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.’
Stuart Fraser is the former head of the powerful Policy & Resources Committee of the peculiar City of London Corporation, and an influential figure in Britain. He’s quoted in The Price We Pay, a recent documentary on tax havens and corporate tax avoidance. He says in the film:
“Many politicians have an illusion that they actually run their country, when actually they run their country within the confines that the global financial system places on them.”
Now then. You’ve probably heard this before.
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.
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.)
Yesterday we received an email containing our quote of the day:
“this decades-overdue accounting rule is a historic development of tectonic proportions. It will enable analyses never before possible and vividly tie the opportunity costs of economic development to other public priorities.“
Our emphasis added. We wrote about this recently, but thought we’d underline its importance, with this quote.
This comes from Greg Leroy of Good Jobs First, a non-profit organisation dedicated to exposing and opposing corporate welfare and the race to the bottom between U.S. states on taxes and subsidies. This is of great interest to us at Fools’ Gold, because so many of these subsidies and pork are handed out in the name of ‘competitiveness’ (or some other weasel word.)
We’ve sometimes used the term ‘tax wars’ instead of ‘tax competition’ to describe the process by which countries try to tempt mobile capital by offering tax breaks, prompting others to follow suit in a race to the bottom. Countries often do this in the name of ‘tax competitiveness,’ which as we’ve shown is generally a fools’ errand — even from a purely self-interested national point of view.
Now an Indonesian group called Prakarsa has issued a note entitled Anticipating Tax War in the ASEAN Economic Integration Era, which raises many familiar concerns, particularly tax holidays. As they argue:
There are a lot of ‘competitiveness’-related rankings of countries and states out there, from the World Economic Forum’s Global Competitiveness Report, to the World Bank’s Ease of Doing Business rankings. (We’ll address some of these in due course.) It’s interesting to note, for starters, that the highly taxed, highly regulated Scandinavian economies seem to do just as well as their low-tax, lightly regulated peers. Recently we made up a little graph to illustrate this, looking at the WEF’s ranking:
There’s no obvious trend here, is there? The high-tax countries seem to be just as ‘competitive’ as the low-tax ones, it seems, even on the WEF’s measures, (which are somewhat skewed toward the low-tax, light regulation model.) The non-trend you see in this graph is just as Martin Wolf, Paul Krugman and various others would have predicted.
Across the world corporations are showered with tax breaks and other inducements in the name of ‘competitiveness.’ In most cases these tax breaks don’t affect investment decisions in any way. They are pure giveaways. In many countries it’s been hard to track the scale and extent of these giveaways, although recently we reported on one such effort by Kevin Farnsworth in the UK, which noted that the race to the bottom between nations and states on tax and corporate subsidies doesn’t stop at zero: it just keeps heading on downwards.
In the United States there has been some very good work done by nonprofit groups, notably Good Jobs First, to expose what’s been going on. (Greg Leroy, Director of Good Jobs First, attended the Fools’ Gold inaugural meeting in Warwick, UK, in February this year.
Now they report in a press release on an excellent development – a form of transparency that’s recommended for all countries.