I wrote this article in August 2008 for the Guardian's Comment is Free. I still think it relevant today. Its objectivity is still open to real doubt. I apologise in advance for the fact that some of the links are now out of date: they all worked when it was written:
When the media talk about tax it always seeks comment from the Institute for Fiscal Studies (IFS). They usually make the link to the organisation by describing it as "independent" or "non-partisan". But is it free from bias? I used to buy this claim, but I have been reading recent output from the IFS as part of its Mirrlees review. This review, headed by Sir James Mirrlees, a Nobel prize-winning economist, is, according to the IFS, meant to "identify the characteristics of a good tax system for any open developed economy in the 21st century".
I presumed when approaching the material that I would find reports whose objectivity accorded with the IFS aspiration to be "seen to be free of bias". I have been profoundly disappointed.
A range of examples illustrates the point. In June the IFS published a paper on the future of corporation tax, charged on company profits. The press statement said:
Corporation tax should be reformed or replaced by a higher VAT rate … to reduce disincentives to invest in the UK, according to two studies commissioned by the Mirrlees review of the British tax system.
The institute has suggested some compensation for the VAT charge through reduced national insurance contribution charges, but let's be clear, corporation tax is expected to raise £52bn for the Treasury this year and VAT £84bn. VAT would have to increase to about 28.3% from the existing 17.5% to recover the loss of tax on corporate profits in my calculation. Ignoring for a moment the inflationary impact, this move is massively regressive. The less well off pay a higher proportion of their income in VAT than do the wealthy because they must spend all they earn to live. Worse, since corporation tax is in effect a tax on profits of companies available for distribution to its owners, the vast majority of whom, by value, are in the top 10% of income and wealth owners, almost all the benefits of this change go to that group.
Isolated recommendations do not make an issue though. It is a pattern of similar recommendations that do create a cause for concern. Other points made in the papers published as part of the review are similarly regressive. For example, the review recommends that VAT be charged at the standard rate (currently 17.5%, but maybe 28% if the IFS got its way on corporation tax) on food, children's clothing, books and other currently zero-rated items. The IFS claims, on the basis of economics I have shown to be without foundation, that this would "interfere less with people's spending decisions" as if there is a real choice between food and luxury items. It also suggests some compensation through increased benefits, but it is quite clear in the example given that only the lowest 30% of households would benefit (those enjoying incomes of £16,000 or less a year). That would leave those on middle income decidedly worse off, to provide £11bn for what the IFS calls "further desirable tax reductions". Since the rich almost invariably benefit most from tax reductions because they do pay most tax in absolute terms, the direction of redistribution is likely to be from the poorest to the richest.
That is also the case with regard to inheritance tax, where the thinktank says (pdf) that given "inheritance tax currently raises less than £4bn a year, consideration could be given to abolishing it altogether". It goes on to say it "do[es] not advocate the introduction of a regular wealth tax". All it does is suggest that capital gains tax might be charged on death but that its payment be deferred until an inherited asset is sold, but again the consequence is perverse. The wealthy can always afford to defer the sale of assets. Those of lesser means inheriting assets may well want to realise them to settle their own liabilities. It is, once again, the less well off who are likely to pay most as a result of this recommendation.
And finally, the IFS makes the extraordinary comment (pdf) that:
To discourage investors from hiding their wealth in foreign tax havens, the authors recommend exempting interest income from personal tax, and allowing shareholders to deduct an imputed normal return on the basis of their shares before imposing tax on dividends and capital gains.
I've done the sums: this would cost the government at least £10bn a year in lost tax revenue, and the saving would (unsurprisingly) go mostly to higher rate taxpayers, some of whom would benefit directly from a change in policy motivated by their previous tax evasion.
But the real question is this: is this thinktank really free of bias? Can it be, when it suggests abolishing tax on all corporate profits, on interest, on wealth and on half of all dividends (as is likely) whilst at the same time suggesting VAT be charged on all food and promoting a massive increase in VAT in general, when that tax is known to be heavily regressive, whilst also proposing tax cuts that would deny the government the revenue to compensate the losers from these changes? I don't think so.
I think the IFS has a bias towards the neoliberal view that suggests that labour should be heavily taxed whilst capital is left virtually tax free. It is one to which successive UK governments have subscribed. As another of the reports (pdf) published by the review says "Whether this move to the right [in taxation attitudes] will persist and to what extent it is now a fact of political life is hard to say." It seems to me that either the IFS wants to make sure it does or that the whole report is just an indication of a lack of political will on the part of the UK to cooperate internationally to ensure capital is taxed.
Whatever the motive, the IFS's claim to be unbiased appears to me shaky. Some of its proposals are very dangerous indeed and about as far removed from the characteristics of a good tax system for any open developed economy in the 21st century as it is possible to be.
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Well said: this is a fallacy that needs more examination.
Have you read the IFS’s ‘Green Budget 2014’? There are some quite barmy neoliberal statements on show in the chapter on business rates, which I have had to read. In particular, the argument that small business relief should be abolished because there is no economic difference between the use of a given property a small business and a billion-pound pension fund.
Hi Richard – did you see this last week from Paul Johnson in the TImes?
http://www.ifs.org.uk/publications/7723
He says two things that seem very open to question.
1) The wealthiest (and poorest) have borne the brunt of deficit reduction.
2) You can’t raise significant sums from cracking down on tax evasion, introducing wealth/property taxes or financial transaction taxes without driving away ‘wealth creation’
He pours scorn on Labour’s pledge to raise £7.5 billion from anti- tax avoidance measures even though this represents a fraction of estimates of the tax gap.
I wondered what your thoughts on this were?
Mike
In my view Paul Johnson is simply wrong on these issues
He does not even know what wealth creation is, I suspect
He is just chanting the City line
Richard
It certainly ties in with your evaluation of him as following a very neoliberal line and it raises significant questions about the BBC’s decision to have the IFS as the go to source on fiscal matters.
Before the last election the BBC ran a report which contained this section:
“The Treasury has already warned of a public spending clampdown. Education, health and other departments could well see a spending freeze over the next few years as attempts are made to stop the escalation of government debt. But the IFS warns that more tax increases maybe needed. It suggests that VAT may have to be imposed on children’s clothes and other items where there is currently no VAT payable.” (BBC 10 O’Clock News, 28 January 2009)
Obviously there were many options for reducing the deficit but it is telling that a) the IFS picked out VAT on children’s clothes as having to be imposed – rather than say wealth or property taxes and b) that the BBC repeated this line uncritically without ever exploring alternatives.
Yes, when do you hear anything from Johnson about annual property taxes, which OECD, IMF, Mirrlees even, consistently state is the easiest and fairest thing to tax (especially land)? You can’t hide land in a tax haven.
The Times stopped being a serious newspaper when it threw its lot in with the neo-lib Tories in the early 1980’s – a thank you to Thatcher overlooking Murdoch’s acquisition of the title.
If you recall, there was a lot of dissent at the newspaper when this happened and the dissenters were dealt with in true neo-lib fashion.
It’s now just a mouth piece for the greedy and uncaring.
I’ve been a bit concerned about the IFS for some time, namely that their analysis is generally taken to be the final word on matters.
Two examples:
It was interesting that when they compared the parties plans for public finances last week, the IFS didn’t model the impact of cuts on economic growth and therefore tax revenue. So it is not clear whether they factored in a multiplier affect into their analysis or what that effect might be.
Additionally, take the IFS’s estimates of the differences between public and private sector pay which appear in their green budgets and which are used as part of the justification for the recent and ongoing public sector pay freeze. Academics at the university of Swansea have done a number of studies (robustness checks) into their calculations and found them to be pretty poor….. http://www.wiserd.ac.uk/files/3114/1658/7902/SBE-E-2012-9.pdf
http://www.wiserd.ac.uk/files/8914/1658/7879/Econ-2013-1.pdf
I can’t believe anyone seriously believes in their impartiality any more, can they? It’s just a zombie meme that staggers on, bereft of life but still walking. Like ‘The Guardian’ is Left wing, trickle-down economics works and the financial services industry contributes to society …
FOR MARK C
i read this earlier How Thatcher got Murdoch what he wanted .
http://www.theguardian.com/uk-news/2015/apr/28/how-margaret-thatcher-and-rupert-murdoch-made-secret-deal#comment-51158705
The most depressing thing about Paul Johnson’s piece, for me, is the glib statement that it’s impossible to raise money by cracking down on tax avoidance/evasion. It seems to me that 20,000 extra HMRC staff would go a long way to tackling both, and specifically on avoidance, a General Anti Avoidance Rule would be hugely beneficial. Taking those plus a land value tax and progressive reforms to income tax and corporation tax, the extra £200bn per year in the Green Party manifesto seems feasible to me. It’s sad that Paul – who I worked with for several years and is certainly an intelligent guy – would prefer to write the Green Party off as loons rather than make a serious engagement with their policy proposals.
Agreed
Do you seriously think we can raise £200bn in tax as easily as you appear to be suggesting?
This is why the Green party have a big credibility problem IMO.
And you think other parties do not have a credibility problem
At least the Greens published all their estimates
Thanks for republishing this – missed it first time round.
What’s also neoliberal about the IFS is that it clearly favours rentiers – by calling for tax reduction on unearned income of various kinds – inheritance, dividends, interest receipts, capital gains. This is Thatcher’s legacy – a something-for-nothing culture for rentiers.
Best wishes
Andrew Sayer (Author of Why We Can’t Afford the Rich, Policy Press, 2014).