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Report: pre-election debates on UK top income tax rates based on unsafe studies

POSTED ON April 21st  - POSTED IN Blog, Tax

Following last week’s blog on top-end income tax rates by Prof. Matthew Watson, today’s blog highlights a detailed new report (summarised here) which is launched today, on the same subject. It looks closely at the evidence behind claims about the revenue effects of cutting or hiking top income tax rates in the UK.

The report was launched (ahead of the May 7th election) by the Tax Justice Network, with the help of today’s Fools’ Gold blogger, and it shows how the official evidence on these revenue yields is subject to such huge, irreducible uncertainties that they are essentially meaningless. Perhaps more damningly these estimates are, as the report’s author John Thompson notes:

Where the parties stand on top income tax rates

The Labour government increased the top income tax rate for anyone earning above £150,000 per year from 40 to 50 percent from April 2010, the first increase since 1974. The coalition government cut the rate to 45 percent in April 2013.

Current manifesto pledges are:

“so selective as to be unreliable and, if relied upon, worthless or worse.

The Tax Justice Network on tax competitiveness

POSTED ON March 30th  - POSTED IN Blog, Tax

TJN logoFools’ Gold has begun publishing a series of articles and documents asking the question: What is Competitiveness? We’ve already looked at the work of Paul Krugman and Robert Reich; now we will look at the views of the Tax Justice Network on a slightly different but related animal: so-called “tax competitiveness.”

One of TJN’s core points is that, as in other areas, tax ‘competition’ between countries bears no relation to the kind of competition that people are most familiar with: the micro-economic phenomenon where firms compete in markets. And yet these two utterly different processes so often get conflated, simply because they share the same word: ‘competition.’ The arguments usually don’t get very far beyond the ‘competition is good, so tax competition must be good, right?’

Well, TJN has been unpacking ‘tax competitiveness’ for some years now; it generally prefers the term ‘tax wars’ instead of ‘tax competition’. Tax wars conveys the harm and highlights the fact that these processes are more akin to currency wars or to trade wars than to anything that might be called ‘competition.’

TJN has three key outputs in this area:

A document entitled Ten Reasons to Defend the Corporation Tax, whose fourth point outlines the arguments in detail;

An earlier report entitled Mythbusters: “A competitive tax system is a better tax system;” and

A permanent webpage entitled Tax Wars, which contains these documents and a series of other articles and blogs looking at different aspects of these issues.

The most fundamental element in TJN’s arguments, perhaps, is that while international co-operation on international tax issues is almost always a good idea, it is often unnecessary. Countries can go it alone, and take a lead by continuing to tax capital and to preserve progressive tax systems.

TJN argues that – particularly for larger economies – tax-cutting generally will not help the local economy. So many of the pressures that countries feel to cut taxes or provide other subsidies to mobile international capital are founded simply on a false understanding of the concept: this myopia is itself the result of lobbying, bamboozlement and woolly and wishful thinking.

TJN’s uncompromising arguments in this area can be summarised as follows:

  1. Tax is not a direct cost to an economy, but a transfer within it. Tax cuts transfer wealth from one part of the economy (e.g. tax-financed roads or courts) to another part (e.g. corporate shareholders). This transfer does not automatically help the local economy. Tax levels may affect investment levels, but that is another matter (see below).

 

  1. The fallacy of composition. A closely related point. People assume that what is good for corporations must be good for the economy. But if benefits or giveaways to one sector come at the expense of costs to another sector, as is the case with (for example) a corporate tax cut, then this logic fails. When considering a national tax policy it always makes sense to consider it from the perspective of the country, rather than from the perspective of international investors. It is in the interests of sectional interests, of course, to equate their interest with the national interest.

 

  1. Tax wars redistribute wealth upwards. Capital is mobile across borders; workers aren’t. So governments feel pressured to cut taxes on mobile capital, which ultimately, and in aggregate, means cutting taxes on wealthy people. Poorer people must pay higher taxes or suffer degraded services as a result.

 

  1. The process of tax cuts and subsidies does not stop at zero. There is no limit to which the owners of capital wish to free-ride off benefits provided by society. Think of the arguments like this:

 

  • If it’s generally a good idea to shower investors with tax cuts, why not cut their effective tax rate to zero?
  • Why stop there? Why not effective negative tax rates, or net subsidy packages?
  • Where does this downwards path stop?

 

  1. Tax cuts tend to attract the wrong kind of investment. Real investors don’t chase tax breaks. Countries need the “good stuff” which involves greenfield investment creating jobs, local supply chains, knowledge transfer, and which is generally embedded in the local economy. If it is embedded like this, then almost by definition it isn’t very tax-sensitive.

 

  1. Many studies are irrelevant or wrong. The ‘fallacy of composition’ point above suggests that many studies measuring whether a tax cut boosts “investment” are of little use, in isolation. The perspective that matters is whether they provide economy-wide benefits, rather than narrow sectoral benefits. In addition, many studies suffer from other problems: poor assumptions, circular reasoning (p24 col. 3), a failure to take into account ‘round-tripping’ (Section 4.4); to take into account timing issues (Section 4.4) and other problems. Some studies, of course, are influenced by those who would directly benefit from tax cuts.

 

  1. In many sectors, it doesn’t matter too much if particular investors exit, because others will take their place. This is particularly true for natural resources: an oilfield isn’t going anywhere and if there’s an after-tax return to be made, the investors will likely come. If investment slows that isn’t ultimately a loss to the country, in the long term: the value remains stored in the ground. But it’s not just about natural resources: where there is an Indian telecommunications licence, for instance, or permissiont to run a Turkish supermarket business, investors who see an after-tax opportunity will come. Don’t start from the perspective of individual investors: start from the perspective of the country.

 

  1. Tax cuts generally don’t affect economic growth rates much. They do have an impact on inequality, but there is no clear evidence that they affect growth, particularly for larger economies. (Section 4.5) What is more, the poster children for tax-cutting aren’t what they seem. Ireland did not get rich from cutting its corporate taxes to 12.5 percent, as one of our inaugural blogs It got rich essentially for other reasons.

 

  1. Tax wars distort markets. A pursuit of so-called ‘competitiveness’ leads countries to cut taxes on mobile capital; this generally means lower effective tax rates for large multinational corporations (MNCs), at the expense of more locally-based smaller players. This helps MNCs out-compete their smaller rivals on a factor – tax – that does nothing to promote genuine productivity or innovation. This favours the large over the small and boost monopoly and oligopoly, increases economic (and therefore political) inequalities, and hurts fair market competition.

 

  1. As already noted, tax ‘competition’ (or tax wars) bear no relation to competition between firms in a market. TJN takes the strong view that the former, a macroeconomic and political phenomenon, is always harmful: a race to the bottom. Yet because tax wars share the word ‘competition’ with the more beneficial microeconomic processes where firms constantly innovate and cut costs to stay in business, many people assume they are healthy. Academic arguments to this effect, originally based on a 1956 paper by Charles Tiebout; lack any solid foundation (Footnote 26, p29). It turns out that Tiebout was probably joking when he first proposed his model.

 

This is a distillation of the main arguments that TJN has made for many years.

For articles more focused on natural resources, extractive industries, fossil fuels and climate change, try this or this.

The main documents at the top of this blog, particularly its Tax Wars page, provide pointers to supportive references and quotations.

Disclosure: TJN is a supporter of the Fools’ Gold project.

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