The False Promise of Corporation Tax Cuts

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Recent research from the UK suggests that such policies constitute hand-outs, rather than effective means to shape firms’ investment decisions.

WatsonBy 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.

Twenty years later and British politicians are still at it. The explicit reference to globalisation might be all that has changed in the meantime, replaced as the rhetoric of choice by the perceived need to demonstrate that UK plc is ‘open for business’ in the wake of the financial crisis and is fighting fit in the ‘global race’. Yet the welfare state is still being stripped to the core as this particular race continues with the bottom as its only likely destination, and money that was formerly set aside for benefits payments is now being recycled as tax inducements for firms to expand their UK-based activities. Any other policy, we are told, would be hopelessly anti-competitive.

British newspapers have been awash for many years now with stories about the alleged hand-out culture of the welfare state. The underlying commentary is always to ask to what ends such transfers are made. Given that the stories uniformly enlist the image of a dependent population scrounging its way through life, the answer at which we are supposed to arrive is ‘no useful end at all’. Perhaps it is now time to redirect that question so that it is asked in relation to both sides of contemporary ‘race-to-the-bottom’ dynamics. Do we get the same answer when enquiring about the effects of the UK Coalition Government’s agenda for cutting corporation tax rates?

Recent work by Nicholas Shaxson and John Christensen from the Tax Justice Network suggests that we do. They have shown how a narrative of ‘tax wars’ has taken hold that stresses the competitive advantage of releasing firms from contributing to the socialised investments from which they, like the rest of us, derive substantial economic benefits. In the UK this is instantiated in the Coalition Government’s target of reducing the headline corporation tax rate by nearly three-tenths between 2010 and 2015, as well as in its embrace of a territorial tax system whereby transnational corporations are only liable for taxation on the income they source domestically.

Given the stated rationale for these policies, the result should already have been a massive influx of new investment and new jobs as the Government’s far-sighted stewardship of Britain’s position in the tax wars is seen to bear fruit. Even allowing for a time lag between the announcement and the observable impact of the policy, significant enhancements of the long-term productive basis of the economy should surely be visible. Otherwise, Coalition corporation tax rate policy will amount to a transfer with no obvious social benefit. What would a government that understands economic justice through a ‘workers versus shirkers’ narrative make of that?

Reuters has recently undertaken the most comprehensive independent analysis to date of the decisions taken by firms to invest in Britain over and above what they had otherwise planned to do before the announcement of impending reductions in corporation tax rates. Instead of relying on the internal logic of the tax wars narrative, they adopted an old-fashioned method to find out what was going on. They asked the firms that had relocated their investment decisions to the benefit of the British economy exactly why they had chosen to do so. A deafening silence ensued when, from the perspective of the tax wars narrative, there should have been consistent acclamation for the wisdom of reducing corporation tax rates.

According to the Reuters report, talk of any job creation dynamic is a misnomer because the overall effect of specifically tax-driven relocations has been a net job loss. Those same firms were just as open about the fact that, in aggregate, they had qualified for the accumulation of so-called ‘tax assets’. In other words, they received more in tax credits from the UK Government than they paid in corporation tax.

We might commend the honesty of the reporting companies in admitting how favourably they have been treated. But, equally, it is impossible not to regret that they are in a position to pocket such largesse whilst their hand-outs act as a drain on the rest of the British economy. Negative job creation and negative tax receipts are just about as far as it is possible to get from a ringing endorsement of Coalition Government policy conducted in line with the Conservative Party’s favourite ‘global race’ metaphor.

And yet the lines on taxation already seem to be drawn in advance of the 2015 UK General Election in a way that seems certain to deliver only more of the same between now and polling day in May. The political parties might disagree over who should benefit the most, but they are tripping over themselves to announce their intentions to bring overall levels of taxation down as a means of incentivising ‘hard work and innovation’. However, as research conducted by the Tax Justice Network and others makes clear, when set within a tax wars frame this often leads to free hand-outs to those within the corporate world who need them least.

Please remember that next time you hear a proposal for restricting the social right to welfare in order to finance politically-motivated corporation tax cuts in the name of enhanced national competitiveness.

 

 

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