Corporation tax

Northern Ireland's proposal to the Treasury that it should have the ability to reduce corporation tax is an audacious move.  If awarded (or even considered seriously) it begins a new phase in the development of regional innovation strategies, and one that may not be healthy.

The ability to vary corporation tax below the central government level and therefore attract certain types of companies is the Holy Grail for those designing regional innovation, economic or regeneration strategies.  We talk often about policy levers for stimulating innovation.  This would be a huge one, and one with direct connection to the business brain.  Indeed, we've seen its efficacy in the meteoric rise of the economy of the Republic of Ireland.  It is a common instrument across the United States and is thought to have had beneficial effects in India, too.

My problem is not with the principle (although there is a pretty massive political principle at stake) but with the enormous challenges of implementation.  If Northern Ireland, why not West Wales, or Yorkshire, or the Highlands & Islands?  Should London be able to put up tax, charging companies more for the privilege of benefiting from being in the capital city?  If it was able to vary tax, perhaps London would use its massive resources to actually lower them further, cementing its position as the UK's dominant (over-dominant?) city.

Locally-variable corporation tax could rapidly lead to the race to the bottom that we see in the United States where localities compete for corporate headquarters, sports teams and shopping malls.  The USA is a big place and can absorb more of these shocks.  The UK is not.

I'm not against variable corporation taxes in principle, but since the UK is a small country with a limited history of local use of economic instruments like this, the downside in internal competition could be significant.  Enormous care will need to be taken in designing them.  Perversely, the decision to implement would presumably need to be taken at the UK-wide level, which surely defeats the point...

References:

• BBC News article
• Article in the Scotsman on similar discussions at the Scottish Executive

Comments

[Tanya McGill]

This is exactly why the Treasury is not giving any kind of answer to NI until AFTER the elections in Scotland because Scotland was quick enough to spot NI's bid and jump in on the back of it.

I heard Michael Smyth, Senior Lecturer at the University of Ulster's School of Economics and Politics on Radio Ulster recently.

He confirmed that the precedent for a local variable measure was set in 1982 for Northern Ireland in the Corporation Tax Relief Grant. It is still available and can be found at:
http://www.hmrc.gov.uk/manuals/ctmanual/CTM02110.htm

It's rarely used and unwieldy but it is a precedent.