Just as the cuckoos herald spring's arrival in Britain, so the shrill calls for corporate tax cuts signal the imminence of an upcoming Budget. The lobbyists are in full voice. And their argument are, as usual, quite insane: divorced from all economic logic. (That doesn't stop the likes of the BBC routinely parroting this nonsense - voodoo economics - without balancing comment, or apparent thought.)
Last week we had a blog on the London School of Economics (LSE) site from Tim Knox of the Centre for Policy Studies (a Thatcherite think-tank) calling for the corporate tax rate in Britain to be cut from its current 26 per cent to 20 per cent, and then lower and lower. Yesterday we had several hundred business leaders signing up toa letter in The Telegraph calling for a cut in the top income tax rates to boost business and entrepreneurialism. And lurking in the background we have the Oxford Centre for Business (Non) Taxation with their cloud cuckoo notion that businesses shouldn't pay tax in the first place since they simply pass the cost on to consumers or workers (but never to shareholders, oh no!).
But is there any merit to these arguments?
In a riposte to Tim Knox posted on the LSE site, Nicholas Shaxsonnotes that corporations in Britain (and elsewhere) are sitting on record piles of unspent cash. The current shortfall of investment has nothing to do with high tax rates and everything to do with insufficient demand to meet potential supply. Cutting corporate taxes will simply make the situation worse as more wealth gushes upwards into the hands of the 1 per cent, and it goes to corporations that are letting it sit idle. As Shaxson points out, corporate tax cuts at this stage will be as effective as pushing on a piece of string:
"British corporations are awash with cash. According to Deloitte, non-financial companies held £731.4 billion in the third quarter of 2011 — the highest ever. Britain also faces soaring fiscal deficits — and the two issues are related, as Martin Wolf explains in the Financial Times: “If the fiscal deficit is to disappear, offsetting adjustments must occur, above all, in the foreign and corporate sectors.”Corporations have all this cash because they are not investing: the opportunities are not there. They are hunkering down, spending less than they are earning, while the government is spending more than it is earning (and thus running deficits). How to shift this ugly picture? There are various ways — but cutting corporate tax rates — further pumping up those bloated and dormant corporate cash piles — clearly isn't one of them."
Also responding to Tim Knox on the LSE blog, John Christensenreferred back to the seductive ideas of Arthur Laffer, an American economist who theorised that a curve might exist which could demonstrate a relationship between government revenues raised and the nominal tax rate. Lowering tax rates would stimulate investment and therefore boost long-term revenue yields; wonderfully seductive stuff, but totally adrift from reality. As Christensen notes:
"I would hope that any university lecturer promoting the Laffer Curve to first year undergraduates would be quickly called to task. Embarrassingly for it proponents, empirical evidence for its existence remains elusive. Most accept that it is shifty, which limits its policy application. You might like to consult the FT's Martin Wolf who has said: “the theory that cuts would pay for themselves has proved altogether wrong.” Or Greg Mankiw, chairman of the Council of Economic Advisers under George W. Bush no less, who described supporters of the idea to be 'charlatans and cranks.'"
Christensen also takes on the hardy perennial argument that high tax rates deter entrepreneurs from investing time, money and effort. The evidence for this deterrent effect was always scarce, and is getting scarcer. Tax rates have fallen significantly across Europe and North America, but there's little evidence of fresh innovation and job creation in productive industries. Too much of what has passed for entrepreneurialsim in the past 30 years has been rent-seeking activity, mergers and acquisitions and privatisation of natural monopolies. But, as John notes, tax cuts for the wealthy have merely served to feather their nests, rather than spurring them to greater effort:
"Way, way back, it might have been arguable that high marginal tax rates reduced rich people's willingness to work. But the evidence was scarce even back in the 1970s, and more recent research suggests that lower tax rates for top earners do not stimulate output, kicking that particular argument into the long grass."
Just as pin-up minister Michael Heseltine was expert in finding the Conservative Party's heart in the 1980s, corporate lobbyists these days know that nothing gets the blood pumping faster within the Tory members in parliament than the idea of a good, meaty tax cut.
The economic shibboleths live on.
NB: From the TJN blog, with permission
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Perhaps before they argue for more corporation taxes they could produce some evidence as to the benefits arising from the ones that have already been granted – that should keep them quiet for a while. If the government was serious about pushing growth they might want to look at putting up the corporate tax rate for those who are sitting on piles of cash and/or just paying back debt and equity.
Couldn’t agree more. There is some merit to special provisions such as the investment tax credit, aimed towards spurring increased investment at a time when there is precious little going on. There is also a great deal of merit to the government gathering corporation tax and using it to invest on our behalf.
There is also quite a lot of benefit to specific taxes which alter behaviour and market systems. Such as short term holdings and speculation, for example.
The danger we face and have faced is that those with an ideology have long since recognised that they must present their ideology as being factual, as simply being logical and right-headed, if perhaps distastful or unpleasant to look upon. There is an urgent need for more politicians who stand on what must sadly be called this side of the argument to go into the detail of why these propositions are wrong– not unfair, not bad, but simply wrong.
I didn’t hear a particularly good rebuttal from anyone on bbc question time last night, for example, of the remarkable certainty the conservatives have that the laffer curve has precisely the shape and position that they think it does. I have to admit, and perhaps I’m being cynical, but I suspect that if the 50% rate had not been introduced, they’d be making the same arguments for lowering the 40% rate.
“I care for riches, to make gifts
To friends, or lead a sick man back to health
With ease and plenty. Else small aid is wealth
For daily gladness; once a man be done
With hunger, rich and poor are all as one.”
Euripides, Electra, 413 B.C.
“Gizza job.
Go on.
I could do that.
Gizza job”
Yosser Hughes
c.1981
Debate on the BBC today suggested the public love affair between Murdoch and Alex Salmond was a cosy deal for NI to promote independence with the reward of Sky upping sticks and moving to a new low corporation tax regime in Edinburgh.
Poses a dilemma for Cameron and Osbourne, though for different reasons. Cameron will have to fight a pro-union campaign without NI’s support and risk being the PM who broke up the union. Osbourne will be faced with a fiscally independent tax haven on his own doorstep.
John Redwood was being i/vd yesterday morning by John Humphrys & I was prowling my kitchen smashing things !
Repeatedly, JR commented that the cuts in high tax rates had helped because the %age of total tax take from the top 1% had increased dramatically from the 80s to now. Repeatedly, JH’s response was to wearily & apparently uninterestedly ask if the rich might pay higher taxes.
The Q that was so obvious : Mr Redwood, you’ve quoted the %age of total tax take from the top 1% from the 80s to now, can you now please tell me the %age of total income that goes to the top 1% from the 80s to now.
Never asked.
On the BBC parliament channel at 6pm on Saturday 3rd March (‘Select Committees – Bank of England Inflation Report Committee’) John Thurso MP asked Adam Posen some questions to which Posen gave some interesting responses. If you find 6 minutes and 30 seconds into the footage; it goes on for a couples of minutes. Posen talks about the different MPC member predictions and how the buyers of government debt he has talked to most fear government austerity.
[…] http://www.taxresearch.org.uk/Blog/2012/03/02/economic-shibboleths-why-corporation-tax-cuts-are-insa… […]
Richard, I came across this article in The Kerryman: Tax move ‘to cost poor states £4bn’ (http://www.kerryman.ie/breaking-news/world-news/tax-move-to-cost-poor-states-4bn-3039896.html ). It says that apparently Osbornie is planning to relax the Controlled Foreign Company (CFC) rules and this will allow corporations to dodge tax on profits made overseas; costing the U.K. about £1 billion a year. More than that it will affect a lot of poorer countries, as corporations will be able to shift profits to tax havens without being penalised. Total madness.
I will pick this up today