2011 May » Tax Research UK

MPs suggest cutting Northern Ireland’s corporate tax rate – in the face of all the evidence

Corporation Tax, Economics, Ireland, TUC 4 Responses »

May 242011

The House of Commons Northern Ireland has just announced that:

There is a convincing case for reducing the corporation tax rate in Northern Ireland, not least so it can better compete with the Republic of Ireland, concludes the Northern Ireland Affairs Committee in a report published today.

The Committee supports the principle of devolving to the Northern Ireland Executive the decision over whether or not to amend the rate of corporation tax, and believes this would assist the indigenous private sector to expand, innovate and employ more staff.

The Committee’s report uses 12.5% as a benchmark for the lower rate of corporation tax, but suggests that on the basis that the decision is devolved to the Northern Ireland executive it may, in due course, choose a lower rate.

I am especially annoyed that they say:

The evidence we received from businesses, trade unions, economists and politicians formed a convincing argument for a lower rate for Northern Ireland, which could help to unlock the potential of its private sector by boosting growth, innovation and exports.

Not telling the truth in your press release does not help your case: I wrote the trade union submission on this: it was vehemently opposed to this change, for very good reasons. The report I wrote for the TUC and Irish Congress of Trade Unions, entitled “Pot of Gold or Fool’s Gold” sets out my arguments in full. We were by no means the only opponents to this reform. That I know of no union supported it, so the press release is blatantly wrong.

But the Committee’s naivete suggests all the reasons why this reform will never happen. They say in their press release (no link as yet):

Low corporation tax is not a panacea for all Northern Ireland’s economic ills, warns the Committee.

They clearly listend to some of the evidence then. They continued:

[T]here are considerable implementation issues: direct comparisons with the Republic of Ireland and its experience with 12.5% are difficult because the UK and Irish tax systems are different.

They’re not just different, they might as well be from different from planets. Even after the UK has a territorial tax system (to be applied, I wonder to Northern Ireland alone in the case of an NI tax rate meaning dual tax rates for UK resident companies?) there are other problems, like Ireland’s lax enquiries regime, it’s disregard for transfer pricing issues, and lax approach to royalties and such matters. Northern Ireland cannot replicate these so it cannot beat the Republic on tax. Nor should it want to. So this policy will always fail.

Then there’s the need for:

the UK Government .. to satisfy the criteria laid down in the Azores judgment for the tax reduction to satisfy EU rules on state aids.

Constitutionally that looks nigh on impossible. Westminster specifically can’t decide on this issue and if it does then it will be illegal under EU law. And yet this report is clear indication that Westminster wants to decide on the issue – a faux pas if ever I saw one.

Moving on:

This means the decision to vary the rate must be devolved to Northern Ireland, the receipts for corporation tax raised in Northern Ireland would be kept in Northern Ireland, but at the same time the block grant would be reduced by the same amount as the initial corporation tax receipts.

The Committee were surprised to discover HM Treasury do not know how much corporation tax is raised in Northern Ireland. It is important that the Northern Ireland Executive has as much information as possible before deciding if, and how, it wishes to lower the rate, and at least a better idea of the amount of financial risk they are taking on. Furthermore, the benefits of lowering corporation tax must not be outweighed by the costs to businesses and HMRC, an issue also identified by previous Commissions into devolving corporation tax to Scotland and Wales.

So, the block grant has to be reduced but no one has idea by how much. That’s not going to work, is it? And even if tried the EU could challenge it – creating massive uncertainty.

And as the Charterd Institute of Tax have said – the additional costs to business of doing this will be massive – which is why they do not want it. All goods and services flowing to Northern Ireland under common ownerhsip will be subject to tranbsfer pricing rules. And the annti-avoiudance rules will be massive.

Then there’s the fact that under EU law this lower tax rate could not apply to finance companies or to companies supplying intra-group activities such as call centres, or group distribution, or the like. And it then becomes clear almost no new business could benefit.

So who would benefit? Well the accountants and lawyers will. And the Taxpayers’ Alliance must be laughing themselves silly this morning that they have conned these MPs. Will anyone else win? Not a chance. This is a nightmare of a policy and the MPs who have promoted it are foolish to do so.

The economic challenge for the next decade

Economics 4 Responses »

May 242011

I enjoyed the chance to call in at the meeting of the New Political Economy Network meeting whilst on my way back from Oslo last evening and have a drink afterwards with a few people.

Discussion over that drink focussed on what we think might happen with the economy.

Howard Reed and I agreed stagnation is the most likely outcome without an external shock at this point of time. There is an absolute shortage of demand in the economy and nothing will change that unless the government spends more. As it isn’t going to do that so stagnation is inevitable.

This does, however, presume that there are no external shocks. Two sources are likely. The first is that the government tries to create another boom in asset prices. They can’t do this in housing this time; lending ratios will not let it happen. The differential between wages and prices is also too great for another boom to take place. There is no sign of another dot-com bubble on the horizon, even if LinkedIn floated itself at absurd price. Commodities are volatile, but Glencore has probably indicated that these prices have peaked by selling at this point in the cycle. The stock market does remain absurdly high though as a result of enforced saving through pensions feeding into the market meaning it is artificially inflated. Maybe it is this market that is the focus of the Cameron strategy; creating a mini-boom to keep the City going and so artificially create a little confidence. If so, it will fail: with real demand stagnant there is no basis for current stock market prices. A further decline is inevitable at some time. It just depends on whether it comes as a shock, or as an adjustment over a period of time.

More likely in my opinion are two alternative sources of shock from default. One is, of course, the exit of one or more of the Euro countries. Greece is the most likely, but the prospect that several might leave in a short period of time is high. This will have massive destabilising consequences for the financial markets, banks, central banks, and our ability to withstand the chaos that will result is questionable. It is not that such reorganisation is, in itself, undesirable: it is very obvious that these countries cannot repay the debt they owe and that as a consequence a rescheduling is inevitable. It is only pretence that this is not taking place now. But if it happens in a disorganised fashion we could face another period like October 2008.

My other concern is that it is still possible that a significant number of states and municipalities in the USA could default on their debt. Some forty states are technically bankrupt in the USA at this point of time, and 70% of their debt is owned by retired people in that country. If there is a default and those people lose then there will be chaos in the world’s largest market. That has enormous potential for disruption.

There are, of course, ways of managing this. Most obviously, the Eurozone will need to print money to overcome the crisis, both the new currency for those who leave its zone, and Euros themselves to keep the European Central Bank solvent. Yes we will have inflation but that is better than the complete financial meltdown. And in the US there has to be a massive change of political mindset: it is not possible to provide a modern state and all the people demand of it without paying for it through tax.

Underpinning this all is a desire on the part of far too many people to hang on to old ideas.

The idea that tax is a bad thing.

The idea that we can have monetary union without fiscal union.

The idea that the market can deliver solutions when it clearly cannot. The idea that savings can pay for old age when it is openly investments that can, and savings and investment are not the same thing.

The idea that there is any connection between the stock market and its valuation and real prospects in the economy.

All these are absurdly misplaced notions in the 21st-century, they still have popular appeal. Keynes was right when he said that most politicians are the slave of defunct economists. The New Political Economy Network is seeking to create a new economics. We need it. In the meantime the old one is placing us at enormous risk. The hope has to be that we can transition from old to new in an orderly fashion.

That is the challenge for the next decade.

If the building industry is collapsing GDP will follow – and it’s Osborne’s choice

Economics 1 Response »

May 242011

As the FT notes:

The value of work awarded to UK construction companies crashed during the past year, raising concerns that the impact of government spending cuts will be far worse than previously feared.

Several things come immediately to mind. First of all I note that the building industry claimed that the fall in construction activity that had such an impact upon GDP figures in the last quarter was overstated. Clearly that was not true: the fall is real.

Second, as is now very apparent, decision by the Conservative government to basically withdraw funding for investment by the state is having an immediate impact upon well-being. We will pay an enormous long-term price for this. Thatcher’s legacy was a massive underinvestment in the necessary resources required to deliver state services. Cameron is clearly doing the same. And yet we cannot do without schools, roads, hospitals, transport infrastructure, and soon. We are also abandoning large part of coastline, and increasing flood risk. All this will be the Cameron legacy. And in the meantime, people lose their jobs and demand declines in the economy, and recession looms on the horizon.

Third, expect stagnation at best, and recession more likely, when the next round of GDP figures come out.

Electorates aren’t being perverse – they’re saying no to neoliberalism

Economics 3 Responses »

May 232011

In Spain the supposedly left of centre government has been punished by the electorate.

In Germany it’s right of Centre Merkel who is being punished.

In both cases the electorate is not being perverse – they’re coming to the same conclusion. Governing parties across Europe are saying much the same thing: that we must cut government spending and if we do then for reasons that no one can rationally explain this act resulting in vast numbers of people becoming unemployed will massively increase confidence and the private sector will jump for joy and lead us to nirvanna.

Except as Paul Krugman notes, there is no evidence this perverse lohgicv works.

There’s ample evience it does not.

And so governing parties are being punished.

As will there succe

We need a better capitalism

Economics, Labour 3 Responses »

May 232011

This was said this weekend:

We need a different kind of economy, fairer to the lowest paid and demanding greater responsibility from the higher paid; broader-based, less reliant on financial services. A better capitalism.

The speaker was right.

The speaker was Ed Miliband.

As Jackie Ashley says this morning:

If that isn’t what Labour is for in 2011, then I don’t know what is. The risk is twofold. First, the media will savage any plans for higher taxes, even for the super-rich. This is a default position in post-Thatcher Britain that Labour just has to live with. Second, it needs an honest and harsh review of what Labour didn’t achieve when it was in government.

The first is a matter of making the case: that’s doable.

Miliband is facing up to the second. That’s enormously welcome.

Now we have to ensure we’re clear what that better capitalism is.

I’m in Norway this morning. I’ll be in London tonight – hopefully discussing just how we deliver the promise of a better capitalism.

One that is fairer to the poor and demands more responsibility of those who should bear it.

One that reduces the role of finance.

One that delivers the promise of a better, more sustainable way of living in the UK that will help people in this country fulfil their potential – which I believe to be the goal of macro economic policy.

Wrong choice – war in Libya more important than good schools

Conservatives 2 Responses »

May 232011

As the Guardian reports, the cost of the war in Libya is likely to be at least £1 billion.

But schools can be allowed to go to the wall.

Which is great in a town like the one where I live – where the nearest alternatives are 10 or more miles away.

This government is not just bad, it’s mad.

Message to Cable: if you don’t believe the state can get us out of this mess quit now and let those who do get on and solve it

ConDems, Economics, Uncategorized 7 Responses »

May 212011

Vince Cable has given an interview to the Guardian this morning. Some of it seems to be Vince trying to reclaim his mantle of old. I fear that’s tarnished.

This is why:

He predicted the impact on people’s lives will not come primarily from government spending cuts, but the squeeze in living standards caused by world prices and a 20% devaluation of sterling against other major currencies.

Oh come on! So it’s all someone else’ fault now he’s in office. That is absurd. If there’s one over-riding characteristic that the Cabinet of which he’s a member shares it is their absolute lack of willing to give any indication of why they wanted to be in office.

Cameron accepts responsibility for nothing.

Lansley wants to strip the Dept of Health of its responsibility for health.

Hammond wants to devolve trains to local government.

And now Cable says if people are going to badly off it’s anyone’s fault but his – and there’s nothing he could do about it.

That’s gross irresponsibility.

It’s also a great line of attack. If these people really don’t want to be in office because they don’t think they can do any thing when they’ve got it why on earth did they want it – except for the ego trip? The moral is simple: kick them out.

Of course there are some things government can’t do a lot about. The incompetence of business and its refusal to invest. The refusal of bankers to bank. The lack of demand in the economy. The fact that the exchange rate was over valued and no isn’t. They can’t stop these things. I’m not saying they can. But dammit, it’s their job to manage the consequence of these things – not just shrug their shoulders as Cale is doing and say ‘bad luck’. Very politely – that’s nonsense.

The Condems did not need to increase VAT to increase inflation and decrease demand.

They don’t need to make hundreds of thousands redundant to fuel fear and keep the savings ratio high.

They don’t need to let bankers carry on, unregulated.

They could – as I have suggested – require that pension funds invest 25% of their contributions in new employment creating activity.

They could promote a Green New Deal.

It’s utter nonsense that the cuts won’t impact people. It’s utter nonsense that we just sit back and take the crap that might flow our way.

The state has a role.

A powerful role.

And if Cable doesn;t know it (and he clearly doesn’t) then he needs to retire soon and let those who believe that the state is an essential component in getting us out of this mess get on and do the job.

When will the Isle of Man admit I was right on VAT all along because they now admit the UK is still subsidising them to be a tax haven?

Isle of Man, Uncategorized 16 Responses »

May 202011

Isle of Man Today has reported:

Chief Minister Tony Brown MHK revealed in an exclusive interview with this week’s Isle of Man Examiner that the UK had a clear intention to revise the agreement again to ensure that the island received no more VAT revenue than we would collect if we were independent.

He said if the change was made, it would result in a ‘substantial’ cut in revenue.

Now that’s odd.

Before the October 2009 revision to this agreement the Isle of Man said there was no subsidy in it. I argued there was – to the tune of £230 million a year.

When the agreement was revised I was (probably rightly) accused of having precipitated the removal of between £90 million and £140 million or so of that subsidy. My response was to make clear that the change had not removed all the subsidy. Of course, I was criticised again.

Then I suggested, I think rightly, that the Isle of Man was trying to manipulate the data to reclaim the subsidy. And of course I was criticised again, heavily.

And now the Chief Minister has admitted I was right all along, yet again, and what is more, the UK has the right to act on that logic and remove the remaining subsidy from the Isle of Man.

In fact I’d argue, of course, that the UK not only has that right, but has a duty to act to end this subsidy once and for all. The idea that the UK subsidises the Isle of Man to be a tax haven is absurd.

But will Tony Brown apologise? I won’t hold my breath.

Tax havens on Resonance FM today at midday and Sunday at 11pm

Secrecy jurisdictions, Tax Havens 1 Response »

May 202011

I guess most people won’t have heard of Resonance FM. Thankfully it’s available on line, here. It’s an eclectic station, I admit, but today at 12 noon they have a programme on tax havens. Nick Shaxson is one half of the programme and I’m the other half.

It’s repeated Sunday 22nd May at 11pm.

Resonance FM is here