I am heading for Dublin this morning where I am meeting Christian Aid and others this afternoon before travelling to Belfast this evening in anticipation of two meetings tomorrow.
I will, perhaps unsurprisingly, be discussing tax in both cities. In Dublin the focus will be tax competition, the role of the Irish government in encouraging it, the threat that the EU poses to its policies now and the bankruptcy of running an economy on the basis of pandering to the tax abuse that is deliberately designed to increase the income and wealth divides that create so much of the friction that quite appropriately distresses so many in both governments around the world and in civil society.
In Northern Ireland the situation is different. Times are, of course, politically difficult in the North at present. No one would wish for the current political tensions, or the causes that have given rise to them. Recognising that is a necessary background to anything I can say. The hope that stable devolved government can be maintained in Northern Ireland is the most important priority for now.
That said, the issue of tax has been significant in creating stress between the various parties at Stormont for some time. There has been reason for this. Whilst there has been cross-party consensus for some time on the desire for a 12.5% tax rate what has become very clear in recent months is that Sinn Fein has been reluctant and even unwilling to accept the consequent cuts to spending in the North that flow from this policy.
Those cuts, which Whitehall is demanding, are the result of the Whitehall grant to Northern Ireland having to be cut if the corporation tax rate is cut as a business incentive (which is what it is) by the exact amount that the rate cut might cost. This is to prevent the provision of artificial state aid under EU rules.
This has never been my sole objection to that tax cut, many more of which I explained as long ago as 2010, here. It is, however a major objection. As Andrew Baker of Queen's University Belfast and I wrote on this issue for the Sheffield Political Economy Research Institute a while back:
Because of EU rules, stemming from the Azores judgement, if it was to cede corporation tax setting powers to Stormont, HM Treasury would have to reduce the size of Northern Ireland's annual block grant. It currently puts this figure at £700 million per annum, which is about 8.7% of the total block grant. Gerald Holtham estimates that, even if the cut were just £300 million, then compensating for that loss would require an additional £2.4 billion in private-sector profits. This translates into an additional £10 billion of Gross Value Added (GVA) (current figure £28 billion).
According to these conservative calculations, breaking even on the budget would therefore require the Northern Ireland economy to grow by a third! Viewed in this light, cutting corporation tax looks like a considerable gamble with the existing budget and public services. A more candid reading might invoke the spectre of self-harming.
I think Sinn Fein has realised the price for an all Ireland headline tax rate is too high, especially when, as Andrew has separately and appropriately noted, the eonomic logic does not stack in many other ways as well.
In that case the question is how should taxes be devolved? I will be exploring ideas that will be more widely available in The Joy of Tax very shortly when it comes to that difficult, and almost wholly unaddressed question in the UK when making my atlks tomorrow.
There are answers. Corporation tax devolution is not amongst them.
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I have things to say on the macroeconomics of this tomorrow, but will keep my powder dry.
The proposal is essentially a supply side measure, when the demand side needs addressing at the same time. To the extent it could have a demand side effect it would be very indirect and rely on the magic of ‘trickle down’.
Devolved VAT or Nat Ins – could work for both demand and supply sides? Would benefit ordinary people more directly in their pockets and you at least stand the chance of a multiplier effect taking hold. I think the Scots have been more along the right lines?
See you tomorrow….
Will do…
Richard
I think the political economy of the NI Executive bears scrutiny in all of this. It is not so much the merits of the corporate tax reduction that has seized the parties. A highly effective business lobby – with strong ties to some of the parties – has effectively exploited the tendency of the coalition to settle for and seize on policies that are – in effect – the lowest common denominator. The aggregating effect on policy deliberation in a forced coalition – of diverse ideological positions – produces a default opportunity for neoliberal convention (inserted via the big consultancy firms, focused business lobbies, and the underdeveloped capacity of parties and civil society to present alternatives).
Peter
Agreed
You say that a corporate tax cut would result in a cut to spending (presumably on the basis that there’s less revenue generated from taxation). However, how does this tally with your recently expressed view (4/9/15) that taxation has no role in funding the State?
Both quotes are below for ease of reference:
“… the desire for a 12.5% tax rate what has become very clear in recent months is that Sinn Fein has been reluctant and even unwilling to accept the consequent cuts to spending in the North that flow from this policy …”
“… Taxation never pays for public services: in effect newly printed money always does that …”
In this case the rules create this link even though theory suggests they should not
I have no way of changing those rules
So the real issue is with the rules on how Northern Ireland is funded rather than any corporation tax rate cut (which presumably you can’t change either)?
No, tax reflects the priorities of an administration on social issues within a macroeconomic framework
I agree with that on the basis tax has a role in redistribution and penalising or incentivising certain activities but fail to see how that provides a link between tax cuts and the impact spending. You clearly said it has no role in paying for public services.
I thought the relevant point here was that Northern Ireland can’t print its own money and IS therefore dependent on balancing its budget through taxation. This is in direct contrast to the UK treasury.
True
But this is why devolved tax needs to be vastly better thought out
Why has UK academia done no work on this?
@ Mary Snell: Your argument seems pure sophistry to me. I am not sure why it is so difficult to understand why the statement about tax having no role in funding State spending precludes tax from having a macro economic impact on social issues which it turn need to be funded. These are subtle arguments which need careful consideration rather than firing off the first thing in your head.
Keep up the invaluable work, Richard, and please don’t be distracted by non-civil society.
@Trevor Dale: Even taking that into account that Northern Ireland cannot print its own money, it still means the funding mechanism is wrong rather than the cut in taxation. This is because Northern Ireland is part of the UK. Per Richard, the tax take of the combined UK has no role in funding the combined State expenditure of the UK as it can print money. Therefore, it must be the funding agreements between constituent parts that are at fault not the tax policy choice (from a funding perspective) whether overall or in the constituent parts.
@ben squirrel. Thanks for your contribution. Do you assume all women lack the mental rigour for a debate? Sorry Richard this is not a go at you for letting the comment through.
Mary
I think you are misreading and maligning Ben
I think you are offering sophistry, and deliberately misconstruing what I have said
There is nothing wrong with saying anyone is offering such an argument and I think you are deliberately distorting what Ben said as well
It would not be for the first time: you did it often in the past
Richard
@Mary Snell,
“Taxation never pays for public services: in effect newly printed money always does that”
That argument is only true of a sovereign currency issuing government. Like the UK govt at Westminster, or the US Federal Govt, or the Australian Federal Govt etc
It’s not true for local councils, the Scottish or NI devolved govts, the US States Govts, or any of the countries in the Eurozone.
They really are just like a household! They do have to balance their budgets or borrow to make up the difference.
taking Mary’s points at face value, it would be argued that borrowing to spend on reduced tax rates for the benefit of a miniscule part of society is the same as borrowing to build productive infrastructure that would benefit society much more widely.
“….because of EU rules, stemming from the Azores judgement, if it was to cede corporation tax setting powers to Stormont, HM Treasury would have to reduce the size of Northern Ireland’s annual block grant. ”
What about direct government spending into NI? Could this be increased to compensate? Or could taxes collected nationally, like income tax, be reduced in NI?
If we view the potential, and only, problem of any type of increased government spending as increased inflation, then it would make sense to direct as much of it as possible to areas which have high unemployment rates and surplus economic capacity where it will have the least inflationary effect.
It’s time we told the EU what they can do with these “rules” IMO !
Such counter mneasures are not possible at present