Corporation tax

There is no apparent advantage to be gained from adding a tax on company profit to its taxation as part of personal income taxation - although it was suggested in the Meade Report that it might be considered to be a payment for the privileges of limited liability^[24]. Corporate taxation may be expected to reduce productivity in several ways. It can alter the relative costs of capital and labour in such a way as to move resources into less productive activities. It imposes compliance costs on firms and administrative costs on governments, thereby diverting resources away from productive activities. It may reduce incentives to invest and innovate, and it may impair technology transfer by deterring foreign direct investment^[25]. The deductability of interest payments favours established corporations that can readily finance their investments by borrowing at the expense of innovative, knowledge-based and recently established firms that are riskier or less able to provide collateral, so have to obtain most of their funding from shareholders. In fact empirical evidence at the firm level^[26] and at the industry level^[27] confirms the conclusion that corporate taxation reduces productivity. However, alternative forms of corporate taxation (such as the use of 100% "capital allowances" or the adoption of "flow-of-funds" taxation) may mitigate some of the above effects.