2011 August » Tax Research UK

The road to ruin is paved with balanced budgets

Economics, Europe, Uncategorized 16 Responses »

Aug 172011

It is quite extraordinary that one of the key proposals to come out of yesterday’s meeting between Merkel and Sarkozy was a demand that Eurozone countries out balanced budget legislation in place by 2012.

Balanced budgets are, of course, designed to constrain government activity. They’re not an economic policy: they’re a right wing political policy that says a government may not borrow to fund its activities.

So, unlike business, which borrows extensively to fund investment, and unlike households, the vast majority of whom could not ever acquire a home without borrowing, government is not allowed to borrow under these proposals even if it were appropriate for the government to do so to fund programmes that can supply considerable future benefit to the people of its country.

So, hospitals must be paid for up front. And so must schools. And roads. And all other infrastructure.

More than that, if the market fails to supply a enough demand to create full employment (as is the case now) then such a move would ban the government form intervening to create demand even though it is known that the only way to get out of the resulting recessionary downward spiral is for the governmentto intervene and stimulate demand until recovery occurs – when rightly it should pull back and repay its debts. In effect these laws would outlaw the only proven mechanism for defeating recession as created by Keynes in the 1930s.

To describe the measures as economic insanity is in the circumstances being kind to them.

It’s easy to see the logic behind such proposals though. All hospitals must be private in future if this is to happen; and so will all road building be privately funded. Education will now be under the control of the private sector and run for its benefit. Whilst if there are unemployed, so what? It keeps wage rates down for the benefit of business.

This is law would then be designed for three purposes. The first is to make sure that privatisation across Europe is guaranteed. The second is to advance the interests of the banks who will profit enormously from that process because there is so much more money to be made by funding infrastructure privately than through government (which in itself is the clearest measure of the inefficiency of the proposal and the massive likely cost to the taxpayer of doing it) and finally it’s designed to shift yet more of the resources of Europe to the rich.

Which is why it has to be vehemently opposed.

Financial Transaction Taxes and corporate tax harmonisation rates – now we’re talking

Corporation Tax, Europe, Transaction Taxes 24 Responses »

Aug 172011

The reality that banks are out of control and that you can’t run a common market without some degree of commonality in tax has finally dawned on the EU.

Merkel and Sarkozy moved towards a financial transaction tax on EU banks yesterday, which is a welcome and overdue move that needs replication way beyond the Eurozone if the feral banking economy is to be brought under control.

And there are also clear signs that corporation tax harmonisation is on the agenda – which makes a complete mockery of moves in the UK by Northern Ireland and Scotland to move against that necessary pre-requsitie for a level playing field for business.

Both moves are in the right direction. Of course the devil will be in the detail. But these are obviously correct initiatives at this time.

As much as the move being made towards balanced budgets, to which i will turn next on this blog, is the wrong one.

It’s goodbye Switzerland as the profits from tax evasion disappear

Banking, Ethics, Secrecy jurisdictions, Switzerland, Tax evasion 2 Responses »

Aug 172011

As the Wall Street Journal notes this morning:

It’s time to move on to other shores for European banks serving wealthy clients: Switzerland will remain famous for its cheese but not for its banking secret anymore.

Monday ABN Amro, the Netherlands’ third biggest bank, announced the decision to sell its private banking operations in Switzerland to local operator Union Bancaire Privee.

The move can be seen as the start of a migration of smaller non-Swiss banks from a country which was the perfect place for tax evaders for decades.

And why are they doing that? The WSJ says:

A recent Swiss-German tax deal is expected to increase the sector’s costs by around CHF500 million, putting additional strain on many smaller and medium-sized banks in Switzerland and operations of non-Swiss banks as well.

The tax-deal, as well as the strong Swiss franc against the euro, bites into profits because serving wealthy customers is expensive. It looks more profitable to invest money in other places.

And as they note:

The timing for ABN Amro’s move wasn’t bad at all. Due to increasing costs in a still highly competitive market–at least for now–potential buyers are willing to pay reasonable prices to reach scale. Industry observers expect similar deals in the future.

Let’s put that another way: these banks have always invested in tax evasion (as they continue toi do in tax havens around the world). And it’s a cold, calculated decision to do so. As I and the Tax Justice Network have always said.

A greater admission of this fact could not be found.

I think Mervyn is saying “it’s over to you George”

Conservatives, Economics 4 Responses »

Aug 162011

I liked this paragraph from Mervyn King’s letter to George Osborne on inflation, today. He said:

The big risks currently facing the UK economy come from the rest of the world. In responding to those risks, or indeed to other risks in either direction, the MPC can use Bank Rate or asset purchases to achieve its objective. There is, however, a limit to what monetary policy can do when large real adjustments are required. And it cannot influence inflation over the next few months.But it can ensure that the adjustment takes place against a backdrop of low inflation in the medium term. In so doing, monetary policy will make the best contribution it can to high and stable levels of growth and employment.

I think you can fairly say that’s as clear a message as he can send which says “I’ve done all I can, now it

Unite Scotland – Economic Brief – Corporation Tax

Corporation Tax, Scotland, TUC 3 Responses »

Aug 162011

Unite published the following briefing written by me on corporation reform tax in Scotland this afternoon:

What is corporation tax?

Corporation tax is the tax due on a company’s profits.

What’s the big deal with corporation tax now?

Corporation tax is right at the forefront of economic debate at present, especially in Scotland. The Scottish Government is to argue for powers to be given to Scotland to change its corporation tax rate so that it does not have to charge the same rate as the rest of the United Kingdom.

Northern Ireland is also arguing for the right to set its own corporation tax rate. Northern Ireland looks like it will reduce its corporation tax rate to 12.5% for all companies. The current rate in the UK as a whole is 26% of large companies who earn more than £1.5 million profit year and 20% small companies. Northern Ireland is set in this rate because the Republic of Ireland has a 12.5% corporation tax rate.

It looks as though the Scottish Government might want to match any tax rate that Northern Ireland sets, in which case Scotland could have a 12.5% corporation tax rate.

Is this good news for Scotland?

It is claimed by those supporting reductions in corporation tax rates that these cuts will have beneficial effects on the economy. The argument is that one or all of these things happens:

Existing businesses in the country have their tax rate cut so they have more money left to invest in new jobs;
Because the tax rate has been reduced the return from running a company is increased and so more new businesses are created, which in turn means more jobs;
Reduced tax rates encourage foreign companies to relocate to the country because they can make a bigger, overall, rate of profit as a result – this brings in new investment, and that in turn creates new jobs.

No one, least of all a trade union, wants to turn down the opportunity of new jobs. If these promises could be delivered then such a change might be good news for Scotland.

Can the promise of new jobs be delivered?

This is where the problems begin to arise, and there are lots of problems:

There is no guarantee that existing companies in Scotland will invest their increased after-tax profits in new jobs – they might just pay them out to their shareholders. The tax increase would in that case simply make some of the better off people in Scotland better off still.
While there is some undoubted evidence of a link between lower corporation tax rates and higher rates of employment, the relationship between the two is very weak indeed. Research has shown that only 7% of additional employment can be explained by low corporation tax rates in the countries that have them. In that case there are many better, and more cost-effective, ways of creating new jobs. Grants remain one such option.
It is undoubtedly true that for a while the Republic of Ireland appeared to benefit from having low corporation tax rates that increased employment. This process has, however, come to an end. The Irish economy has collapsed, unemployment has risen, people are emigrating, major employers have left including companies like Dell computers, and hardship has followed on. If the model did work – and that is highly questionable – it doesn’t any more.

But isn’t it worth a try?

There is always an argument for taking a risk when there is no cost in doing so. Unfortunately, if Scotland cut its corporation tax rate there would be a considerable cost, no one is quite sure what it would be, as yet, but there are complex European rules that would have to be adhered to.

This would mean that the amount of money granted to Scotland by the Westminster Government would have to be cut by the same amount as the corporation tax cut. No one has ever calculated precisely the total value of corporation taxes paid by Scottish companies, and no one is sure how they could precisely calculate this figure. But, it is presently estimated that Northern Ireland will lose £300 million a year if it cuts its corporation tax rate. It is safe to assume that the cost to Scotland would be much more, and could run into billions of pounds a year.

But if the right number of jobs were created wouldn’t it still pay to take that risk?

We can only decide that by looking at the evidence. The best, and most optimistic, evidence currently available comes from those promoting this reform in Northern Ireland. They have suggested that losing a grant of £272 million a year from Westminster will generate 4500 new jobs a year in Northern Ireland. But note the cost: that’s almost £61,000 a job. Average pay in Northern Ireland is about £22,000 a year.

A generous estimate of the amount of tax that each new job will generate is £8,000 a year. Northern Ireland is allowed to claim credit for that additional tax paid, but it will still be losing £53,000 a year on the jobs created in the first year.

Now admittedly, presuming those jobs continue to the second year the loss in that year will only be £45,000 per job created. But on this logic (which those promoting this idea have accepted as correct) and assuming no jobs are lost it will take up to 15 years for this cut in corporation tax to be paid back in terms of extra revenue earned from new jobs created in Northern Ireland. Put in that context this is a risk not worth taking, and a cost that’s unreasonable for each job created.

So is there any remaining reason to cut corporation tax in Scotland?

Not that we can find. But we can find lots of reasons why Scotland should not cut its corporation tax rate. For example, as the UK’s Chartered Institute of Tax has pointed out, any such change would massively increase the administrative hassle for companies which were trading in both England and Scotland. In fact, the additional costs of proving that a business has allocated their profits correctly between the two nations could more than offset any tax saved.

And on top of that England would have to pass laws to prevent profits being artificially relocated to Scotland. This would make it harder for companies to relocate to Scotland. We might actually see obstacles being put in the way of investment in Scotland just because we have a lower corporation tax rate. That would be a particularly perverse outcome of any such change.

Finally, and most importantly, there is the issue of social justice. The fact is that, as has been proven time and again, societies work best when they are equal. The most likely outcome of cutting corporation tax rates in Scotland is that the richest in our community will get richer, whilst the rest of us will become worse off. Scotland will be worse off because of the cut in services that would result from the reduction of the grant from Westminster. Inequality in Scotland will, in all probability, rise. This is an outcome that we can’t accept as being just, fair or good for Scotland as a whole.

This special economic brief has been produced in cooperation with Unite Scotland by tax expert Richard Murphy, in response to the launch of the Scottish Government’sCorporation Tax Discussion Paper, ‘Options for Reform’ .

This is not the case of one rotten apple, or even one rotten company. This is big corporate culture

Ethics, Secrecy jurisdictions, Tax avoidance, Tax Havens, Uncategorized 3 Responses »

Aug 162011

Evidence released today seems to provide the clearest possible evidence that News International has been far from truthful about the hacking scandal it has been involved in.

The claim that this was a case of a ‘rotten apple’ or two – the perennial excuse of those dismissing corporate wrong doing – is blown asunder if the new evidence is true (and there seems little reason to doubt it).

But let’s be clear, there’s nothing surprising about large corporates misrepresenting the truth.

They do so every time they claim to operate a business from a tax haven. That’s always a sham at best. Nipping in to Jersey, Cayman, Zug or wherever to sign pre-agreed board minutes does not represent operating a business from these places: it is just a deliberate charade designed to claim that this is the case. Hiring local lawyers to operate a subsidiary for you, and then claiming that they had power to make local decisions when it is abundantly obvious this cannot be true, is just as much a sham.

And yet this practice is to be found in large numbers of major corporations. If the directors of those companies can believe in this charade there are two things to say about them. The first is that they are willing to turn a blind eye to any abuse if it will increase their profits. The second is that they live in a world so far removed from reality that any defence is believed by them to be plausible.

Don’t think what has happened at News International is unusual in that case: isn’t. This is the large corporate world laid bare.

And it is this sort of abuse that Cameron has to stop now, and very clearly and openly attack, or his credibility in claiming that reform of British society is at the heart of his agenda is shattered.

The small business tax gap is huge – according to a small business accountant

Accounting, Companies House, Conservatives, Ethics, Tax evasion 4 Responses »

Aug 162011

This comment on the blog today is worth repeating:

Well I am a big supporter of smaller businesses, but some proprietors just refuse to pay their tax, even though the profit have been artificially reduced. Usually these people have a very hard attitude towards crime, benefits and the poor. How do I know this? Well, Richard isn’t the only qualified accountant that wants social justice. (Note that it isn’t me that has reduced the profits!).

As is this response:

@ Martin

Even more reason to increase staffing at HM Revenue and Customs – one of Richard’s favourite topics!
Some (business) people (after fiddling their books to show artificially low profits) want their dust bins emptying, a health service, the fire brigade and police without contributing towards them: and then make hypocritical and derogatory comments about the performance of these services.

Stop this by making their accountants “shop” them which in turn will help the HMRC to fine them. Regularly and heavily.

I am sure the accountant who wrote is absolutely right: there are large numbers of corrupt small businesses in the UK. It’s why the tax gap is much bigger than HMRC admit. It’s also why David Gauke is grossly negligent to ignore my warnings on the number of small companies being struck from the UK register of companies each year – none of whom he says could possibly owe any tax, a claim which puts him firmly in box entitled ‘naive, gullible and incompetent’ unless the one marked ‘wilfully turning a blind eye’ applies instead. I’ll publish more on this negligence on his part soon.

But now we’re having a discussion on social responsibility will Gauke do anything about it? Don’t bet on it.

How much has Mode 4 got to answer for in the UK economy?

Economics Comments Off

Aug 162011

I’m no expert on the subject of Mode 4 rules on employment and temporary migration, but it’s been suggested that the issue is much more prevalent than I have realised and is being used to undermine UK employment conditions, pay and opportunities for work.

There is a long comment from Gary Burgess on the issue here for those with interest in the subject, and I think due to the extent of the research offered in the comment that I should draw attention to the issue.

Further informed comment is welcome – but this issue is contentious so please note the comments policy of this blog before ranting.

Scotland starts move towards beggar they neighbour tax policy from which only large companies will win

Corporation Tax, Scotland 8 Responses »

Aug 162011

As the BBC in Scotland have reported:

The Scottish government is to unveil its plans on taking control of corporation tax.

Finance Secretary John Swinney will confirm a move to lower the headline rate of business tax and to give tax breaks to small firms.

Excluding north sea oil, corporation tax generated £2.6bn in revenue for Scotland in the year to 2010.

But Mr Swinney sees making a reduction in the charge as a way to add fresh revenue and attract new businesses.

Mr Swinney is a sadly deluded man.

I have explained why this policy would not work for Northern Ireland, here. In Northern Ireland the argument for it is that the land border with the Republic justifies it. In Scotland there is no justification for it at all bar the economic madness of supply side neoliberalism that says if only government got out of the way then everything would be rosy in the world, the economy would floiuyrish and the rivers would flow with milk and the land would be awash with honey.

Except there’s no evidence for that. And wise people know it. As the BBC also note:

[T]he Institute of Chartered Accountants in Scotland said that changes to the rate of corporation tax - the main rate currently stands at 26% – could leave the government short of money to fund public services.

And as PWC warned recently:

The implications of cutting Scotland’s rate of corporation tax are “highly complex”, PricewaterhouseCoopers (PwC) has warned.

PwC warned EU tax rules meant cutting corporation tax in Scotland would result in a reduction in the block grant, equivalent to the loss of revenue to Westminster.

PWC are right on this occasion. The rules are clear: pound for pound Scotland has to lose grant from Westminster to match corporation tax lost by cutting its rate so the only way it can win is if for reason no one can explain cutting the rate (which is already low, particularly given there aren’t that many large companies left in Scotland) is going to suddenly increase the profits earned in Scotland.

Of course this is Laffer curve theory – theory which has never been proven to work for anyone but big business -w ho will gain from this move, you can be sure, just as throughout Scotland ordinary people will lose by having their services cut.

But it’s worse than that. As the BBC also noted:

In addition, it could start a tit-for-tat war over corporation tax rates with the other home nations.

Too right it will. And at the very least the complexity of moving to Scotland will become enormous – because HMRC in the rest of the UK will not be challenging all relocations on the grounds that they are tax avoidance – and rightly so.

So we’ll now have HMRC Scotland at war with HMRC England and Wales with HMRC in Northern Ireland potentially lobbing in its tuppence worth too.

Whilst the Tories will of course demand rate cuts for England too.

And where will this lead? To less funding to close the deficit, more cuts, an increase in the income and wealth gaps, more chaos in society and diminishing social cohesion. Which is just about the last range of outcomes we need right now.

The SNP’s policy on this issue comes from the economics of the madhouse. The trouble is they plan to release the mayhem, that’s intended to create on the UK economy. It’s an act of gross irresponsibility on their part. But worst of all it’s a betrayal of the ordinary people of Scotland to try to turn that country into a tax haven right now, at cost to those who need strong government and not business run amok with greed. I sincerely hope the people of Scotland turn on them in retribution. Because if there’s any silver lining in this it’s the fact that this must surely considerably increase Labour’s chances north of the border.