2011 January » Tax Research UK

The reality hits home – the ConDems are delivering recession, or worse

ConDems, Economics, Labour 7 Responses »

Jan 252011

Yes I know there was snow in December.

Yes I know that gives George Osborne an excuse for worse than expected GDP figures.

But even being charitable it looks likely the UK economy would have flat-lined at best in the last quarter of 2010.

And let’s be clear – Ed Balls was right to say that this is the consequence of ConDem cuts reversing the trend to recovery that Labour left in our economy.

Richard Lambert, outgoing director of the CBI said yesterday that the ConDems were cutting without a plan, without consideration for growth and without consideration of consequences. Liberated from his constraint of needing to keep his membership happy as he’s now leaving he was, for once, right.

No pone denies there are issues to address in our economy. No one denies that resolving the legacy of neo-liberal economics – a malaise from which New Labour suffered but from which Labour must be cured in the future – won’t be hard. But reckless cutting, cavalier cuts and dogma driven redundancy is already driving hope out of our eco9nomy.

It’s true that once any political party loses economic credibility it takes time to regain it. Labour faces that problem. But lets face it – neither the Conservatives or Liberal Democrats ever had this credibility – neither did, after all, win the last election, for precisely this reason and despite facing a prime minister who was by then a lame duck.

And if now the economy goes belly up so rapidly after the ConDems reversed do much that Labour did to deliver growth – whilst bringing in borrowing much below expectation – then Labour’s record is going to be looked at in a new light. Especially if government borrowing now increases, as is likely.

I wonder what the odds of Osborne going in a reshuffle are? I’d think they’re getting to be one to look at for the punters out there. Not that I am. So please don’t ask me to put up a tenner. I don’t.

What a difference a policy makes

ConDems, Economics, Labour, USA 5 Responses »

Jan 252011

The FT reports:

The US fiscal stimulus package agreed late last year and the Federal Reserve’s autumn decision to restart quantitative easing have significantly improved the outlook for growth, according to the International Monetary Fund.

Meanwhile, as the Guardian notes:

The business secretary, Vince Cable, was tonight forced to defend the government’s approach to economic growth after the departing head of the CBI used a valedictory speech to accuse ministers of hindering business and job creation through politically motivated initiatives.

On the eve of figures expected to show a sharp slowdown in the pace of growth in the final three months of 2010, Sir Richard Lambert said the government’s strategy would make the country’s problems worse if it was simply about cutting spending.

What a difference a policy makes, eh? One government – the US government – has taken proactive action to support its economy. It may not have done enough. It may have been too timid on some issues. It may not have tackled some of the difficult problems. But it has acted and will see the result.

And we have a government that even the CBI think is cutting for the sheer political fun of doing so – inflicting needless pain on the people of the UK.

How long will it take people to realise that Labour did not cause this crisis? The real crisis we’re going to face was made by the Conservatives and their Lib Dem friends.

Fianna Fail look like they will be wiped out in Ireland for doing something similar. That fate awaits the ConDems here. And rightly so. If, and I admit it’s still an if, Labour presents a viable alternative. And yes, I do mean the sort of viable alternative I write about.

Jersey, yesterday and today

Jersey 17 Responses »

Jan 252011

Jersey really is a great place. It’s been a pleasure to be here – and I’m not expecting to change my mind after a meeting with local politicians this morning.

Last evening I spoke at a meeting in St Helier, talking, seemingly to the audience’s pleasure for 30 minutes and taking questions for more than 75 minutes after that, the while thing only slightly delayed by local television interviews.

I was honest – as I predicted I said Jersey is in a mess. I’ll publish the text of my talk later – simply because I forgot to bring the final electronic version with me. But what was interesting to me were the questions; questions that revealed deep concerns for this island, its people, its future and for social justice here and elsewhere.

Much of what I said has been published before, and I won’t repeat it. But I also dealt with independence – which I think would be a disaster for this island which is going to need all the friends it can get over the years to come: the problems that finance leaving here will cause – as will happen, and how the States needs to ensure that people are protected from the negative equity in housing that will follow, forcing banks to take this risk: and the fact that replacing zero / ten is going to be harder than local politicians in the ruling party seem to think or at least say.

This last point is crucial. This time, as I pointed out, they need to have the courage to not adopt a solution “Made in Douglas, Isle of Man”, not least because the VAT sharing agreement that let the Isle of Man propose zero /ten in 2000 has now been holed below the waterline.

And they can’t easily adopt territorial taxation because they know this will require their tax authority to ask where a Jersey company actually is – and prove it. This is something they have always refused to do to date – simply saying ‘”it’s not here – it’s elsewhere” and so have turned a blind eye to its activity and the possibility it might not be “elsewhere” but actually “nowhere”. Under territorial tax this deliberate turning of the blind eye could not happen. In that case the local tax authority here would have data to say where Jersey companies really were – data they could then be required to information exchange, and that would, of course, open up all sorts of unattractive possibilities for those using Jersey.

But those risks already exist. As I also pointed out, the one thing people in tax say they want is certainty. But Jersey’s politicians have made it clear that they will hang on to zero / ten like dying people clinging to the ropes of the lifeboat. Or in this case, they will hope against hope that the EU might decide that tax haven abuse in personal tax law is still abuse but legal when the identical abuse is unacceptable in business tax law. In the meantime though they will be in constant battle with the UK, who is duty bound to demand reform, and this will for some time to come remove all certainty from the Jersey tax system – which will hang in limbo for years potentially whilst a decision is made at the extraordinarily slow pace that typifies Brussels. And throughout that time no one will bring business to Jersey when thy have no idea what the future holds. The indecision on tax of local politicians will kill finance whatever the outcome in other words.

Or as I put it, in that case what have they got to lose by looking at my Plan B?

Sarkozy demands a Tobin Tax

Banking, G20, Transaction tax 1 Response »

Jan 252011

As the Independent notes:

The French President Nicolas Sarkozy opened his presidency of the G20 group of nations yesterday by calling for a $100bn (£62bn) tax on banks. The so-called "Tobin tax" on transactions has been championed by organisations such as Oxfam and the TUC, but the financial services industry vehemently opposes it.

The finance industry vehemently opposes a lot of things they’re going to have to come to terms with. And I suspect a transaction tax is one of them.

The bankers aren’t going

Banking Comments Off

Jan 252011

As the FT notes this morning, HSBC has rejected move of head office from London to Hong Kong. It’s new CEO had previously warned that HSBC might relocate abroad, most likely to Hong Kong, if the government forced banks to split their retail and investment banking businesses.

Well, government advisers are talking about some form of split.

And HSBC is staying.

There’s good reason for that. London is where they need to be and complying with the requirements of the UK is a price worth paying for being here.

Politicians please note: you need not be held to ransom by these people. Whenever they talk about leaving it’s just bluff. The truth is, there is no where to go that suits as well London. And they know it.

Corporation Tax Cuts Don’t Lead To Prosperity

Corporation Tax, Economics, Ireland 8 Responses »

Jan 242011

The following is shamelessly re-posted by me from the Socialist Economic Bulletin blog. It’s far too important to ignore. It’s by Michael Burke and I hope he and his publisher will forgive me:

“In George Osborne’s Budget in June 2010 it was announced that the rate of corporation tax will be cut in a series of steps from 28% to 24%. This was part of a series of measures which, it is claimed, would boost growth. In fact they comprised part of a series of tax cuts for companies and the highly paid which amount to a giveaway of £12.4bn in 2014/15, almost exactly equal to the yield from the VAT hike of £13.45bn – which in contrast will come overwhelmingly from the pockets of the poor.

But, just as the package of tax measures are not about deficit-reduction at all, but a transfer of incomes from the poor to the rich, so the claim that lowering tax rates will lead to growth is also incorrect. The claim is that lower taxes increase the flow of Foreign Direct Investment (FDI). But the recent FDI Barometer produced by Think London, the agency that promotes FDI in London, shows that overseas investors are less likely to invest in London, not more likely because of recent developments in UK economic policy. In a survey of over 300 executives responsible for making FDI allocations, 60% said the lower tax rate would not change the attractiveness of London as an investment destination, 13% said it would make them more likely to investment, but 22% said it would make them less likely to invest. Therefore a net balance of 9% said lower corporate taxes would make London less attractive to investors!

In fact those surveyed were much more agitated about racist immigration policies – with 48% opposed to the Tory-led Coalition’s cap on non-EU immigration.

This is because FDI is not driven by corporate tax rates. At one end of the scale the highest corporate tax rates in the OECD are imposed by the US and Japan at 39%. Germany has a 30% rate. The lowest rates are in Iceland (15%) and Ireland (12.5%), which should be more a warning than a model!

FDI, in common with all investment, is driven by prospective rates of return. Some factors, such as geographical location are outside policymakers’ hands. But the quality of road, rail, air and port infrastructure are not. Likewise, the size of the market is outside policymakers’ hands, except over the very long run, but economic growth rates are not. In particular, studies repeatedly show that it is the quality and skills of the workforce that is the main policy-driven factor in attracting FDI.

Ireland, with the lowest corporation tax rate in the OECD, demonstrates this reality. It is an article of faith for the Dublin government and its supporters that the 12.5% rate is the key to attracting FDI. Both the Taoiseach Brian Cowen and the Finance Minister Brian Lenihan have taking to describing it as “our international brand”. In the 1998 Budget (introduced in December 1997) their predecessor as Finance Minister, Charlie McCreevey, introduced the legislation for a new regime of corporation tax that led to the phased introduction of the 12.5% rate of corporation tax from 1 January 2003 – down from 32%.

Figure 1 below shows what actually happened to FDI in Ireland before and after the cut to 12.5% corporation tax. In the period since the corporation tax was slashed there have been many quarters where there was a net outflow of FDI and the annual average total was an inflow of just €2.3bn. Before the rate was cut that annual average inflow was €17.7bn, and there was only one quarter of net outflow in FDI.

Figure 1

If FDI were measured relative to either the level of GDP or as a proportion of total investment, the before and after contrast would be even starker.
Clearly, low corporate tax rates did not leads to higher inflows of FDI, and are not responsible for it. But over a prolonged period the Irish economy has had a much greater share of world FDI inflows than would be suggested by the small size of the domestic economy.
Figure 2 below shows one of the main reasons why that is the case. It shows the percentage of the 20-24 year old population in EU countries who achieved at least an upper second level education. Ireland comes out top.

Figure 2

This also helps to explains why FDI investors don’t relish tax cuts. They aren’t fools. They know that low-tax economies do not have the resources to pay for investment in infrastructure, transport links and above all education- the factors that actually attract FDI. Low corporate taxes therefore do not attract, even deter FDI, as the London survey and the Irish experience demonstrate.

But George Osborne is a long-time fan of his fellow Thatcherites in Ireland. In fact the current Dublin government has far more fans in Downing Street than in Ireland, with its opinion poll rating dropping to 14% even before the latest resignations of nearly half the Cabinet. Determined to emulate the effects of Ireland’s Thatcherite economic policymaking, the Tory-led government has set out a course to lower corporate taxes. This will not attract FDI, but it does have the effect of allowing established companies to retain a greater proportion of their profits- and lowering wages and increasing capital’s ability to generate profits remains the essence of government policy. Reality shows there will be no increase in FDI to Britain due to lower corporate taxes.”

I would add one important clarification: the Irish FDI figures appear to be net data i.e. inflows less onward outflows.

It’s not what the Banking Commission thinks that matters

Banking Comments Off

Jan 242011

There’s been lots of coverage of the thoughts of Sir John Vickers who is chairing the UK’s Banking Commission.

He is rightly making noises about protecting the economy from investment banking – protection that is only possible by ring-fencing ordinary banking from such activity.

That’s the good news.

The bad news? This would have to get past Osborne – who is a young man with no future in politics after the next election but with ample opportunity to be bought out by banking once he’s out of office for good.

That’s the problem.

The charge sheet against Labour

ConDems, Economics, Labour 5 Responses »

Jan 242011

Larry Elliot summarises the charge sheet against Labour – and by implication Ed Balls – this morning. He says:

The charge sheet against Labour is a lengthy one: it boasted about abolishing boom and bust when it hadn’t; it over spent and over borrowed; it gave the City far too much freedom while neglecting manufacturing; it built an economy that was far too dependent on the willingness of individuals to amass personal debt and for financiers to take risks with other people’s money.

And it’s true – to the extent, for example, that the Keynesian maxim of saving should have been in place from 2005 onwards.

But remember it’s also true that Cameron and Osborne argued for less regulation of banks and credit and committed to all of Labour’s spending plans until quite late in the last parliament. And Osborne promoted Ireland as the model for our economy. He wanted us to be a tax haven! We would have been so much worse off under them.

And the evidence that we will be so much worse off is mounting. Household spending is falling. Business failure is increasing. GDP will fall today – and with it the prospect of double dip recession becomes very real – with no options left in the bankrupt policy book of the ConDems to deal with it.

Sure Labour got things wrong – like all politicians too influenced by neoliberal economics for too long. The difference is they may be willing to learn from their mistakes.

And if that’s true it is a massive difference.

And it’s one that the electorate will notice. Because like it or not they felt good under Labour. And they sure as heck aren’t going to under this government. And that’s going to be very. very telling. Especially when they won’t have the comfort of the NHS to pick up the pieces by the time the Conservatives have finished with it.

Next, the opposition needs to expose the fact that Cameron and Osborne do not have a Plan B if the economy heads back towards recession. Back in the Autumn, the chancellor indicated that his Plan B, should the fiscal tightening prove too much for the economy to bear, would be a resumption of the Bank of England’s quantitative easing programme. The creation of electronic money through buying gilts is, however, no longer on the agenda due to the repeated over-shooting of the government’sinflation target. Far from thinking about easing monetary policy, the Bank is now being pressed by some in the City to raise interest rates. Should it bow to that pressure, the only macro-economic tool left to Osborne would be to slow the pace of fiscal retrenchment in the Budget, which would be seized upon by Balls as evidence that Labour had been right all along.

The shadow chancellor was closely involved in Brown’s decision to grant independence to the Bank, and should have a long think about why Threadneedle Street was initially unable to curb the UK’s debt-driven boom, was too slow in its response to the slump of 2008 and is now in danger of losing its anti-inflationary credibility.

In reality, the one macro-economic instrument currently available to UK policymakers is a fall in the exchange rate, which would help exports but push inflation even higher through its impact on imports. To the extent that the coalition has a strategy for rebalancing the economy, it is the familiar British model of allowing the currency to do the work. Plans for a Green Investment Bank have been scaled back as a result of spending restraint, while lending to businesses – despite pressure on the banks from Cable – continues to contract.

The challenge for Labour is not just to come up with proposals for, say, a new national investment bank or to provide state support for environmental technologies – useful though both would be. It also has to come up with an overall critique of the economy in which those individual policies can sit. This should be based on three principles. The first is that there is an in-built tendency for manufacturing to be weak and the City to be strong. Left to its own devices, the economy will tend to be unbalanced. Second, the biggest mistakes Labour made in power resulted from intervening too little rather than too much. Finally, we are not all this in together, and when it comes to choosing between the bankers with their multimillion-pound bonuses and the young unemployed, between VAT for the many and tax havens for the few, Labour knows which side it is on.

Tax havens: what we’re asking for is transparency and accountability

Secrecy jurisdictions, Tax avoidance, Tax Havens, Tax justice 3 Responses »

Jan 242011

I note this morning that Dan Mitchell of the far-right US Center for Freedom and Prosperity has a response to yesterday’s report in the Sunday Mail on tax haven subsidiaries of major UK companies on Forbes. It would be amusing if it did not reveal so much about the thinking of so many who promote tax haven abuse.

Mitchell says of the report:

This [report] is quite akin to the propaganda issued by American statists.

I’m sure the Mail is amused to find itself described as statist! Mitchell really does make clear how extreme his position is by saying so!

But it gets worse when he says:

[C]ould it be the case that leftists on both sides of the Atlantic don’t like tax competition? But rather than openly argue for tax harmonization and other policies that would lead to higher taxes and a loss of fiscal sovereignty, they think they will have more luck expanding the power of government by employing demagoguery against the big, bad, multinational companies and small, low-tax jurisdictions.

To give these statists credit, they are being smart. Tax competition almost certainly is the biggest impediment that now exists to restrain big government. Greedy politicians understand that high taxes may simply lead the geese with the golden eggs to fly across the border. Indeed, competition between governments is surely the main reason that tax rates have dropped so dramatically in the past 30 years.

Let’s be clear: there is an extremely effective mechanism for determining the tax rates within a state. It is called democracy. When a small elite that control the financial services industry capture the legislatures of secrecy jurisdictions so that they can be used to assault the decisions taken by the electorates of democratic states on the appropriate proportions of tax to be paid out of their GDP and by the various elements that make up their eco9nomy then we’re not talking about tax competition, we’re talking about an assault on the democratic system.

And we’re talking about the shift of tax from capital onto labour – which is exactly, I am sure, what the Mail is worried about. It’s massive UK readership is made up, by and large, of people who work in employment on middle incomes in the UK. They’re not statist: far from it. But they know two things: the first if they’re paying the taxes the corporate world is avoiding. Secondly, at a gut, instinctive level, they realise that this assault on the state is going on and the power to address it through the ballot box is being undermined. And they don’t like either.

Maybe they perceive some other issues too. Like the fact that major corporates who use tax havens to hide profits have an unfair competitive advantage compared to those small businesses that Mail readers might create. And like the fact that as a result of the use of offshore big business is beginning to, on average, pay lower overall rates of tax than small business. And that the multinational corporation, when combining offshore and group accounts can create almost complete anonymity for what it does – which the growing enterprise in the UK cannot – in my opinion rightly – achieve. But that again tips the playing field against honest, small business.

So much for the freedom and prosperity Mitchell claims to promote. It’s as faux as the concern the the supposed UK Taxpayers’ Alliance has for the taxpayer. Mitchell supports freedom for his large sponsors (whoever they might be – he’s never said) – who if they’re corporates might use that freedom to hoard their cash away from their shareholders, government and productive use. The TPA likewise has no concern whatsoever for the taxpayer – unless they too are the large corporate and a wealthy elite.

So let’s be clear what these right wing groups promote. They promote anti-democratic monopoly abuse. This is not freedom or prosperity. What they seek is the right to exploit. No wonder the Mail does not like them – it’s instinct is that it is its readership that will be exploited. And their instinct is right.

And what’s the demand to tackle this abuse? Firstly, openness, accountability and honesty – that is information on record in tax havens. This is fundamental to the proper operation of markets – which those who propose secrecy seek to undermine. Second, we ask for country-by-country reporting by multinational corporations. That is a profit and loss account for each and every jurisdiction in which they trade so we know what they do, where. If, as the proponents of tax havens claim, they’re so useful why not tell us by how much? What’s the problem with that?

Lastly, yes – we do expect tax compliance. That is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. And yes we admit there’s a problem for tax havens here. The reality is that in most cases tax haven activity is offshore activity – and that by definition means it records transactions that actually take place elsewhere and not in the tax haven. And if the corporation does that those transactions can’t be tax compliant, also by definition. And we have a problem with that. As does the Sunday Mail.

But this isn’t a statist position. It’s about believing in democracy, markets and the availability of the information that is essential if they are to work properly, and yes, it’s about fair play – which has always meant holding large corporates and monopolies to account.

Isn’t it strange that the right claim to be for freedom and prosperity when promoting monopoly, ineffective markets and mechanisms that undermine the credibility of democratic decision making? How can that be? And isn’t it obvious in that case why tax justice is now so popular?