TUC » Tax Research UK

This is not a pension reform – it’s simply a 3% pay cut

Jun 302011

I support those on strike today.

I think they are right to protest about the plans the government is making to reduce pension rights. They are arbitrary. Worse, as Nigel Stanley of the TUC pointed out yesterday when writing for the False Economy blog, all they really amount to is a pay cut. His argument is so well put that rather than seek to create my own I reproduce it here, I hope with his permission since (for the sake of disclosure) I make it clear he and I occasionally work together on TUC matters:

“Few people understand how pensions work. The government is relying on this in their attacks on public sector pensions. Ministers claim that they are gold-plated, unreformed and unsustainable. The right-wing press join in by saying that it is unfair that private sector workers’ tax should pay for public sector pensions.

Yet what the government is doing is simple. It is asking public sector workers – already facing a two-year pay freeze, job losses and inflation running higher than it has for more than a decade – to make a further, and even more unfair, contribution to reducing the deficit.

They are doing this by trying to impose an arbitrary extra pension contribution of three per cent of pay on the public sector. This is not a pension reform – it is simply a pay cut.

This comes on top of significant reductions in the value of public sector pensions that blow away the claims that they are unreformed or unsustainable.

Changes negotiated with the previous government reduced the value of public sector pensions by 10 per cent through a range of changes. In particular, under so-called “cap and share”, members agreed to first share – and then fully bear – the costs of any unexpected increase in longevity. This is due to add a billion pounds of extra member contributions.

The National Audit Office closely examined this package and concluded:

“In addition to saving significant sums of money, the changes are projected to stabilise costs in the long-term around their current level as a proportion of GDP.”

So even before anything done by the coalition government or recommended in the Hutton Report, public sector pensions had been both reformed and made sustainable. This is not union assertion, but the hard-headed view of the National Audit Office.

On top of these negotiated changes, the coalition has made a further attack on the value of public service pensions by replacing the Retail Prices Index that has always been used to uprate pensions with the lower Consumer Prices Index. This will further reduce the value of public service pensions by 15 per cent – so we have a cut of 25p in the pound if you combine this with the negotiated changes.

Changing indexation breached the commitments of both coalition parties to protect accrued rights. This is pensions jargon for the pension you have built up in the past. Scheme members made contributions to what they thought was an RPI-linked pension; now they have had its value reduced by 15p in the pound at a stroke.

Yet ministers persist in saying that public sector pensions are unaffordable. The Prime Minister said on Tuesday that the system was in danger of going broke. But this chart in the Hutton Report shows that public service pensions payments will decline as a share of GDP – even before any of the changes proposed in Hutton bite.

Public sector pensions as proportion of GDP

Treasury Minister Justine Greening was completely unable to argue that pensions were unaffordable when this was put to her on the Today programme.

No doubt this is exactly the kind of assertion that the Public Accounts Committee had in mind when it said: “Officials appeared to define affordability on the basis of public perception rather than judgement on the cost in relation to either GDP or total public spending.”

So public sector pensions are sustainable. They have changed.

That leaves the assertion that they are gold-plated. John Hutton was clear that this is untrue:

“The Commission firmly rejected the claim that current public service pensions are ‘gold plated’.”

The figures bear him out. In the big four national schemes the majority of pensions paid are less than £5,600 a year. In the Local Government Scheme half get less than £3,000.

Of course a few very well-paid public servants get considerably more than this. But there are not many of them. And unlike the private sector, wheretop boardroom pensions are solid gold, not just gold-plated, top public servants are in the same scheme as their staff.

Here is the distribution of civil service pensions. As can be seen the vast majority are well-short of even being modest.

Distribution of public sector pensions

What is true is that many in the private sector get a raw deal – the private sector is now a pensions disaster area. Two out of three private sector workers get no employer help in building up a pension. Even the better employers have not only closed salary related pensions, but significantly cut their contributions to the riskier replacements.

But the answer is not to level down by removing pensions altogether from two-thirds of nurses; it is to improve pensions in the private sector. And it is telling that those so keen on attacking this unfairness never talk about the costs of pension tax relief, currently running at £35 billion a year – more than the cost of public sector pensions and heavily skewed towards the rich.

It is no wonder that public sector workers are angry. One union on strike has never taken such action in its history before. Unions know that pensions are long-term arrangements that do change over time. Negotiations are common in private and public sector. But the government’s agenda seems to have little to do with pension reform. This is simply making public sector workers – most of whom are modestly paid – take on an ever greater part of the burden of closing a deficit they did not cause.”

Nigel Stanley is Head of Campaigns and Communications at the TUC.

Unite on 30 June

TUC, UK Uncut, Uncategorized Comments Off

Jun 232011

Governments throughout Europe continue to give tax handouts to bankers and big business while cutting back on public services for old people, sick people, children and those in need.

We have clear choices ahead of us: we need to resist the tax handouts without control being taken of the banks. We need to resist the tax haven economy. We need to support our welfare services. Most of all we need to protect democracy from the deep pockets of the banks, hedge funds, and other special interests.

UK Uncut has released a short and fun video calling for activists to take to the streets in support of industrial actions to protect vital public services on 30 June.

They’re right to do so.

Which is why I suggest you watch it here.

Great news – Osborne looks at cutting higher rate tax relief on pensions

Pensions, Tax avoidance, TUC, Uncategorized 4 Responses »

Jun 182011

I’ve long argued that the wealthiest in this country do far too well out of the tax system. In 2008 in the TUC publication ‘The Missing Billions’ I estimated that 570,000 people earning more than £100,000 a year between them enjoyed tax reliefs which one of them needed costing the state at least £8.4 billion a year (page 32 here).

One of the particularly absurd reliefs that those on higher rates of tax enjoy is pension tax relief at higher rates. Why the pension savings of the best off in the country have to be encouraged by being given a subsidy at least twice, and sometimes 2.5 times that given to the 90% who pay tax at basic rate has always been particularly baffling. The logic of any progressive tax system is that the least well off should benefit most. The logic of this tax relief is that those with greatest capacity to save (the best off) get the highest level of tax relief to do so – with the inevitable consequence that the gap in wealth between richest and poorest increases (even given recently introduced contribution caps) as a result of direct subsidies given to the richest by the state. It’s absurd, for example, that a 50% tax payer can get a tax subsidy of £25,00) a year towards their savings from the state at present – which is more than average pay.

So for once I applaud news from the government - that it is looking to axe higher rate pension relief and save £7bn a year as a result.

It’s a move that makes complete sense in this environment.

And it should be followed by caps on all other forms of savings subsidies and the abolition of all tax relief on gifts to charities at higher rate too – although in the latter case the saving should be directed to the charities.

So for once credit where it is due – if Osborne does this I’ll give him full credit for it.

But, on his current track record expect the idea to be dropped by Tuesday.

Hat tip: Frances Coppola

Tax residence and domicile

Tax avoidance, TUC 14 Responses »

Jun 172011

The government has announced new consultations on the above subjects to day.

I’d suggest they read this, which I wrote for the TUC.

I’ve not had reason to change my mind on the subject since last year.

Sean O’Grady gets corporation tax very wrong in the Independent

Corporation Tax, Economics, Tax avoidance, TUC 2 Responses »

May 302011

Sean O’Grady in the Independent has delivered another of his spectacularly wild economic comments in response to my new report on corporation tax for the TUC.

My contentions in that report, all backed by evidence are that:

a) The UK already has competitive corporation tax rates;

b) The UK small companies rate of corporation tax that is applicable to more than 90% of companies in the UK is way below average in almost all states like the UK. Half of all private sector employees work for companies like this – a fact O’Grady seems not to know;

c) There is little evidence that cutting corporation tax increases employment or growth;

d) What evidence there is is very weak – well over 90% of growth and employment is stimulated by other factors – including (quite probably) the beneficial effect of public spending funded by tax.

O’Grady has none of that. He says:

My verdict is “nice try brothers”.

What evidence does he rely on to make this patronising and really rather silly comment? Common sense he says – the common sense that apparently says that if billions are parked in Ireland, Cayman and the BVI we should copy them.

Except that these funds are not parked there at all, even in the case of Ireland (as the case of Google reported in the Sunday Times yesterday shows). They’re accounted for there. That’s very different indeed. There’s no money to be made in Cayman and the BVI and almost none in Ireland – as recent experience has painfully shown. Low tax rates don’t induce people to move where they trade or where they employ people: they induce people to move where they record their profits. That’s something very different indeed. O’Grady should know that. Like most economic commentators he doesn’t though – or chooses to ignore it.

And as a a result he gets spectacularly wrong why the French and Germans make such a fuss over this abuse: it’s not that this activity takes their business away: what these tax havens do is take away their tax revenues: the very tax revenues needed to support the infrastructure, training, and private poverty rights that make those profits possible. That’s why they’re annoyed, because without that tax the business in question is not sustainable, and they know that because unlike us they aren’t plagued by the short term thinking of our major corporations. But again, O’Grady does not get that. So he claims WPP moved for tax butlet’s be blunt, it didn’t: WPP moved where it accounted for tax, which is something very different indeed, and why they could also agree to come back so easily.

So what else does he claim? Well:

Also jobs are not the only factor or valid goal of economic policy; firms that don’t use much labour esp. in financial services can contribute to output and growth after all.

It’s a perverse argument when all states that relied heavily on growth of this sort have suffered so badly.

And he also argues that:

Although there’s a lot of beggar my neighbour and free rider activity associated with incentives (tax breaks, subsidies, planning relaxation) for inward investment between and within countries it does work, again as the Irish experience longer term shows very well, or Docklands in the UK, or Spain in the 1980s, though again it is not the sole factor.

No- actually there’s no evidence that any such arrangements have ever generated growth; there’s just evidence that they have resulted in beggar my neighbour shifts in the tax burden from companies to individuals.

But then he gets really desperate: he says:

Ask yourself what would happen if we raised corporation tax to 50% or 100%. Would that create jobs? So my verdict is “nice try, brothers”.

The answer would be “that’s so stupid a suggestion no one would do it – and no one is saying they should”. We have to remember a good reason for corporation tax is that it exists to ensure income tax is paid – especially when we cannot (because of the way in which tax havens work) identify a great many of the owners of companies who would escape all tax as a result if there was no corporation tax. So the logic of 100% corporation tax rates would only be relevant if we had 100% income tax rates. We don’t. I think it inconceivable we will so the logic of the question is not just bizarre, it’s crass and unbecoming of a serious newspaper that it be asked to publish it.

But it is incredible that a tax designed to protect revenue is having its tax base decimated, as my report shows; is having effective tax rates for large companies reduced to well below the basic rate of income tax in this country and below the rate corporate charged to small companies and well below international norms, and all on the basis of the unproven logic that this will result in new jobs in the UK.

Ask a simple question – not what would happen in the absurd scenario of 100% taxes that he quotes – but what happens in the real scenario of 0% taxes we can observe? How many new jobs outside accountants and lawyers offices have low tax rates created in Cayman (population 50,000 or less), BVI (23,000 pop), Jersey (90,000 pop) etc? Almost none is the answer. It’s because low tax does not create jobs, new investment, innovation or new skills. There is emphatic evidence of this. These places prove it. Low tax is simply associated with states with low GDP, under achievement or failing government or failing economies (note: Ireland). Look at Africa too. The fact is higher taxes equate with wealth and tax works best when rate differentials at particular levels of income are reduced. All the plan to reduce corporation tax rates in the UK will do is increase rate differentials to the advantage of the owners of large companies, but there is no indication it will create any new jobs, at all.

That’s what my report shows.

O’Grady shows a complete lack of understanding of tax havens, accounting, corporate migration and the relationships between tax and wealth generation. Shame on him. We did much better than that.

Or to put it another way: I / the TUC hit the nail on the head and all he could was resort to platitudes and abusive commentary dependent on stereotypes to respond to it in the hope that people would not identify the weaknesses in his thinking, which are legion.

Poor effort O’Grady, I say. Try much harder next time to stick to the facts and seek to present an argument. Until then go to the back of the class.

Mike Devereux – the friend of big companies is wrong about corporation tax and growth

Corporation Tax, Ethics, TUC, Uncategorized 3 Responses »

May 282011

The Guardian, rightly, sought contrary opinion when reporting my new report for the TUC on corporation tax cuts.

The found it from my old foe, Prof Mike Devereux of the Oxford Centre for Business Taxation, which would be better named the Oxford Centre for the Non-Taxation of Business.

As the Guardian reports:

Mike Devereux, director of the Oxford University Centre for Business Taxation, said the report did not take into account all the variables that might affect growth rates in order to establish whether corporation tax affected investment.

“The evidence for whether corporation tax affects growth in this report is weak, to say the least,” he added. “As the report acknowledges, there are all kinds of things which may affect growth rates. Looking at a correlation means you are not controlling for any other differences. There are all kinds of reasons why growth rates might differ.”

It’s anyone’s guess what Mike means when saying that, but the report sought to add clarity:

The TUC study contradicts a detailed analysis conducted by the OECD. Published in November 2010, it found that corporate taxes were the most harmful type of tax for economic growth.

Devereux suggested the research itself was not definitive, however, but added: “To say corporation tax does not affect growth is just ignoring quite a lot of academic literature.”

Mike’s trouble is I did not say it did not affect growth: read the report and it clearly says there is a link between corporation tax and growth. I did not deny it: I do not deny it.

But what the report did do was assess the significance of that link. As the report says:

It transpires that analysis of the correlation between tax rates and growth in OECD countries (excluding the top and bottom outliers) finds that at best the relationship between the two variables is weak, with the r² coefficient less than 7%.

In English that means that at most 7% of growth differences can be explained by differences in tax rates. As the report puts it:

Tax rate differentials of between 27% and 40% over a period of 14 years are clustered so weakly around growth rates that these growth rates only vary between 1.9% and 2.3% per annum as a result.

The relationship of changing tax rates over time (which is what the UK government is proposing to do) and growth is weak based on this data. The linkage between the two as suggested by the resulting correlation coefficient that might reasonably be expected to apply to the UK suggest that over 90% of growth in this range is explained by factors other than tax. In that case cutting tax rates to stimulate growth appears a poor choice of economic policy.

That’s the message of this report.

Devereux’s work, we should remember is (not just in my opinion) fundamentally unreliable because of failures to mention conflicts of interest, enough for the Times Higher Education supplement to have reported on the issue. His work is funded, amongst others by the FTSE 100 group of finance directors to the tune of at least £5 million. It’s a fact Devereux rarely discloses. But it does help explain why he and his colleagues work so hard for the abolition of corporation tax whenever they can, including by heavily influencing the Institute for Fiscal Studies’ Mirrlees Report on this issue.

Now I’m not for a minute claiming my work is unbiased: I’m just saying that I am openly acknowledging my bias. Those biases have significance. What Devereux is saying is that if all other factors are taken out of account, as his supposedly objective academic work does, then there is a proven link between cuts in corporation tax and growth. His work is designed to influence policy: he might like to pretend it isn’t but he never objects when it is used for that purpose. I have to conclude his work is politically motivated as a result, with intent to lower corporation tax rates or to see the entire tax abolished, with the burden being effectively added to VAT (his chosen option, which would increase the VAT rate to over 30%).

But my point is that Devereux’s choice to ‘control’ for those other factors when coming to this recommendation ignores the fact that my findings suggest that those other factors explain 93% of growth and changes in corporation tax in countries comparable to the UK explain just 7%.

So, when making policy, and deciding how to allocate scarce resources would any rational, objective person, use corporation tax to stimulate growth when it is apparent that this has weak links with growth and that its impact is at best highly marginal or would you instead go off and look at and invest in the other factors that encourage growth?

The right choice is very obviously to look to recreate growth using other mechanisms.

Deveruex though, by ‘controlling’ for these other factors seeks to remove them from consideration. He makes the choice ‘do you cut taxes, or not?’. Well if that was the only option then you might cut taxes. What my work shows is that Devereux asks the wrong question, uses statistics badly and as a result comes to the wrong answer, which is inevitable when your political blinkers mean you ask the wrong question, which is what I think he’s doing. But that’s the risk resulting from accepting sponsorship from big business. Again, there’s no problem with accepting sponsorship: I clearly have. But why doesn’t Devereux ever ensure that this bias is recorded when he is claiming to make academic objective comment which in my opinion is nothing of the sort?

If corporation tax cuts don’t work will Labour have the courage to reverse them?

Corporation Tax, Labour, TUC 1 Response »

May 282011

The Guardian and the Herald in Scotland have covered my new report on corporation tax, competition and its relationships with growth and employment published by the TUC.

As the Guardian notes:

Lower corporate tax rates may not boost economic growth, a new report suggests, taking issue with a key principle at the heart of the Tories’ economic policies.

The report, by chartered accountant Richard Murphy on behalf of the Trades Union Congress, suggests the correlation between lower corporate tax rates and higher economic growth is weak at best. “Low corporate tax rates reduce revenues, but fail to create jobs,” the report says.

The conclusion is based on an analysis of the corporation tax rates of OECD countries between 1997 and 2010. “Analysis of the correlation between tax rates and growth in OECD countries (excluding the top and bottom outliers) finds that, at best, the relationship between the two variables is weak,” Murphy concluded.

The coalition has cut the headline rate of corporation tax in order to boost growth. It was 28% when Labour left office and will reach 23% by 2013. In the last budget, the government said: “The reductions in the rate of corporation tax and healthy financial position of UK companies in aggregate should help support further investment growth.”

Ministers say they want to make the UK competitive and attractive for multi-nationals. TUC general secretary Brendan Barber said: “The government has been seduced by employer calls for more corporate tax cuts. But while everyone wants to pay less tax, from multinational corporations to ordinary taxpayers, the argument that simply cutting corporation tax will fuel jobs and growth does not stand up to scrutiny.”

I have no doubt that the evidence will show that to be true.

But the question is – will a Labour government have the courage to reverse these changes in future? If we are to ever have the publoic services we need they will have to.

The debate has to begin, now.

The fallacy at the core of Conservative economic thinking is that low tax works

Corporation Tax, Economics, TUC 2 Responses »

May 282011

I have the following blog on the TUC’s Touchstone site this morning:

At the heart of George Osborne’s economic policy is a deeply perverse belief that if he cuts public spending and services people’s confidence will increase because they will think that they will have more money to spend themselves as a result and so there will be economic expansion as they spend more in anticipation of this windfall. This is called expansionary fiscal contraction. There is no evidence to support it: it’s very obviously not working. It has rightly attracted opprobrium,including from Paul Krugman.

This perverse, and failing, policy is matched by another perverse policy which will also fail, but which has not as yet had time to evidence that fact. This is the policy of cutting corporation tax in the belief that this will increase both growth and employment, which is central to Osborne’s policy of cutting the mainstream corporation tax rate from 28%, which it inherited from Labour, to 23% over a period of four years.

It is argued by many, including academics and the OECD that there is, indeed, a relationship between growth, employment, and low corporation tax rates. However, new research that I’ve undertaken for the TUC, published today, leads me to seriously doubt this.

Using sample data from OECD, EU and other sources, and considering a long time period, from 1997 to 2010 I found that whilst it is true that there is some limited correlation between falling tax rates and increased growth and employment, those links were so weak that other factors must explain the causation of the relationship, and that changing corporation tax rates do not.

In fact, applying statistical analysis to the data, and making sure that obviously dissimilar countries to the UK, like Ireland, Luxembourg, Italy and Japan in the case of growth (because the first two are both small states and tax havens, and the last two have suffered such low rates of growth that they cannot be compared to the UK) and Greece, Italy and Spain with regard to employment (because their employment patterns are so different from the UK’s), suggests that just 7% of growth can be explained by the enormous range of different corporation tax rates offered by the countries surveyed, and only 6% of the significant variation in employment rates can be explained by differences in corporation tax rates.

That is significant: if comparison is made with countries like the UK, rather than making comparison to all countries, then it becomes very clear that changing corporation tax rates has almost no impact upon either growth or employment, and well over 90% of any difference has to be explained by other factors, which might well include the level of public spending in the country.

This research makes clear as a result that these cuts in corporation tax are likely to provide almost no return to UK economy, They are, on the other hand, guaranteed to make large UK companies richer. As a consequence, the gap between rich and poor in this country will increase whilst the resources available to the government will be reduced.

The research makes another very important point though, which is that is that the claim that these cuts in tax rates are necessary because the UK is uncompetitive is also wrong. The U.K.’s current corporation tax rates were already at or below international averages, and there is no reason to reduce them as a consequence. In addition, because well over 90% of all UK companies pay tax at the UK small companies rate, which is currently 20%, and this is vastly lower than the average corporation tax rate across most OECD and EU countries, we do in fact already have an extremely generous corporation tax regime in the UK, Despite that the obvious observation has to be made that it is not apparently delivering growth at this time. Why cuts should therefore suddenly deliver growth when low rates are not already doing so is hard to work out.

The reality is this policy of cutting corporation tax, just like the policy of expansionary fiscal contraction, appears to have no logic in fact: it appears to be entirely driven by dogma. That dogma is based upon a dislike of government and public services, and the desire to increase corporate profits at the expense of all other sections in society and parts of the economy. The resulting policy of tax cuts for companies, when almost everyone else is seeing tax increases, is further indication that we are not all in this together.

Indeed, the exact opposite is the truth: whilst my report shows that the government expects tax yields from income tax, national insurance and VAT to increase significantly over the next few years corporation tax takes will, having taken inflation into account, flat line. There is, as a result, just one sector in the UK economy that is being favoured by the policy of cuts, and that is big business. Even small business will not benefit in the same way, its corporation tax cut is being cut by just 1%, whereas the cut for big businesses is 5%.

The implication is clear: this government is running an economic policy for the boardroom’s of big business, for bankers, international financiers, tax avoiders and those with significant wealth. Everyone else is having a tough time: for this elite though things have never been so good. And it is important to stress, there is no logic to this: this is political choice, designed to deliver gain for a tiny proportion of society at cost to everyone else.

Corporation tax cuts do not stimulate growth

Corporation Tax, TUC, Uncategorized 12 Responses »

May 282011

The TUC has launched a new report I have written on corporation tax this morning. As the report says, it:

Reviews the history of UK corporation tax, the history of UK mainstream corporation tax rates and the history of UK small company corporation tax rates.
Compares movements in UK corporation tax rates with those of a sample set of data drawn from more than 60 other countries.
Notes the history of corporation tax yields in the UK in isolation and in comparison to other main taxes, and then reviews forecast trends in these yields.
Describes, using examples, the proposed changes in UK corporation tax and the impact they might have on the tax base.
Speculates on the impact of the proposed changes on tax yield.
Reviews data on the relationship between corporation tax and growth in GDP and average employment rates in the EU15 states and selected other locations.

As a result of this work the report suggests that:

There is no current competitive pressure to undertake these tax reforms;
The consequence of those reforms will be declining corporation tax yields at a time when increased revenues are needed to reduce the deficit;
Large companies will see a disproportionate decline in their tax charges when compared to small companies, creating an unfair competitive advantage for large companies. This will hinder internal tax competitiveness in the UK;
There is a significant prospect of there being outflows of profit from the UK as a result of proposed changes in the UK corporate tax base;
There will be some disadvantages for developing countries as a result of the proposed changes in the UK’s corporate tax base that will harm their prospects of collecting the taxes legitimately due to them.
There is little prospect of significant growth resulting from these changes in corporation tax;
Consequently these tax cuts represent a poor use of government resources at a time when these are exceptionally scarce.

Evidence is, of course, suggested to support each conclusion.

Why do this now? I suggest it’s appropriate for several reasons. First the Finance Bill is currently making progress through the Commons. Opposition to its tax cuts for big business is still possible.

Second, there is a large body of opinion that says tax cuts stimulate growth. I can reproduce that result, but only by including tax haven states. The UK is not a tax haven state so the comparison is simply misleading. I presume no one wants to copy the Irish debacle and no one thinks the UK could behave as Luxembourg has.

Third, squeals that the UK has uncompetitive taxes are heard often but analysis does not support this view.

Fourthly, the fact that massive effective tax cuts are being given to big business (but not small business) now is an issue that has hardly been noted as yet.

Lastly, the UK has to accept that its actions have unforeseen consequences. The abandonment of our residence based principles of tax and controlled foreign company regulation will have serious consequences for some developing countries.

These are issues that need to be on the political agenda and without reports of this sort they won’t be.

I am well aware opponents will protest. That’s not the point: what I show is that I too can pick data and show that links between tax rates and employment and growth are weak: data in my case selected to ensure that the samples were similar to the UK. Such data cannot prove causal relationships at the end of the day, but it can say associations between data are weak. The relationships I found between tax rates, growth and employment were very weak; well under 10% of all variation in growth and employment could be explained by tax rates. In that case the suggestion is simple: to change tax rates is a very poor way to stimulate the economy.

As ever, the Conservatives are backing the wrong economic policy.

But the error of judgement does, undoubtedly suit their friends in big business.