2010 February » Tax Research UK

How one woman can cause economic boom or bust

Economics Comments Off

Feb 282010

BBC News – How one woman can cause economic boom or bust.

Sobering thoughts for those economists who think data is the be all and end all of an argument.

Sometimes it’s just plain misleading unless you understand a) how it was collected b) what it relates to c) how small some samples are.

As an accountant I can say I can never think of a situation where data came ahead of judgement in formulating a strategy – not least because, just about without exception the decision to be made invariably requires data to be extrapolated – and how you do that is always judgemental.

Hat tip to Chris Hopkins

The evidence does not support the theory on corporation tax incidence

Corporation Tax, Economics 19 Responses »

Feb 282010

I’ve been having a courteous debate with Tom Worstall over the last week on the incidence of financial transaction taxes (yes I know it sounds surprising, but it’s also been true). At the end of it the best Tim could say was:

For myself, before we decide to change the taxation system for the globe’s financial markets I would insist that we should only be making changes where we can predict both the effects and the magnitude of them.

He came to this position having failed to knock any holes in my logic on the potential incidence of a financial transaction tax on foreign currency as explained in Taxing Banks. I on the other hand have argued that sufficient data to predict the future and the consequence of all action is never available. In that case we use a priori logic, whatever relevant and reliable data we may have to test and a considerable quantity of judgement to decide what to do since the evidence will always be incomplete and the opportunity for error will, therefore always exist.

The difference in contention between me and Tim is not, however, the weight given to empirical data over logic: poor logic can never be resolved by good data. Good data can support logic or give rise to further questions. Therefore anyone of sound mind has to put sound logic ahead of data: to argue anything else is itself illogical.

Rather though the difference between Tim and me is something quite different: I argue that we have to make judgement. Tim is seeking to deny that although I am quite sure that he knows in doing so he is just using a rhetorical tool to object to change to a status quo which he desires and which I abhor – namely the exploitation of society by banks. I seriously doubt he or anyone could believe that action on taxation cannot take place unless it were possible to predict with the degree of reliability he seems to think essential the effect and magnitude of the change they might create. We’re unable to do that. So Tim is either seeking to deny the reality of the uncertainty inherent in the human condition or he is putting forward an argument that he knows to be false in the hope it will achieve his political aim. Not surprisingly we’ve agreed to differ on the outcome of our debate.

I did, however, then ask him to consider the issue of the tax incidence of corporation tax, which I discussed here. He said:

If, as Joe Stiglitz pointed out can happen, the incidence of corporation tax on the workers’ wages is higher than 100%, then cutting corporation tax will increase the workers’ wages by more than the cut in corporation tax. Even assuming that taxes on labour are raised to cover the lost revenue (that no other measures are taken, such as different methods or taxing returns to capital, or spending cuts) as we don’t think that the incidence of taxation upon labour is more than 100% on labour then labour will be better off by being taxed directly rather than indirectly.

In other words, he thinks that the incidence argument suggests that as corporation tax falls labour rates should rise. Note this does not imply that this must be the case in individual companies: it should be so across the economy as a whole. In other words, if Tim is right as corporation tax rates fall then wages should rise. He is unambiguous about this. It’s an a priori argument which can be tested with data. This is data I prepared on trends in corporation tax in the UK from 2000 to 2006 based on detailed analysis of tax paid by the largest 50 UK companies in that period, published in the Missing Billions in 2008:

The effective rates of corporation tax in the UK fell during this period from 26.1% to 22.5%.

If Tim is right wages should have risen as a result. This graph is based on direct download of Office for National Statistics data and shows what actually happened:

From a high of 55.2% labour share of GDP in 2001 it fell to 53.2% in 2008. The return to capital, however, rose from 19.9% in 2001 to 23.5% in 2008.

I thin on this occasion the data is compelling and unambiguously supports the logic I have presented that corporation tax cuts reduce the return to labour and increase the return to capital. In other words they reallocate income from those who work for it to those who do not work for it: they reallocate income from the poorest to the wealthiest and they make society more unequal and the tax system more regressive as a result.

Of course, data is insufficient in itself to prove a case. The logic has to be right to. But those who honestly believe that the incidence of corporation tax is on labour are few and far between – and it is their work which has, by and large, lead to the crisis we’re now in. Those who do however think that companies do pay tax and that when they do so the incidence is on capital are widespread, and whilst herds aren’t always right on this occasion the logical flow in their argument is so obvious it is hard to contend with. It just helps that the facts support it.

This is nonsense – of course there’s a market for the debt to finance new trains

Economics, Green New Deal 10 Responses »

Feb 272010

Intercity trains upgrade postponed | UK news | guardian.co.uk .

It’s claimed that:

A £7.5bn contract to replace Britain’s ageing intercity train fleet has been postponed after the government blamed the state of the debt markets and slow growth in passenger numbers for creating uncertainty over the deal.

This makes no sense at all. We will run trains in the UK for the next thirty plus years. These are assets with a life at least that long. They can be used as security. They will generate an income stream. the demand for high quality asset backed securities with an identifiable income stream is large. We need to build these trains – preferably in the UK, of course.

Can no one in government see the logic of the Green New Deal (see right hand column)? This is exactly the sort of project, if UK based, that we need now to revitalise the UK.

And the bankers still say ‘love us, or we’ll run away’

Banking Comments Off

Feb 272010

Letters: Despite the mistakes, we need bankers | Business | The Guardian .

There’s been an amazing response to the letter of which I was a co-signatory in the Guardian yesterday on banking in the letter’s page of the same paper today.

Stuart Fraser, who is chairman of the, policy and resources committee, City of London Corporation trots out the usual line about the City paying lots of tax (without noting the negative impact on us all) and then says:

These benefits could easily be diminished if we unilaterally pursue the policies suggested, instead of building a consensus among our international competitors, many of whom are facing similar issues, especially in the US and the EU. We cannot afford to place our international competitiveness in jeopardy by implementing tax and regulatory proposals that risk driving top City firms and hence the provision of the financial services and products we need, to more welcoming business environments overseas. This will only damage the UK economy by making the raising of capital for new businesses more difficult, as well as raising its price and by reducing our tax revenues and employment prospects.

On other words the only argument is the usual one of ‘if you don’t love us and show it by giving us enormous tax advantages we’ll leave’.

But we know as a matter of fact bankers aren’t leaving. Fewer left last year than in 2008 and the totla number was just over 1,000 – a tiny proprtion of the total.

This argument is now so worn out it is irrelevant. If this is all that can be offered as reason for maintaining the status quo we can now safely say the debate has been won, the argument is over, and now all that is required is that the process of change begin.

Let’s get on with it.

No more free lunches

Blogging 1 Response »

Feb 272010

No more free lunches.

My blog mentor, Dennis Howlett, is moving to a partly paid for approach to blogging.

Much of his content will be free.

Some value added will be paid for.

As he says:

That’s taught me a lesson: see, hear, enjoy, consume‚Ä¶but think. That doesn’t always make me popular. But then I’m not doing this to be popular but because my true passion is value delivery.

I sense that despite this being the worst recession in living memory, and with the real prospect of a double dip, the time is right for me to up the stakes in value delivery. But it cannot be free forever. We all have to eat. We all have to provide. I am no different and am certainly not one of those people who has a secret stash that give me the luxury of not having to earn something along the way.

I think Dennis is right in his main market. He’s one of the world’s leading bloggers on accounting systems and the internet.

He has over 5,000 Twitter followers.

He has real influence in a paid for market.

My suspicion is that the change will work.

Right now it’s not a direction of travel I’m taking.

Double-dip recession fears: we need the Green New Deal more than ever

Green New Deal Comments Off

Feb 262010

FT.com / Currencies – Sterling hit by double-dip recession fears.

As the FT notes:

The pound dropped to a fresh nine-month low against the dollar on Thursday and also lost ground against the beleaguered euro on fears the UK economy had not escaped from recession in the fourth quarter.

Sterling fell to a low of $1.5270 against the dollar, its weakest level since May, after figures showed UK business investment dropped far more than expected in the fourth quarter.

This was, I hate to say, almost inevitable. All we have done to date is bail out banks. That’s worked: we’ve saved money from collapse and still have an economy as a result, albeit that the banks continue abusing it.

Now we have to rebuild that economy. This cannot be done using the methods that have failed to date. Throwing money at banks has to stop. Banking reform, as demanded by me and many others today, has to happen. Mervyn King, I note, agrees. As the Guardian notes:

Britain’s sprawling banks must be split up to prevent international investors losing confidence in the future of the City of London as a financial centre, Bank of England governor Mervyn King argued today.

Delivering his strongest defence yet of the argument that risky “casino” banking must be hived off from workaday retail deposit-taking, King said the UK could not afford to give the markets the impression that its banks would have to be periodically bailed out by the taxpayer.

Even then we need financial transaction taxes. But that will not be enough. These are still issues focussed on the finance sector. The real economy needs help too. This makes it time for the Green New Deal:

Massive investment in renewable energy and wider environmental transformation in the UK, leading to,
The creation of thousands of new green collar jobs
Reining in reckless aspects of the finance sector – but making low-cost capital available to fund the UK’s green economic shift
Building a new alliance between environmentalists, industry, agriculture, and unions to put the interests of the real economy ahead of those of footloose finance

No one esle, amazingly, has argued for a proactive approach to business to solve the crisis we face. And yet it’s deliverable now.

We need it badly.

Disclosure: I’m one of its authors.

MPs act to stop vulture funds

Development, Secrecy jurisdictions, Tax Havens 1 Response »

Feb 262010

MPs act to stop vulture funds using UK courts to pursue poor nations | Business | guardian.co.uk .

Vulture funds would be banned from pursuing the world’s poorest countries for debts in the UK courts, under a private member’s bill that has won the backing of the government.

MPs will vote on the second reading of the debt relief (developing countries) bill, sponsored by Labour backbencher Andrew Gwynne, on Friday. The Treasury has repeatedly promised to tackle the problem of investors suing poverty-stricken governments, often over debts contracted decades ago.

So-called vulture funds buy the debts of poor countries, usually at a sizeable discount, wait until the government has received debt relief from foreign creditors, and then pursue their share of the debt in courts around the world.

Vultures are invariably based in tax havens / secrecy jurisdictions. This is an essential development to stop yet another offshore abuse.

Congratulations to all involved.

Letters: We need wholesale reform of the banks

Banking 4 Responses »

Feb 262010

Letters: We need wholesale reform of the banks | Business | The Guardian .

From this morning’s Guardian:

As Jill Treanor reports (Anger escalates over Royal Bank of Scotland p lan to pay £1.3bn bonuses, 25 February), this week’s announcement by the 84% tax-payer-owned bank will be unpalatable to the vast majority of British citizens. The very same institutions that left Britain and the world economy tilting on the edge of collapse have benefited the most from state action. Despite this, they are once again cashing in unjust and unearned rewards. In light of this, it’s right that we demand “never again”: we cannot afford to turn back to the way our banks were run before the crash. We now need wholesale reform.

We therefore call on the government to instigate a package of regulations and reforms that would amount to a new banking settlement, in order to bring financial services more in line with the social and economic needs of the people. In the short term, we should look at capping remuneration (set as a percentage of net revenue), this would help tackle flagrant high pay, shore up bank balance sheets and provide a level playing field across the banking sector. RBS and Lloyds would then no longer be a “prisoner to the market”. We should also repeat the bankers’ bonus windfall tax, and extend it to hedge funds and private equity houses, the riskiest and shadiest financial operators.

In the medium to long term, we must harness the wealth of the financial sector for socially useful means with a transactions tax. We should also have a new Glass-Steagall Act to separate retail and investment banking. Finally we should now establish a high pay commission. If introduced in the right way, these reforms would significantly transfer risk from the state and taxpayers back on to financial institutions, while at the same time fundamentally change banks behaviour and change the culture of the City. The government must have the conviction to ensure that never again will the short-term financial interests of the finance sector come before the needs of the wider economy and society.

Andrew Simms, Policy Director, nef

Ann Pettifor, author, The Coming First World Debt Crisis

Baroness Helena Kennedy QC

Billy Hayes, General Secretary, CWU

Chris Edwards, Senior Fellow, Economics, University of East Anglia, UK

Dave Prentis, General Secretary, UNISON

Dennis Leech, Professor of Economics, Warwick University, UK

Dr Martin Parker, Universityof LeicesterSchoolof Management

Dr Sally Ruane, DemountfordUniversity

Gavin Hayes, General Secretary, Compass

Geoffrey Hodgson, Research Professor of Business Studies, University of Hertfordshire, UK

Guy Palmer, Director, The Poverty Site

Howard Reed

Lindsay Hoyle MP

Neal Lawson, Chair, Compass

Nick Isles

Paddy Tipping MP

Prof Dave Byrne, DurhamUniversity

Prof George Irvin, SOASUniversity

Prof Gregor Gall, Universityof Hertfordshire

Prof Hugh Willmott, CardiffBusinessSchool

Prof Karel Williams, ManchesterBusinessSchool

Prof Malcolm Sawyer, LeedsUniversityBusinessSchool

Prof Martin Parkker, Schoolof Management,. Universityof Leicester

Prof Peter Case, BristolBusinessSchool

Prof Prem Sikka, EssexBusinessSchool

Prof Stefano Harney, Schoolof Business& Management, QMUL

Prof Tim Jackson, SurreyUniversity

Richard Murphy, Tax Justice Network UK

Rt Hon John Battle MP

Stewart Lansley, author, Rich Britain: The Rise and Rise of the New Super-Wealthy

Sunny Hundal, Liberal Conspiracy

Tony Lloyd MP

Victoria Chick, Emeritus Professor of Economics, UniversityCollegeLondon, UK

Will Straw, Liberal Conspiracy

Ismail Erturk, ManchesterBusinessSchool

Ann Clwyd MP

Dai Davies MP

Derek Wyatt MP

Frank Field MP

John Austin MP

Mark Durkan MP

Mark Lazarowicz MP

Michael Clapham MP

Michael Meacher MP

Paul Holmes MP

Sam Tarry, Chair, Young Labour

Prof Christine Cooper, Universityof Strathclyde

Now tell me there’s no case for a financial transaction tax

Banking, Transaction Taxes 9 Responses »

Feb 262010

FT.com / Companies / Banks – RBS pays more than 100 staff a £1m bonus.

The FT notes:

Royal Bank of Scotland admitted on Thursday that more than 100 of its investment bankers will take home bonuses of at least £1m for 2009, a year in which the government-owned bank posted a net loss of £3.6bn.

RBS is one of the biggest players in the socially useless fianncial markers. Those who partake are amongst the recipients of these bonuses.

So please don’t now tell me there’s no case for a financial transaction tax of the sort proposed by the TUC, Tax Justice Network, Christian Aid and others in ‘Taxing Banks’ where we firmly predict that one of the benefits of such a tax will be a significant fall in trading volumes and consequent demand for bankers – with their pay tumbling as a result.

I’m well aware conventional economists do not agree – and they have provided not a shred of evidence, let alone logic, to support their case as yet. They simply say the cost will be passed on to others – but when the customer for more than 40% of all trades in this market is another bank and the number of customers overall is tiny there is no logic in that claim – the consumer is identifiable and able to resist the charge.

I stand by my claim – one of the great benefits of financial transaction taxes will be that they will significantly cut bakers’ pay. And that’s universally considered a good thing by all but bankers and those in awe of them.

Rather oddly, you can’t imagine why they would be so vehement in their opposition unless I was right, can you?