Aligning Corporation Tax and Income Tax

A prelude to radical reform

Executive summary

There are many reasons for aligning the main rate of corporation tax with the basic rate of income tax (currently 20 per cent). Any one of these reasons alone would be sufficient to justify reform. Together they make an overwhelming case:

  • The tax bias against equity causes companies to leverage more than they would prefer if decisions were not distorted. This issue was identified in the recent ICB report.
  • The tax bias against equity distorts investors’ decisions.
  • Lower rates of corporation tax (whether or not tied to the basic rate of income tax) would reduce taxes paid by investors which has direct advantages for pension funds, beneficiaries of unit trusts etc., as well as indirect effects in making the economy more capital intensive in an environment in which capital mobility is sensitive to international corporation tax rates.
  • Aligning the main rate of