Bill Gates just launched a devastating attack on the idea that corporation taxes kill innovation

Bill Gates JunckerREUTERS/Francois LenoirBill Gates (R) with European Commission president Jean-Claude Juncker (L).

Bill Gates, the co-founder of Microsoft who is estimated to be worth around $US86 billion (£54.2 billion), dismissed the idea that corporation tax prevents innovation as “nonsense”.

Gates said that with corporate profits near to all-time highs and effective corporate tax rates having been in steady decline, the idea that “innovators are on strike because tax rates are at 35% on corporations” is simply not credible, according to Bloomberg.

His intervention will come as a bitter blow for right-wing parties on both sides of the Atlantic, which have long claimed that corporation taxes provide a strong disincentive for companies to invest in new research and products.

As Conservative MP Matthew Hancock told the Telegraph in March: “We have made a lot of progress and corporation tax is coming down again in April [when the main rate dropped from 21 to 20%]. Labour want to put up corporation tax, we want to reduce it because we think it shows that Britain is open for business.”

Governments have long looked at lowering corporation tax as a key mechanism not only of encouraging existing businesses to increase investment but also to entice companies domiciled elsewhere to move their headquarters bringing their tax revenues with them. Unfortunately, Gates is saying that the first of those may well be more the product of effective lobbying rather than a law of economics.

“Corporate profit as a per cent of U.S. GDP, the tax, corporate profit tax, is 2%. It used to be 4%. That’s at a time where corporate profits are at an all-time high,” he told Bloomberg.

“What’s actually being paid is way less. And the notion that change in that nominal rate will unlock something, you know, overstates how you improve things.”

If all you are doing, by lowering corporate taxes, is attempting to “beggar thy neighbour,” then it is a strategy that; a) will likely benefit smaller states with relatively modest welfare commitments most of all and; b) will end up cannibalising your tax base.

In either case, as Gates suggested, it seems highly unlikely to substantially increase long term economic growth or innovation, and could even reduce investment if constantly shifting the rates adds to uncertainty for businesses.

There are some more interesting arguments to be made for shifting the burden of corporate taxes onto individuals. That is, given that many economists believe that the incidence of corporation tax falls on workers through lower salaries or consumers via higher prices it could be more economically efficient and progressive to raise that money through income tax.

That, however, is not the argument currently being made by right-of-centre politicians. Indeed the Conservative government in Britain has pledged to pass a law to ban rises in income tax over the next parliament — a move that would effectively cede its control of over 65% of all tax revenues.

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