An unacceptable price for low business taxes

The Labour pledge to raise corporate taxes (Report, 10 May) is the economically responsible reaction to the failures of corporate tax competition. The deductive mathematical models from supply-side economics that justify low corporate taxation assume that "the state" is purely self-seeking and "the firm" an efficient bundle of contracts that creates wealth. They ignore the historical functions of actual states as the primary force for social integration and development in capitalist systems. They ignore the shift of actual large corporations away from the "retain and reinvest" model of the post-war period to the extractive "downsize and divest" model of the present, to use William Lazonick's terms.

Supply-side theory insists that reduced corporate taxation equals increased productive investment and long-term wage growth, but where is the evidence for this outcome? The "competitively" lower taxed UK has seen slower improvements in productivity than Germany, France, Sweden, Norway or the US, which retains the highest corporation tax of all. British business expenditure on R&D as a proportion of GDP has declined in the last decade and the UK has suffered a historic drop in real wages. In an era of unprecedented corporate profits and high cash holdings the evidence for the redundancy of tax relief is remarkable: UK corporate tax cuts have apparently translated straight into higher shareholder payouts and share repurchases to further inflate the share price: ie they have been absorbed into the prevailing US and UK dynamic of financial value extraction that underpins the escalating wealth of the 1%, not an investment dynamic.

Investment funds typically consider a dividend payout ratio (the relationship of payout to earnings) of over 55% as indicating a drain on long-term earnings potential and unsustainable. By August 2016 the ratio for the FTSE 100 stood at 107%.

Large corporations may decry Labour's tax policy but the OECD evidence is that firms intent on long-term investment (rather than, say, mergers and acquisitions to secure tax breaks) are primarily concerned with the skills base, infrastructure and R&D. Labour's corporate tax policy is essential not just to help pay for this human and fixed capital investment but to wean large UK firms off the crack of wealth extraction and back to wealth creation.