Corporate tax surcharge

What is the problem we’re trying to fix?

There are several problem scenarios where a corporate tax surcharge might be a solution.

  • “Too big to fail”: Some sectors pose particular risks in an economic downturn and could bring the economy down with them if they were to fail (e.g. banks), and so the government would have to bail them out using our collective pool of resources, generated from our taxes. 
  • “Critical infrastructure or services”:  Some companies own or manage vital infrastructure and service provision where the government would have to step in if the company failed (e.g. electricity generator-retailers).
  • “Lack of competition”: Some sectors lack competition (e.g. supermarkets) which enables these companies to earn higher profits that would be the case if there was real competition.

How does a corporate surcharge work?

A corporate tax surcharge is a charge on the profits of the relevant sector or company in addition to standard corporate tax. These surcharges target sectors or companies that are making high profits, and can be made to apply to profits over a certain amount - so will not affect small or medium sized businesses.

For example, in the UK there is a banking surcharge of 3% on top of the standard 25% corporate tax rate, and applies to profits over £100 million (for banking groups).

Why would this be better?

Surcharges ensure certain sectors and companies that pose risks to our economy make a fair contribution - it is like insurance in the event the government has to bail them out using revenue generated from our taxes. 

The surcharge is focused on companies earning large profits, so wouldn’t affect small or medium sized businesses. As a small percentage of high profits it does not affect the viability of the business, which will still retain the majority of their profits.

While governments have to make calls about which sectors or companies face surcharges, this is appropriate given it is governments who will have to cover the costs using public money if the businesses fail. Further, the charges could be determined by an independent body like the Commerce Commission.