Updated with new IMF data, June 22, 2015; and with Philip Baker comments; June 29, 2015
Update 2: from Reuters, Dec 22, 2015:
“Seven of the biggest investment banks operating in London paid little or no tax in Britain last year, despite reporting billions of dollars in profits, a Reuters analysis of corporate filings shows.”
How tax wars may affect UK small and big business
So-called “competition” between countries on tax (which some of us think is generally better known as “Tax Wars”) is a process that has nothing to do with what people normally understand competition to be. (To get a first sense of the differences, ponder the differences between a failed company and a failed state. Or look at this.)
The process produces a range of harms, which stem from basic operating principles. Capital can shift easily across borders, but workers generally can’t. So governments try to lure mobile capital by cutting taxes on it — then make up for the lost tax revenues by taxing ordinary people and workers more — since it’s far tougher for workers to rip their kids out of school and move when tax rates change.
The end result is that taxes on capital fall, and workers suffer higher taxes. Among other things, this increases inequality.
Here we go again. Look at this latest piece of financial sector lobbying, courtesy of Reuters, which normally strives to be a fair and balanced news organisation.
This requires quite some unpacking. To begin with:
“Britain is prepared to review a tax on banks to head off the threat that large multinational banks like HSBC could leave London’s financial centre and shift their operations overseas, the Sunday Times reported, citing industry sources.
Finance minister George Osborne is to lay the ground for such a review in a speech this week, by saying that the newly-elected Conservative government is committed to maintaining the competitiveness of banks, the paper reported.”
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:
Cross-posted with the Tax Justice Network.
From the Financial Times, a report on a survey by the Tolley Tax Journal of businesses’ responses to the UK’s policy of savage cuts to the corporate income tax. It’s about the UK, but it has wide international relevance.
“More than six out of 10 respondents thought the cut in the corporate tax rate, by 8 percentage points to 20 per cent, had boosted their own companies’ investment and growth, although for most it only had a marginal impact.”
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:
- Conservative: haven’t ruled out a cut in the top rate to below 45p in the £
- Labour: will restore the top rate to 50p
- Liberal Democrats: no specific pledges on top rate.
- Green Party: a top rate of 60p in the £
- SNP: has said it supports a top rate of 50p.
- UKIP: a 40p top rate.
- Plaid Cymru: a 50p top rate
“so selective as to be unreliable and, if relied upon, worthless or worse.”
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.
The term “UK PLC” — the ‘PLC’ bit standing for Public Limited Company — evokes notions that whole countries behave like corporations. It is routinely trotted out by politicians in the United Kingdom: why, this FG editor even heard (and gnashed teeth at) this very term on the BBC’s Today Programme this morning, on a day when 100 UK business leaders signed an open letter suggesting that the UK must display that it is “open for business” by supplying further tax cuts and other goodies to large corporations.
Versions of these kinds of slogans, implicitly equating the interests of large corporate players with the wider national interest, can be found in most countries.
In our latest article, Will Davies asks how slogans such as these – which are intimately intertwined with notions of ‘national competitiveness’ – have managed to achieve such sway over policy-making, around the world.
We’ve already noted that the words ‘competitive’ and ‘competitiveness’ (as applied to whole nation states) are backed by a supportive cast of various other weasel words and terms. One of the commonest is ‘anti-business’ – a term that we’ll dissect in the near future. This UK-focused article highlights prominent usage of the term, in the run-up to next May’s General Election, focusing on the case of Stefano Pessina, boss of the retail pharmacy giant Walgreen Boots Alliance. As Matthew Watson argues, voters should check the evidence on both sides of the argument for tell-tale signs of self-serving use of such competitiveness mantras.
The Two Sides of Speaking Up for Business
By Mathew Watson, Professor of Political Economy and ESRC Professorial Fellow, University of Warwick. An earlier version of this post appeared on the Speri Comment blog in March 2015. Permission to re-post is very gratefully acknowledged.
Recent research from the UK suggests that such policies constitute hand-outs, rather than effective means to shape firms’ investment decisions.
By Matthew Watson, Professor of Political Economy and ESRC Professorial Fellow, University of Warwick, UK. An earlier version of this post appeared on the Speri Comment blog in November 2014. Permission to re-post is very gratefully acknowledged.
It is now more than a generation since British politicians first discovered how the image of globally footloose firms might be used to make the case for establishing a business-friendly environment. Whatever the commitments given at the time that hard-won social rights would not be bargained away on the altar of competitiveness demands, tax cuts for firms that might otherwise threaten to relocate overseas still had to be paid for somehow. That, after all, is the logic of the ‘race-to-the-bottom’ dynamics unleashed by an increasingly globalised economy.