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?
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Surely, there are three independent issues here:
1. For a given choice on each of the other two issues, do we want high taxes-and-spending or low taxation-and-sending. This issue is a left-right political issue.
2. For a given choice on each of the other two issues, do we want to run a currrent deficit (to get the economy going in the short term, in order to get the rolling debt down over the long-term), or a current surplus (to get the rolling debt down in the short-term, irrespective of the long-term). This is a rather contentious macro-economic issue.
3. For a given choice on each of the other two issues, how do we want to set the balance between payroll taxes, consumer taxes, taxes on super-normal earned income, and taxes on corporate profits and other un-earned income.
The debate about the inpact of reductions/increases in taxes on corporate profit and other unearned income is (or ought to be) firmly placed in the third category. Thus:
– We should NOT be asking ‘do taxes on corporate profit and other unearned income have an adverse impact on the ‘natural’ level of economic activity’, because the answer (of course) is yes. ALL taxes have an adverse impact on the level of economic activity.
– Instead, we should be asking ‘FOR A GIVEN LEVEL OF TAX REVENUE, which tax-alignment has LEAST adverse impact on the level of economic activity.
The answer to that question is undoubtedly taxes on corporate profit and other unearned income. Thus, FOR A GIVEN LEVEL OF TAX REVENUE, we should be seeking to INCREASE taxes on corporate profit and other unearned income, and to DECREASE payroll taxes and consumer taxes. The only (spurious) counter-argument to that position is that corporate profit and other unearned income is easy to re-engineer to tax havens and secrecy jurisdictions; resulting in a ‘race to the bottom’ to the point where corporate profit and other unearned income is virtually un-taxable.
Tim
Whilst I have some sympathy with this I also have real problems
The idea that the state always reduces economic activity is absurdly wrong. Try living without:
– law
– order
– property rights (which can only be enforced the state)
– corporations
– defence
– transport infrastructure
– universal education
– universal healthcare
– universal pensions
– universal provision for the sick and disabled
– an agency willing to counter the externalities the market can never address
and on, and on and on
The suggestion that the world would be richer without states is so wrong
I suggest in fact the reason why cutting is so hard is that we find we need the satte very badly indeed
And if I can be so bold, rather more than we have it
Richard
I wholeheartedly agree with everything you have said here (and elsewhere). I did not intend to suggest that ‘taxes’ and ‘the state’ were ‘bad’.
My primary point was that there are THREE DISTINCT ISSUES here.
Issue 3 relates SOLELY to the RELATIVE merits of corporation taxes when compared to payroll and consumption taxes, and is the SOLE issue I wished to address to make a secondary point. That secondary point was that, FOR A GIVEN LEVEL OF REQUIRED TOTAL TAX REVENUE (determined in issue 1), corporation taxes were less damaging to the private economy than payroll and consumption taxes. Thus, FOR A GIVEN LEVEL OF REQUIRED TOTAL TAX REVENUE, we should increase the rates of tax on corporation taxes and reduce payroll and consumption taxes (if only the tax havens were prevented from blocking that option, with a competitive race to the bottom).
Issue 1 relates SOLELY to the RELATIVE merits of high taxes-and-spending when compared to low taxes-and-spending, and is the SOLE issue you addressed. I agree with you that high taxes-and-spending is far better than low taxes-and-spending, but that was not the issue about which I wished to make a point – some other time maybe!