Competitiveness Myths, Income Tax and ‘Expansionary Austerity’

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Matthew Watson

Matthew Watson

In his latest essay for us, Prof. Matthew Watson of Warwick University looks at the utterings of John Redwood, one of Britain’s most vociferous proponents of the idea that tax cuts for the very wealthiest will make an economy more ‘competitive.’ (Take a look at this article to get a flavour of Redwood’s ‘competitive’-tax-cuts-for-all-ailments stance.)

Watson’s article precedes an in-depth report that we will be co-publishing next week, skewering the evidence that UK politicians are using when they make claims about what happens when you change top income tax rates.

An earlier version of this post appeared on the Politics Reconsidered blog in April 2014. Permission to re-post is very gratefully acknowledged.

 

Competitiveness myths, Income Tax and expansionary austerity

By Matthew Watson

Some small signs of growth for the British economy here, some small uptick in numbers in work there, and the nature of modern party politics seems to dictate that dubious claims about the expansionary nature of austerity will come marching back into view. Throw in some spurious comments about the endorsement of competitiveness policy and they tend to stifle further political debate.

I had convinced myself that I was too long in the tooth to ever see anything new in these tired old arguments. However, in this respect at least, I am now approaching the first anniversary of the day when the words ‘thank goodness for John Redwood’ entered my head for the very first time. This was such an unexpected occurrence that it requires some explanation.

The British Conservative Party describes Redwood as “a hard-hitting campaigner” and, in an attempt to vest this hard-hitting campaigner with authority, visitors to its website are told that he is a “businessman by background”. Last spring, he did what I had thought was impossible in the peddling of competitiveness myths. He put two and two together to come up with something well in excess of four when suggesting that the Treasury had been proved “utterly wrong” in its prediction that a five-percentage-point income tax cut for the richest 1% would lead to reduced overall tax revenues. Here was proof, should there have been a need for it, that if the lens through which you view the world is sufficiently skewed then you can make even the most basic statistics say anything you please.

Redwood’s variant of the expansionary austerity thesis took the following form. Ripping the heart out of the welfare system to fund top-end tax cuts, he seemed to be saying, places the British economy on a level of competitiveness that would otherwise be unattainable: it has reawakened a dormant entrepreneurial spirit to such an impressive degree, he was saying, that more rather than less tax was paid overall in the first year of the new lower rate. More people have been put into work through releasing society’s highest fliers from the “anti-competitive” burden of funding the welfare state, and they paid the Government back for its courageous pursuit of austerity to the tune of a whopping extra £9 billion in tax.

Well, perhaps he didn’t express himself in quite such grandiose terms. However, this was still the gist of his comments.

Two points should be made in response.

(1) Redwood managed to take one thing that was true – HM Revenue and Customs did indeed collect £9 billion of additional tax receipts in 2013/2014 compared with 2012/2013. But he then proceeded to turn it into a series of claims for which he had no evidence.

The increase in tax receipts did not follow a proportionate increase in the number of people paying tax. As the UK’s Office for National Statistics and even the Government’s own Office for Budget Responsibility have shown, the greatest difference resulted from existing taxpayers paying more of what was due. The pre-announced reduction of the top rate of income tax from 50% to 45% was accompanied by a loophole big enough for any competent accountant to drive a bus through it.

The real issue here is the outbreak of tax-switching that ensued. High earners delayed payment on tax that was due at 50% in 2012/2013, so that it could be paid instead at the lower rate of 45% in 2013/2014. The country’s highest earners, in other words, simply refused to look a gift horse in the mouth. This tax-switching artificially depressed revenues in the earlier time period and enhanced them in the later one, so there is no need to search too far for explanations of 2013/2014’s bumper crop of tax receipts. And certainly there is no need to embrace Redwood’s particular brand of expansionary austerity alchemy and the competitiveness myths that serve to sustain it.

(2) Even if his argument could be made to stand up in its own terms, however, does it not reveal a startling lack of ambition at the heart of UK Government economic policy? Redwood is, after all, a former Shadow Secretary of State for Trade and Industry and Prime Minister David Cameron’s specially selected appointee to head the Conservative Party’s Policy Review Group on Economic Competitiveness. But the only thing he seems to be able to say having held those briefs is that innovation is incentivised by tax cuts. [If so, they might like to answer each of these points, in turn.]

Surely, though, there is more to the likelihood of having a marketable idea than whether or not you live in a low-tax environment. Are we really likely to believe that entrepreneurs keep all their best ideas to themselves if personal tax rates are set above a certain threshold? Austerity has not only placed a blanket of conformity over British economic policymaking. It now also seems to be encroaching upon what politicians are willing to say about the nature of modern economic life more generally.

Redwood’s intervention into the debate about tax competitiveness and top-end tax cuts was as instructive in this regard as it was unhelpful if a serious debate is finally to be had about the necessary supporting conditions for economic innovation. Desperately needed debates of this nature would appear to be yet another victim of UK austerity politics.

By Matthew Watson, Professor of Political Economy, University of Warwick. 

 

 

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