Jolyon Maugham has published the most extraordinary blog this morning. Admittedly he did not write it, but given that in the nature of blogging I suspect people do not publish articles that they do not agree with his publication of this article whilst still claiming to support Labour principles is hard to reconcile.
The article, written by Irish academic Stuart MacLennan, who is an Assistant Professor at Trinity College Dublin, supposedly attacks the diverted profits tax, about which both Jolyon and I have reservations, but it does so on the basis of a fundamentalist defence of tax competition. McLennan claims that:
Tax competition is entirely compatible with, if not encouraged by, the free-trading economic model to which the UK has subscribed for the entirety of its modern history.
When did modern history begin is the question I immediately wanted to ask?
And when did we promote this free market capitalism? As far as I can see we promoted a biggish state from 1945 to 1980, then had one as matter of fact whatever was said until about 2010, and only now are actually seeing policy based on the idea of shrinking it on the assumption that the market actually knows best. Even then this is notionally being done in a deeply regulated way (even if the resources to enforce that regulation will not be available). So I would agree that we may have supported free-market economic models since a little before a week last Tuesday, but the claim that we have done so throughout our entire modern history is, to be polite, bunkum, unless modern history began in 2010.
Despite this McLennan continues:
The free market capitalism to which the Chancellor is undoubtedly an adherent sees the market allocating its resources to the locations and functions that are most profitable.
Free-market capitalism might see free markets doing that, but let's be clear about what the necessary assumptions are for free-market capitalism achieving this goal. They are that:
- There are many firms in any market.
- Freedom of entry and exit.
- All firms produce an identical or homogeneous product.
- All firms are price takers, therefore the firm's demand curve is perfectly elastic.
- There is perfect information and knowledge.
If these conditions exist then it is possible, on an economist's blackboard, for a capitalist to make a rational choice between firms as to the best user of capital who might, on the basis of their efficiency, pay the maximum return on the sum invested and so, supposedly, produce the optimal outcome for society as a whole. But, there are one or two problems with this idea when it comes to tax competition. Take these as a sample list (there are more):
- There can only be one government in any one place: we cannot afford two as the evidence is that this results in failed states;
- Duplicate governments do not exist: in a place there is no choice of government available to a person as their can only be one competent authority and therefore market entry is discouraged (it's called war);
- By their nature governments are neither identical or homogenous: they are adapted to the circumstances of the place that they govern no one would wish it any other way;
- By definition governments are not price takers: by definition they are market-makers;
- Most governments, and most especially that of the UK, which has promoted a whole series of tax havens, are active participants in the creation of market opacity which is deliberately designed to ensure that those requiring information on the trading undertaken by major market participants is not available to them so that they can only as a consequence make suboptimal decisions.
In other words, if our Chancellor is an adherent of this idea of free-market capitalism than the difference between his assumptions and the reality of the world in which he actually operates is profound and if he has not appreciated that such differences exist then we all need to worry. Despite this McClellan suggests:
Taxation is every bit a factor in this allocation, in the same way as regulatory environment, national infrastructure, labour costs, access to materials, and market-provision. How states compete is a political choice, with differing approaches easily being attributable to the left and right of the political spectrum. While Germany may well have higher corporate tax rates, an enterprise that locates there clearly values the infrastructure and skilled workforce which that higher tax environment provides.
Tax is not a factor in this allocation: tax is a social construct designed to reclaim from an economy the money injected into it by government when it undertakes spending in pursuit of its democratic mandate, with that tax system being designed to achieve the following six goals that are elaborated in more detail in The Joy of Tax:
- Ratify the value of money by demanding that tax be paid with it;
- Reclaim the money spent into the economy by the government to prevent inflation arising;
- Redistribute income and wealth;
- Reprice market failure;
- Raise representation in a democracy by encouraging people to vote;
- Reorganise the economy through fiscal policy.
None of these is about competition: in fact, all of these are about, to varying degrees, compensating for the failure of competition. Despite which McLennan claims
However, George Osborne clearly sees Britain's competitive edge as coming, increasingly, from its fiscal policy.
The patent box has no purpose other than to encourage enterprises to locate their research and development arms in the UK. The ongoing cuts to Corporation Tax can only be construed as intended to have a similar, but much broader, effect. And it is arguable that the Chancellor is right to do so. Tax competition is intrinsically linked to the conservative free market ideology to which the Chancellor is sworn.
This is bizarre, and in direct contradiction to the claim that free markets allocate resources efficiently: anybody who believe that markets do achieve that would think that a government's attempts to interfere in that process by distorting the level playing field on which such decisions should be made are antithetical to the optimal outcome of market allocations of resources. McLennan has not apparently seen the contradiction, which then means that his further claim that the whole of the EU is found on the same, flawed, logic is simple further evidence that he does not either:
a) understand what he's claiming, or more likely
b) does understand and despite that is quite willing to suggest that the appropriate functions of the state should be distorted in the interests not of the free market, but of the rentier market that we have which exploits market capture; inequality in information availability; unequal allocation of capital which ensures somehow better access to the process of government than others; and the existence of satellite jurisdictions that are willing to sell their legislature to the highest bidder to ensure that the taxation policies of democratically elected governments are undermined all for the purposes of promoting increased inequality in society.
There really are no other options available: to promote tax competition you either have to be a naive fool or you have to be a proponent of a false ideology that does not support free markets but which does, instead, seek to undermine the state and its right to govern on behalf of the people who elected it with the aim if promoting an increase in economic inequality.
So, to get back to Jolyon's theme: if the promotion of tax competition is the only way to undermine the Diverted Profits Tax then give me the tax. Actually, of course, that is not true; the Diverted Profit Tax is flawed at a host of other levels and this recourse to a wholly false argument was, therefore, unnecessary, and all the more disappointing for that reason.
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I think that you have misrepresented my argument quite considerably, Richard. At no point do I make any of the arguments identified my own. I simply highlight that the arguments in favour of tax competition are entirely consistent with the free-market neoliberal consensus, with which I (for the record) am extremely uncomfortable. The only argument I make is that it is both conceptually and practically unsound for the Chancellor to seek to clap-down on tax competition all the while seeking to improve Britain’s competitiveness by slashing Corporation Tax.
I think them you might need to add a little of the first person caveat into your blogging because I read you as a proponent, and I think fairly
I read all the final arguments in the lights of the gushing exposition of tax competition that came before
If that was a misreading it was an entirely reasonable one, I think
Richard,
I agree with much of what you write, but have a couple of questions about your assumptions
3. By their nature governments are neither identical or homogeneous: they are adapted to the circumstances of the place that they govern no one would wish it any other way;
4. By definition governments are not price takers: by definition they are market-makers
3 by definition leads to the existence of differential taxation and arbitrage opportunities.
https://www.youtube.com/watch?v=sUNgv4iVwzI
The petrol stations in the Ardennes are an extreme example but I’m not sure what the solution is? A common European petrol tax? For many that cure would be worse than the problem! (I accept that Lux is an example of the problem not the solution!)
Governments are market makers not price takers. Hmmm I’ll agree that some states can be but many others aren’t to a greater or less extent.
My issue is that it seems almost impossible to have democratic control over tax incentives or to know whether the government is making the right tradeoffs.
A little while back I was unemployed and got offered a job for a tech company, which the choice of two office locations to base myself from, one in the UK, one outside it. I chose the one outside it, partly because of the 40% income tax (it’s roughly about 22% including social security here), partly because of the high cost of living in the south east. For the same pre-tax wage my standard of living is undoubtedly much higher for that choice.
I am a rational actor – I factor cost into my decision – if the UK was to increase the costs of working in the UK (and not be tax competitive) then more rational actors would make similar decisions to myself. This is common sense. A Government must make a judgement call on how much it can extract before people change their behaviour. This is also common sense.
The vast majority of people will never move
It is not worth worrying about a few who do
Fact is the vast majority of people do not move. If everyone in the UK acted in this manner the country would be empty.
Fact is there are many other qualitative factors at work other than a narrow, limiting, utilitarian, algorithm approach. Which is why so many people chose to stay. There seems to be an implicit assumption here that those who choose to stay, to contribute to a wider society of which they wish to be a part, are not acting rationally. Some explicit criteria needs to be spelled out acting to what constitutes rational and non rational behaviour.
For example, is someone who has no children and is happy to pay taxes to educate other peoples children acting irrationally? Conversely, is someone who avoids paying the same tax as everyone else whilst benefitting from everything those taxes pay for, infrastructure, investment, public services etc acting rationally?
Well, I’m not originally from Britain, so choosing not to live there is an easier choice (especially with the prospect of getting on the property market in the SE). A million Polish people in the UK shows that even people of modest means will move though – Ireland lost about 1/10th of its population in a few years after its crash. And, the people who pay the highest taxes tend to be more mobile – and a small amount of people at the top pay a disproportionate amount of taxes – so losing even a smaller amount of people could lead to a loss of a disproportionate amount of taxes.
Plus, it’s not only the people who leave – but the fact it might be cheaper to recruit staff in other locations (who are happy on a smaller wage, with less tax and lower cost of living – as they tend to be here). My current employer is not a European company, but has offices in 4 European countries, so it’s not even a case of anyone leaving anywhere – just accountants looking at stats of productivity vs cost and deciding to recruit more of their global staff elsewhere.
If you think Ireland Poland are comparable to the UK I think you need to do some more thinking