David Gauke MP, the Tory Exchequer Secretary, and a man for whom I have little regard (a feeling which I know is reciprocated) was speaking at the Oxford Centre for Business Taxation yesterday and said:
We are prioritising reform of Corporation Tax because it is the most growth impeding tax there is.
In contrast there are those who insist we increase Corporation tax and reduce the deficit on the backs of business.
As if “business” was an entity separate from society, distinct from employees, and irrelevant to growth.
The argument is made — I heard it last week from the trade unions in Northern Ireland — that cutting corporation tax favours the wealthy over the rest of society.
But of course the economics doesn't stack up.
We all know that higher business taxes feed through to a combination of prices, dividends, pensions, profits...and for an open economy like the UK, wages in particular.
Higher taxes on profits reduce the return to investment, leading to lower levels of investment. And a lower level of investment undermines productivity which ultimately feeds through to lower wages.
Ever increasing tax rates would simply serve to make the UK's business environment internationally uncompetitive....to the detriment of our private sector, and to the detriment of our wider society, rich and poor alike.
Cutting Corporation Tax encourages investment. As the Chancellor said last year, reducing the headline rate signals that we are committed to creating a competitive environment for business.
There's no other way to describe this but complete and utter nonsense. Unless of course you call it a lie - with a gratuitous insult for my work (he likes delivering them) for unions in Northern Ireland thrown in.
The explanation is very simple. It's that right now the world's corporations are sitting on an absolute mountain of cash. Martin Wolf notes it often in the FT. The FT recently noted it in a video cast. Paul Krugman did too the other day.
The reality is that there is not one iota of evidence that a) investment is being impeded by a shortage of cash as a result of tax paid by corporations b) changing tax rates will in any way encourage more investment when companies are already refusing to do it and are lending their cash to governments instead (how else do you think the deficits are funded?)
But despite this Gauke carries on saying that tax cuts are the way to encourage investment. Which is flagrantly not true, as the evidence shows.
So why does he promote tax cuts then? Because they make the rich richer. Precisely as the unions in Northern OIreland say. It's the only obvious explanation there is. And it's at the core of his government's philosophy.
Gauke like me believes there is tax incidence - corporation tax is paid by someone else than a company at the end of the day. He however hides behind the convenient claims of the Oxford Centre for Business Taxation that the charge falls on labour (an argument contrived on the basis of exceptionally dubious and bluntly biased analysis that only looked at the consequence of corporation tax increases and not decreases - which is what Gauke is delivering). The reality is as I say - that tax cuts deliver wealth to shareholders and no one else. Not once, not ever, has a manager turned round and said "we've had a corporate tax cut - have a pay rise". Nor, candidly, have they ever turned round and said "we've had a tax cut - let's invest more" - indeed the evidence is that higher taxes encourage investment and lower ones don't.
And that blows his whole policy apart.
Which is not surprising as his whole policy is about increasing the wealth gap in the UK and nothing else.
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“Not once, not ever, has a manager turned round and said “we’ve had a corporate tax cut — have a pay rise”. Yet this is precisely what businesses should do en masse, in order to boost economic demand. But the fallacy of composition dictates that the individual firm must cut costs in order to boost profits. So the accumulation of financial capital with nowhere to invest continues until what?
Defending a position by starting your professional argument with the words “We all know that…” is poor. He might as well have started with “my dad says…”.
I may quote that in future!
Cutting corporation tax to encourage foreign businesses to invest here while at the same time neglecting our home grown industries leaves us more exposed to the vagaries of international finance capital. Yes, these companies create jobs and pay taxes here (as little as they can get away with at any rate) but the bulk of the profit simply leaves the country.
As much as investment flows into the country, just as much flows straight out again. It’s a zero sum game.
“indeed the evidence is that higher taxes encourage investment and lower ones don’t.”
I have no doubt that this is totally correct. However, could you explain how this is the case?
With higher tax rates tax reliefs have more value and so influence behaviour more e.g. by encouraging investment to get tax relief
At low rates who cares? Take the money and run…..
Do you not believe that tax relief should be cut, though? At £8 billion a year, it seems excessive to grant this to people who don’t really need it.
The money needed to be raised by the recently proposed “granny tax” was estimated to be around £1.7 billlion.
While I maintain that the government can easily afford to pay for what it wants and that I disagree with “robbing Peter to help Paul”, surely a cut from tax relief to put the necessary money towards this would not really be a bad thing?
And wasn’t the last cut in corporation tax worth around £24 billion? Says a lot for this government’s priorities.
It is quite scandalous that in the fifth largest economy (I hope that is our correct position in the world ranking) the UK Government has to subsidise wages by the use of tax credits , housing benefits etc. All employers should pay an adequate living wage to their employees and not expect the Government to use taxpayer funds to effectively boost corporate profits.
That is part of the problem; inadequate wages leading to no demand. That is part of the reason that corporations are literally sitting on mountains of cash, that there is precious little demand in the economy, so they feel that it is not worth investing.
If the government, in a fit of decisive thinking, decided to set the minimum wage to £10 an hour, people would have more money to spend on goods and services, the government will be receiving more in taxation and, almost certainly, more jobs would be created as a result. Yes, we’ll have the usual gripes about higher wages pushing up costs, but surely that will be offset by the increase in business coming their way.
As a useful by-product, if the wage increase resulted in higher inflation, this would help dampen down the value of debt. I still maintain that the inflation we have at the moment is fairly low. It is only because wages have been suppressed to such low levels is the reason why it is having such an effect. 5% inflation is actually quite low.
Of course, any measures such as this will serve to help the working man and woman, so they won’t be entertained in a million years.
This speech should be considered an obscenity by supporters of the government line that we’re all in this together and all should make sacrifices. Because it couldn’t be clearer that we’re all in this together doesn’t apply to everyone.
I’d never even heard of David Gauke. But it is quite clear he is Public Enemy No.3 (2 being Osborne and 1 Cameron). Please can you post a picture of him? It is wrong that a man who is so much a part of the problem should be so obscure.
It is wrong that he should be able to turn up at an entity claiming to be part of Oxford University & spout this kind of crap unchallenged by the student body.
“With higher tax rates tax reliefs have more value and so influence behaviour more e.g. by encouraging investment to get tax relief”
You’re criticising Gauke for economic fallacies yet you seriously believe that higher tax rates encourage investment because the tax relief is worth more?!
A recent reprot from the City argued just that
And of course it’s true – it encourages real investment by manufacturing whereas low tax per se encourages speculation
You may have a point about larger companies RM. But it is not true for small and medium sized companies
and the self employed .
Here where the effective tax rates from all kinds of taxes is high – Corporation Tax , Employers NI, Class 4 NI , (and VAT for retail businesses) then a reduction in taxes would have a marked beneficial effect on employment and improve the standard of living of many. I know of many self employed/ small company properietors who work for less than the minimum wage.
I think you have a point there
BUT attempts to reform this by Brown backfired