MNI INTERVIEW: IP Tax Reform Can Boost UK Productivity -Surico

The UK government could boost productivity at little cost by allowing firms to write off the cost of intellectual property purchases, Paolo Surico, a professor at London Business School and a specialist in monetary and fiscal policy, told MNI.

With Chancellor of the Rachel Reeves under pressure to fill a fiscal gap in her November budget, Surico, an adviser to central banks and other institutions, argued that a move on intellectual property would be in line with government promises to drive up growth.

Firms which purchase intellectual property are currently at an unfair disadvantage versus those which develop their own and are allowed to write it off for tax purposes, given that IP boosts productivity in both cases, Surico said in an interview.

Funding the full amortisation of purchases of IP licenses and patents would cost the treasury as little as GBP900 million while boosting UK GDP by over GBP4 billion, he said, citing research looking at U.S. data.

"This country ...is obsessed about stimulating innovation, but we only count innovation [for tax purposes] when you make a frontier innovation that can be patented. However, the majority of innovation ... is just bringing all those firms that are not at the frontier to the frontier, and often how they do that is through licensing technology and purchasing patents from other firms," he said.

FREE LUNCH

It would be fiscally neutral, but economically positive, for the government to increase corporate income tax by the relatively small amount necessary to fund the full amortisation of IP purchases, which would benefit the most innovative firms, he said.

"In some sense, this is a free lunch because you do something that is budget neutral but is expansionary," Surico said, though he noted that any resulting boost to productivity from supporting research and development would take time. (See MNI INTERVIEW 2: UK Tax Hikes Before Fiscal Rule Change - NIESR)

“History shows that whenever the public R & D, and government funds, crowd in private funds, this is really where private firms, especially startups, really take off ...The evidence suggests that the first effect comes in after two to three years, but the peak effect will materialise around six years, still well beyond the first term of the government," he said.

Surico's work was cited by the Treasury when in the spring it slightly increased defence spending but tilted heavily away from capital spending and towards military R & D. 

Some of his research has focussed on the effect of different types of taxation on inflation expectations, which he has found tend to be lowered by increases in personal taxes but not by corporate tax hikes.

INFLATION EXPECTATIONS

Elevated inflation expectations are one reason why some members of the Bank of England’s Monetary Policy Committee are now wary over interest rate cuts, in the wake of Reeves’s decision in her first budget in October 2024 to raise employer national insurance contributions rather than employee taxation.

This time round there has been speculation that the Treasury could again extend the freezes on personal tax thresholds. Surico noted that hiking personal taxation to fill the current budget gap would also come at an economic cost.

"Personal income tax cuts, or hikes, very much resemble a one-off demand shock, whereas the transmission of a corporate income tax [change] very much resembles a supply shock ... There is a clear difference between an increase in personal taxes that really bring down significantly inflation expectations, as opposed to corporate taxes that do not do that," Surico said.

With this year’s Budget pushed back to Nov 26, the MPC will not be able to factor in the impact of any fiscal changes to its November growth and inflation forecasts. (See MNI INTERVIEW: Employment Law Hit To UK Productivity - Haskel)