New UK government pushing old ‘competitive’ tax policies

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UK tax barrister Jolyon Maugham, who is at a tax conference today, issued these tweets, citing the UK’s returning Financial Secretary to the Treasury, David Gauke:

Gauke comments

 

Where to begin with this nonsense? (NB Here we are aiming at Gauke, not at Maugham, who’s just the messenger providing a useful service.)

Gauke boasts that the UK’s corporate tax cuts have saved businesses £10 billion per year.

Which raises a few questions.

For one thing, who is benefiting from this?

From the UK’s self-interested national perspective, this doesn’t look particularly good, as the UK’s Office for National Statistics notes:

“Rest of the world ownership stood at an estimated 53.2% of the value of the UK stock market at the end of 2012, up from 30.7% in 1998 and 43.4% in 2010.”

Listed companies aren’t the end of the story but at least on this evidence, a whole lot of those ‘savings,’ stumped up by other UK taxpayers, leak out to foreigners. Is this a ‘competitive’ tax policy?

And before anyone wheels out the ‘tax incidence’ argument (as Gauke did in Tweet 3, above) they need to answer the questions pp7-8 of this document first.

And beyond that, consider this. A corporate tax cut will tend to increase returns to capital, relative to labour. To put it another way, it will raise the cost of labour, relative to capital. This may result in a relative tendency to employ fewer workers, and to invest less in their training (and retaining.) This will tend to reduce labour productivity. And, as we recently noted, Britain has been doing particularly badly on labour productivity recently (also see, for example, the Conference Board stats on this.) It’s also clearly true, for similar reasons, that these relatively higher labour costs will tend to reduce incentives for British employers to invest in employing British workers, and increase incentives to poach workers from other fair lands.

Is this a ‘competitive’ policy? If so, how so?

And that’s just start of it. Anyone trying to defend a ‘competitive’ tax regime needs to rebut this more generic lot of arguments too.

Then, we need to ask this: who, exactly, is paying for these £10 billion in annual giveaways “savings”?

Well, it’s UK taxpayers. Who else?

These cuts have brought little new investment to the UK – and may well have hurt investment in the UK economy, partly by reducing aggregate demand (as government spends less, while corporates already sitting on huge cash piles fail to invest their windfalls in the demand-deficient economy, thus making it a less attractive investment destination.)

Now back to the tweet: “we must maintain our international competitiveness on corporate tax” – why, exactly?  What does ‘competitiveness’ mean? For your chosen definition, is that a good thing, once all the costs elsewhere in an economy are taken into account? To repeat, read this short article, and then explain why the UK needs to be “competitive” on tax.

Finally: “competitive is the watchword but fairness too.”

But the two work in opposite directions. It’s kind of like saying “We must take money from poorer people and give it to richer people – in a fair way.”

Still, never let economic fallacies and internal contradictions get in the way of a good corporate tax cut.

 

 

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