From the Roosevelt Institute in the United States, a long report that seeks to generate an overall estimate of costs to the US economy of the financial sector, over and above the benefits that the finance sector provides:
“What has the flawed financial system cost the U.S. economy? How much have American families, taxpayers, and businesses been “overcharged” as a result of these questionable financial activities?
After some detailed work, an answer is in:
“In this report, we estimate these costs by analyzing three components: (1) rents, or excess profits; (2) misallocation costs, or the price of diverting resources away from non-financial activities; and (3) crisis costs, meaning the cost of the 2008 financial crisis. Adding these together, we estimate that the financial system will impose an excess cost of as much as $22.7 trillion between 1990 and 2023, making finance in its current form a net drag on the American economy.”
And the quote of the day is this one, via The Guardian newspaper and Professor Rowland Atkinson of Sheffield University, author of a two-year study of the super-rich in London.
“You can argue that the rich are a tax on everybody [else] in London”
Update: see our January 5, 2016 article New research: ‘competing’ aggressively on tax reduces growth, a guest blog by Nikolay Anguelov of the University of Massachusetts, Dartmouth.
Recently Prof. Matthew Watson wrote an article for us entitled The Anti-Growth Dynamics of the Competitiveness Agenda, in which he outlined generic reasons, both from a supply side and a demand side, where supposedly ‘competitive’ policies on wages and in other areas are likely to depress economic growth.
Now a new study from the Canadian Center for Policy Alternatives (CCPA) complements this and notes something more specific that we’ve remarked on previously: that ‘competitive’ corporate tax cuts are likely to be equivalent to pushing on a string. They will tend to feed corporate cash hoarding (what Mark Carney has called ‘dead money’) instead of business investment – while sucking revenue and investment and spending power out of the government sector, depressing demand and investment. The likely result is slower growth.
How does this stack up, from an empirical perspective? Well a new blog from the Tax Justice Network constitutes good supporting evidence for the proposition that ‘competitive’ corporate tax cuts depress growth.
New Study: Corporate Tax Cuts may have been ‘The Greatest Blunder.’
This month the New York Times
republished a press release from discussed a recent report by the British Bankers’ Association, a lobby group. The NY Times article was entitled Britain Losing Its Competitive Edge in Banking, Trade Group Warns, and it began like this.
“The British government needs to take “urgent action” to address concerns about its regulatory and tax environment if London is to remain a global financial center and if lenders based in Britain are to remain competitive internationally, according to a banking trade group.”
Britain’s summer budget in July 2015 contained a set of reforms to the tax regime for the banking sector which it presented like this:
What those numbers mean, essentially, is that the changes will mean that the banking sector is going to be paying more tax. Hooray!
Time to get out the champagne?
In a word, no. There is serious mischief in here. We have just had a reply to a Freedom of Information request which confirms this.
Here’s the thing. Recently we posted an article entitled “Why a ‘competitive’ economy means less competition.” It explained, by way of background, how the ‘competitiveness agenda‘ – under which possibly politically astute (and possibly economically illiterate) politicians urge the government to shower subsidies on banks, multinational corporations and wealthy individuals under threat that they’ll flee elsewhere – will tend to boost the large and wealthy players more than they otherwise would have, enabling them to kill their smaller and more locally-rooted competitors on factors that have nothing to do with genuine innovation or productivity, and everything to do with pure wealth extraction.
We showed how this was the case both in the field of corporate tax, and in the financial sector too. (It doesn’t stop there, but that’s another set of cans of worms.)
Our article noted how the bank reforms in the summer budget were in fact two reforms: first, a reduction in a tax called the ‘bank levy’ (which hits the largest banks hardest, and predictably led to a load of hyperventilating claptrap about ‘tipping points’ and other such nonsense); and second, a new eight percent ‘bank surcharge’ (which hits a much wider range of banks, including the smaller so-called ‘challenger banks’.)
The first means less tax; the second means more tax; and the net result is forecast to be slightly more tax.
What was the justification given for these reforms? Well, they said:
Competitiveness, once again. (In fact that short section contains three more versions of the c-word, including this variant: “reducing the risk of . . .influencing banks’ decisions on the location of internationally mobile activities.”)
To summarise: the smaller banks will be penalised relative to the bigger banks – in the name of ‘competitiveness.’
This, of course, is likely to reduce competition in banking — which is what we argued in our more detailed earlier post.
But one of the things we noted then was that that in the official explanation for the bank levy, and even in the detailed budget policy costings, they didn’t (for obvious political reasons, it seems) break down the impacts of the two separate tax changes.
This was devious: it would have been a piece of cake to publish this data, but this would have exposed what was going on. Much easier to mash up the two different reforms and present it as a politically popular tax increase on the banks. It’s probably doubly devious in this respect – but we’ll get to that in a second.
Now then. Fools’ Gold submitted a Freedom of Information request to obtain this data, and the results of this request are now in:
(We’ve pasted the relevant part of the FOI response itself below.)
To be precise, they are forecasting that the changes to the bank levy will cost UK taxpayers £4.2 billion over the next five years. (And, of course, there’ll be a whole lot more after that.)
Update, Nov 9: we thought this was new information (and it still appears to be, in terms of precision), but Simon Bowers points out these less precise numbers on p94 of this OBR document.
For fuller context and explanation, please see our original blog.
One fourth-last thing. Let’s not forget that the bank levy was put in places for damned good reasons.
One third-last thing. We said earlier that they may have been doubly devious here. What we meant was that this may have been cynically planned as a long term double whammy to get rid of all those pesky bank taxes.
First, you cut the bank levy sharply, but soften up the population by dressing it up as just being part of a tax hike on banks. Next people will see what’s going on and say ‘but hey, this is reducing competition!’ And you use that as excuse to row back on the eight percent surcharge (or you simply repeat the exercise until the bank levy has finally been throttled.)
One second last thing. To be more precise about that FOI response we had, HM Revenue & Customs said this:
One final thing. Fools’ Gold posts have been a little thin, of late. Apologies. This is because of a big project that’s been going on elsewhere: that’s now done (and do check out all those country reports). We will shortly get back to more regular posting, once the backlog we’ve built up gets out of the way.
Update: now re-published at Naked Capitalism.
The purveyors of the modern-day Competitiveness Agenda exhibit pronounced Panglossian tendencies. They see only positive things for everyone if their advice is followed. A ‘competitive’ economy will boast high levels of growth, they say, and the whole of society will benefit when the trickle-down effects impact on their lives.
As Matthew Watson argues, however, this Panglossian scenario elevates optimism over evidence. The modern-day Competitiveness Agenda can be turned on its head in the interests of a more progressive social settlement by exploring its fundamental anti-growth dynamics.
This post has been added to our relatively new page called The Harms which outline the range of different ways in which the Competitiveness Agenda tends to hurt those countries that practise it.
The Anti-Growth Dynamics of the Competitiveness Agenda
By Matthew Watson
Recently we have written about how supposedly ‘competitive’ national policies on tax and the financial sector in Britain tend to favour large multinational firms over smaller, more locally-based ones, and how they also tend to lead to less competition in markets too.
This is the result of what we sometimes call the “Competitiveness Agenda”, which pushes the idea that you have to pamper and give subsidies to mobile capital, for fear that it will flee to more hospitable jurisdictions. Of course the firms that are most able to flee (or partly flee) to foreign jurisdictions are naturally the internationally-focused ones – and that usually means larger multinational corporations. The smaller locally-focused ones, which are most rooted in the local economy won’t generally flee.
Update 1, Oct 30: the results of our Freedom of Information Request are now in. See our updated article UK’s bank levy reforms will cost £4.2bn in tax over 5 years.
Update 2: see also How ‘Competitive’ Tax and Incentive Policies hurt U.S. small businesses.
(Now cross-posted at Naked Capitalism)
The ‘competitiveness’ of a country can be taken to mean many things. Many people, such as Martin Wolf or Paul Krugman, have argued forcefully that it is a meaningless or dangerous concept. On another level it’s a question of language: you can make national ‘competitiveness’ mean whatever you like.
But there is a very common use of the term out there — what we are starting to call the Competitiveness Agenda — which accepts a particular meaning for the word ‘competitive.’ This agenda involves special pleading to bestow perks such as tax cuts on capital (or on capital owners), on the basis that if they aren’t pampered they will flee to other more hospitable jurisdictions. (Whether they would actually do this is another matter: the point here is that the scaremongering is often effective in securing pork for capital.)
One of the core insights driving the Fools’ Gold project is this: national ‘competitiveness’ is a confused and dangerous term to use when talking about an economy. What people (politicians, especially) often seem to think is that if you support one economic sector, that will necessarily make your economy as a whole more competitive. The problem is: that ‘support’ generally has to come from somewhere else in your economy.
So a corporate tax cut, for instance, is paid for by others in the economy, via lower corporate tax revenues, which may mean reduced fewer universities and courts, and so on. A more deregulated (and hence supposedly ‘competitive’) financial sector will see taxpayers taking on risks and eventually being forced to pay for them, while bankers get the cream.
These kinds of internal transfer do not automatically enhance growth, productivity, or anything that one might call ‘competitiveness.’