Replacing Corporation Tax With Externality Taxes: Race To The Good

By Ian Harris
Published by Financial World (December 2018/January 2019).

[An edited version of this article first appeared as “ Replacing Corporation Tax With Externality Taxes: Race To The Good", Financial World (December 2018/January 2019, p28).]


Ian Harris examines better ways to tax companies. He believes that corporation tax is an inefficient tax, which is becoming nigh-on uncollectable from fiscally-nimble, global corporations. Ian advocates that it would be better instead to tax undesirable corporate behaviour more heavily with expenditure taxes, while incentivising better approaches, such as energy efficiency and the use of low emissions technologies, with lower or zero rates on those taxes. Rather than being a “race to the bottom”, as opponents of low or zero corporation taxes assert, Ian believes that such targeted taxation would be a “race to the good”.


Corporation tax is an agonisingly inefficient tax. It is often used as a political football. Advocates of high corporate taxes see it as a progressve tax that can be used to help reduce inequalities in society, Supporters of low corporate taxes respond that international corporations simply patriate their operations, their profits or both in states that offer low corporate tax regimes, rendering high rates of corporation tax tokenistic. My view is closer to this second view than the first, but with a twist or two.

Let me first set out a few contextual facts about corporation tax. It currently accounts for about 8% of the UK’s gross tax take. About £58 billion per annum. A little less than property taxes, a little more than combined Pigovian or “sin” taxes; tobacco, alcohol, gambling etc. The treasury estimates that the proposed reduction in corporation tax rate from 20% to 17% will cost just over £3 billion in lost reveues per annum. By way of contrast, income tax and national insurance contributions generate some £300 billion annually.

Further, corporation tax is comparatively expensive to collect. Clear numbers for this are not available, but a disproportionate amount of Her Majesty’s Revenue and Customs (HMRC) resource is deployed on this tax, as is a vastly disproportionate amount of professional advisory time and fees.

I propose that direct corporation tax in the UK be replaced by higher rates of indirect or exenditure taxes, mostly related to externalities that corporate activities cause. For example, property, fuel, emissions, road and water use. There is a strong case for substituting land values for extant, unfathomable “rateable values”. These externalities are already taxed; often at differential rates depending on whether the user is an organisation or an individual/household.

I also propose that such expenditure taxes on corporates be subject to reductions or exemptions when corporate behaviour is aligned with government and regulatory goals to reduce externalities. For example, the use of renewable energy or low emissions technologies would result in lower rates (or possibly even zero rates) on those taxes. Existing fossil fuel subsidy schemes should be phased out.

In my opinion, such targeted tax incentives would lead to relatively rapid uptake of desirable technologies and methods in corporate environments. That in turn would lead to more investment in green and clean technologies, soon enough leading to improved offerings to individual/household consumers.

My proposed approach to incentivising green and clean technologies is very different to the more conventional, capital tax breaks suggested for green and clean finance, e.g. supercharged capital gains tax reduction schemes and/or stamp duty forgiveness. Such schemes tend to add a layer of complexity and opportunities for gaming, to an already over-complex and excessively gameable tax regime.

My firm, Z/Yen Group, has recently published the first edition of the Global Green Finance Index – see We asked an open question about taxation with regard to encouraging green finance. We got a myriad of answers, ranging from “tax incentives are essential to get green finance moving” to “tax incentives don’t work”. Not overwhelming support for my views there. Except that, when you look carefully at the responses, negative views about tax incentives tend to assume capital tax incentives for the green finance companies or financial products, not targeted expenditure taxes calibrated to encourage the use of clean/green methods.

I believe firmly in simplifying tax systems, which I believe have got out of hand in its complexity. I also believe in a single, universal benefits and income tax system to replace the current disjoined personal tax and benefits systems that lead to unfair, regressive tax rates; taxing some of our poorest citizens at the highest effective marginal rates, when they simultaneously pay tax and lose benefits. A separate discussion for another day.

But returning to corporate taxation, replacing an entire, overly complex and hard-to-collect corporation tax with well-targeted differential rates on externality taxes that already exist, must surely be a helpful step, both towards simplification and towards fairness.

Some will argue that the UK extinguishing corporation tax would represent a tax-haven-style “race to the bottom”, but I believe that the well-targeted replacements proposed would instead make it a “race to the good”.

Ian Harris


Director, Z/Yen Group Limited

Ian Harris is a founder/Director of Z/Yen, the City of London’s leading commercial think-tank, to promote societal advance through better finance and technology. Ian is co-author, together with Michael Mainelli, of three books, most recently the award-winning “The Price of Fish: A New Approach to Wicked Economics and Better Decisions.”