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The Scottish government is living in La-La Laffer Land

Corporation Tax, Scotland 10 Responses »

Aug 242011

John Swinney, Scottish Finance Minister issued a press release today saying:

“Scotland needs full control of the key economic levers to meet the specific challenges facing the Scottish economy – and the cross-party Scotland Bill Committee in the last parliament concluded that this power should be available to the Scottish Government if it is granted to Northern Ireland.

“Control over corporation tax would enable us to boost investment, bringing jobs to communities across Scotland, grow the economy and take the right decisions for Scotland.

“There is clear evidence from around the world of the benefits from lowering burdens on business – and this 54-page document sets out the compelling evidence in more detail than ever before.

“Lower corporation tax is a vital source of competitive advantage in an integrated global economy, helping to attract new businesses and highly-skilled jobs. A competitive corporation tax regime has been a feature of the economic success of many countries, and we want Scotland to have the same opportunities to bring in jobs and boost growth.

And much more in similar style.

But as the Telegraph noted this morning:

Figures on Friday are expected to show that companies are not spending despite the Government’s best efforts to encourage corporate activity by slashing employers’ National Insurance contributions and corporation tax.

Stagnant investment in the second quarter, as BarCap has forecast, would follow a 3.2pc decline in the first three months of the year. By contrast, the Office for Budget Responsibility expects business investment to expand by 6.7pc this year and contribute a third of total growth.

Let’s explain that in simple terms. Tax rates have never, and tax rates never will encourage real growth.

Low tax rates do encourage people to artificially relocate profits to low tax locations. But they never encourage people to make more real money. That’s because making money requires a strong top line and corporation tax is charged on what’s l;eft over at the bottom line. And as is obvious, if government withdraws from the economy (as now) because it does not believe in tax then top lines are weak and bottom lines disappear – and tax considerations go out of the window in a panic about survival.

But John Swinney and the Office for Budget Responsibility are still living in the La-La Land of the Laffer curve that says cutting tax rates increases yields.

They rely on a graph like this:

They implicitly argue that we’re on the right hand side of the graph i.e. the downward sloping but of the graph and if only we cut tax rates then yield would increase.

The trouble is I did a survey of the academic literature a while back and found the only place that might be on the right hand side of the graph was Sweden and there was not a hope that any tax rate in the UK (including the 50% income tax rate we now have) would put us anywhere near that point.

So tax cuts in the UK always mean less tax.

And more corporate profit – none of which would stay in Scotland you can be sure.

So candidly, these people really are in La La land and it’s time they woke up and saw the reality of the harm they’re really proposing to the ordinary people who will suffer cuts in education, health care, pensions and other essential services as a result of their mad thinking. Because that’s what they’re really prescribing. Which is exactly why the Taxpaters’ Alliance sells this myth to them.

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’ .

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.

The Scottish Campaign for Fiscal Responsibility is a right wing front for tax cuts

Scotland, Uncategorized 2 Responses »

Jun 212011

The Scottish Campaign for Fiscal Responsibility is a new organisation, launched this month. It says of itself that it:

is an independent, non-party political coalition

As far as it goes that may be true. But in The Scotsman this morning it was arguing for tax competition.

And on its web site it argues for greater fiscal freedom for Scotland as if this would somehow get round the EU requirements on a cut in the grant from Westminster – which it would not.

Typically for such an organisation, no indication of its funding is provided on its web site.

So this seems to be like so many so called think tanks not about thinking at all, but all about promoting the neoliberal mantra that tax competition is good.

It’s left Ireland bust.

It brought the world to crisis in 2008.

The Crown Dependencies are heading for bankruptcy.

But still they argue for this policy of destruction.

I sincerely hope the people of Scotland take note and ignore this siren call.

It had to happen: the campaign to turn Scotland into a tax haven has begun

Guernsey, Isle of Man, Jersey, Scotland, Uncategorized 3 Responses »

Jun 212011

It was, I suppose, inevitable that the SNP’s recent victory in the Scottish elections would set the tax haven enthusiast free to argue that Scotland should join that pariah’s club, urged on by Alex Salmond’s call for Scotland to have the right to set its own corporation tax rate. And that has duly happened. As the Scotsman reports this morning:

Famously, the three islands [that form the Crown Dependencies] have used that autonomy to market themselves as offshore tax havens for the rich, turning them into some of the wealthiest places on the planet.

Their example is now coming under scrutiny, as the new SNP Government in Edinburgh presses ahead with its plans for an independence referendum – which has turned growing attention on to what the Nationalists these days mean by independence. A study by Professor James Mitchell of Strathclyde University proposed that the SNP is now proposing a form of “looser union” with the UK, where it would attain sovereignty but remain part of a “confederation” of British nations. Such a nation would control matters in its own borders, but would buy in services from the rest of the UK where it was deemed appropriate.

The examples of the three British Dependencies fall short of the what the SNP wants for Scotland – full independence. But they are linked into the UK in a way which the SNP also envisages.

So could Scotland follow suit? Ben Thomson, of the Campaign for Fiscal Responsibility, says that the UK should encourage the kind of tax competition shown up by the three territories.

“The game is not about dividing up the cake. It is about how do you attract a bigger cake within the UK by attracting businesses to come here. We in a global game competing against Geneva, Luxembourg or Dublin. If these businesses didn’t set up in the Channel Islands, they would end up in the Cayman Islands or Bermuda.” Thomson says that, given the powers of the Dependencies, a fiscally independent Scotland could set taxes in its own areas of strength – such as oil and gas, or whisky – to suit its own local circumstances.

Thankfully there are voices of reason in Scotland, and some from unlikely sources:

But turning Scotland wholesale into a tax haven would be near impossible, say tax experts. The three islands’ heavy reliance on financial services, and low levels of social need, are utterly at odds with Scotland’s own profile.

Rhona Irving, a partner with PriceWaterhouseCoopers, asks: “How would you replace the tax take if you reduced it to these levels? How would you fund public services? Are you going to attract enough businesses to make up the deficit you would have?”

She’s right – and for once good for PWC for pointing out the glringly obvious fact that the tax haven model is not viable.

In case they haven’t nopticed all the Crown Dependencies are in deep fiancial trouble, unable to balance their books and are in possession of tax susyems ruled illegal by the European Union. But what the heck, why let something like that get in the way of the tax competition mantra?