Corporation Tax rebate recommended
PRESS RELEASE
From the Institute of Welsh Affairs
For publication after 0010 Tuesday November 28th 2006
A rebate on corporation tax in Wales, financed by switching the bulk
of economic development funds away from support programmes aimed at
“picking winners”, is recommended in an analysis of policy
options for the National Assembly for Wales Third Term starting next
May.
The recommendation is made in a 300-page report from the Institute
of Welsh Affairs drawing on the work of eight specialist panels covering
education, health, the economy and other policy areas.
In making the controversial tax proposal, the report argues that despite
the best efforts of the Welsh Development Agency and the operation
of Regional Selective Assistance over 30 years, Wales’s relative
gross domestic product per capita has fallen steadily.
“Public expenditure on economic development has not been notably
successful. Instead of spending money to “pick winners”
or on politically acceptable projects, the increased economic development
budget could be used for a general rebate on corporation tax,”
Professor James Foreman-Peck of Cardiff Business School, one of the
authors of the report, states.
This would increase the desirability of Wales as a location for internationally
footloose industry and stimulate growth of indigenous, profitable
companies. It would involve giving up political power and patronage,
and rebating money to firms that anyway would stay in Wales but it
would eliminate the need to second-guess business and identify those
that would be beneficial for Wales.
Although an overall 10 percentage point reduction could, in theory,
be financed from the existing economic development budget, the rebate
could if necessary be graded, the report argues, in favour of smaller
companies.
“A rate of say 10 per cent for the first £100,000 of taxable
profit could be followed by a 20 per cent rate for the next £200,000
and full rate could be applied to the balance. Such a scheme would
favour not only small companies but also those that are not very profitable.
By helping smaller companies, the graduated tax helps redress the
built-in advantage that larger companies enjoy due to economies of
scale.”
While recognising the proposal is controversial, the report argues
that the economic success of the Republic of Ireland and increasingly
widespread low business taxes in Eastern Europe, suggest that this
approach should be considered seriously. There is already pressure
to do so in Northern Ireland where the border with the Republic is
also a border between high and low corporation tax regimes, it says.
The panel also argues for a research programme to be put in place
to address options for improving or renegotiating the Barnett formula,
which determines Treasury funding for Wales, and for more rigorous
measurement of the efficiency of public sector services.
Its members also argue strongly for the establishment within the Assembly
of a finance committee charged with examining efficiency and resource
issues, which, it believes, would concentrate minds and provide a
counterbalance to the current focus on policy and spending on policy.
It also calls for the establishment of an independent Welsh Public
Finance Research Unit along the lines of similar bodies in London
and Dublin.
This would provide an element of analysis of the complex Assembly
Government finances that is lacking in the public domain, such as
the largely unnoticed change of focus in capital spending in Wales
over recent years away from health and education towards economic
development.
The report, the work of eight Policy Groups made up of 103 experts,
will be discussed at a special conference to be held in Cardiff on
Monday November 27th. For further details on how to obtain copies
of Time to Deliver (price £30 plus £2 p&p), please
call 029 2066 6606 or e-mail wales@iwa.org.uk
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