatedly over the ongoing uncertainty the government has failed to take away.
Holding out the prospect of further cuts to tax rates is a way of reassuring them everything is going to be alright.
And if access to the EU’s Single Market was an important reason for businesses to set up shop here, undercutting EU tax rates could persuade them to stay after Brexit.
The thing is, the corporate tax rate is already way below the average of developed countries.
More importantly, it would worsen perhaps the biggest economic problem of our times: growing inequality.
Cutting taxes for corporations benefits shareholders a lot more than workers. About 80% of the corporate tax burden falls on shareholders, says think tank Tax Policy Center.
Capital has already been running circles around labour for a long time.
Since the global financial crisis, workers have had to live with virtually no wage growth while stock markets have only gone up and up and up.
Now that wage growth has finally picked up, higher-than-expected inflation in the UK is spoiling the party.
Workers need a shot in the arm, but corporate tax cuts would only give shareholders another boost.
Says Simon Tilford in Project Syndicate:
“Corporations are already sitting on a sizeable cash surplus; but, rather than invest in workers, equipment, or research and development, they have been buying back their own shares.
“In the United States, this practice has accelerated since the enactment of corporate tax cuts in December 2017.”
If corporate tax cuts would do little to improve the UK economy, it makes even less sense to pursue this policy for political reasons.
Theresa May made a big deal in her first speech as Prime Minister of creating a country “that works for everyone”.
May was going to tackle the “burning injustices”.
It was a memorable speech, but one that will come back to haunt her and her party once the people realise it was nothing but empty words.
With Brexit consuming most of her time, the PM hasn’t really broken any ground in this area yet. It’s a mistake that could cost her.
“Among all the follies committed by the May government, ignoring the underlying motivations behind Brexit is the most shameful,” concludes Sebastian Payne in the Financial Times.
“Once the UK stumbles out of the EU next March, Britons will ask: what has changed? If Mrs May (or whoever succeeds her) has no answer, the fed up will turn to nastier alternatives on the fringes.”
Yesterday Bloomberg reported the UK’s wealthiest people are making contingency plans, just like UK businesses.
Only where businesses are preparing for Brexit, some of the UK’s wealthy are drawing up a “Plan B” for a Labour government led by Corbyn.
Where May plans to hand businesses and shareholders a break, the left-wing Corbyn proposes measures that will benefit workers.
One of his ideas is to make companies with more than 250 employees hand over 10% of their equity to employees.
May’s cabinet is said to be musing about a November general election (yes, another one!), while Labour will jump on any opportunity for a rerun of last year’s snap election.
“The greater the mess we inherit, the more radical we have to be,” said would-be Chancellor John McDonnell at the Labour Party Conference in Liverpool.
The fact that his party doesn’t command a convincing lead in the polls, even when no one seems particularly happy with May, implies voters are reluctant to hand power to the hard left.
With the Conservative Party and Labour neck and neck, the last thing May should want to do is announce a policy that would indeed benefit the few, not the many.