People often wonder why I criticise the Institute for Fiscal Studies for right wing fundamentalism, as I have done on this blog, quite often. The reason is that it is right-wing and fundamentalist, however good its analyses might be when it comes to budgets, spending reviews and so on.
Take this report from the BBC:
In the Royal Economic Society's annual lecture on Tuesday, Professor Rachel Griffith will argue corporate tax should be charged like VAT.
"A preferable way to tax corporate income would be to tax profits at the destination of sales", she will argue.
Ms Griffith is professor of economics at Manchester University.
They might have added that Professor Griffith is also Deputy Research Director at the Institute for Fiscal Studies and that what she is saying continues a long line of such commentary on corporation tax from that body with which I have a fundamental problem.
This difficulty is simply stated and is that a corporation tax that behaves like a VAT is in fact the same as VAT. It's a sales tax. And sales taxes have three fundamental problems.
The first is that they are regressive: in other words those with lowest incomes pay a higher proportion of VAT than those with higher income. The reverse is true, of course with regard to taxes on shareholders - which despite IFS claims is exactly what corporation tax is now. So this suggestion is massively socially regressive and will increase economic inequality.
Second, sales taxes fail to reward producer states. They may be developing countries who lose out on revenues on the extractive industries. Or they could be high tech states who have spent a lot on innovation. However looked at this is absurd: the states bearing the costs do not get the revenues in such a system. That's economically bizarre, to be kind, and massively harmful to developing countries in the process.
And third, do this and capital almost ceases to be taxed in practice. How convenient for the owners of capital.
This proposal, most closely associated with Prof Michael Devereux of the Oxford Centre for Business Taxation, who is also closely linked to the IFS, which also espoused it in its Mirrlees Review, reveals an indifference to the role of tax in redistribution within and between states and ignores economic fundamentals but happens to suit the owners of capital very well.
If that is not right wing fundamentalism I do not know what is.
Beware the IFS when it comes to policy issues: it is very far from the neutral think tank it likes to pretend to be but is, instead, a fully paid up advocate of neoliberalism and the flooding up of wealth.
PS: I have been asked to define right wing and fundamentalist
Right wing in this context is having a bias to capital
Fundamentalist means it works in neoclassical economic theory so let's do it in practice
PPS: I watched the lecture - and yes, a VAT was suggested.
To achieve the recovery of corporation tax would require a VAT rate exceeding 26%
I note it was said that this is not a VAT in answer to my questions - but throughout the lecture it was said that this tax base would be like VAT
Looks like VAT, quacks like VAT, is VAT, I think precisely because the aim of incidence in this case is sales - and that is precisely what is wrong with the logic
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Is destination-based sales not a fundamental factor of Unitary Taxation, which I believe you are in favour of?
I have concerns over whether it’s possible to actually determine the destination of sales in a manner useful for CT calcuations, but it’s deeply embedded in all UT systems I’ve looked at – see Picciotto, Durst, US systems (which tend to double down on it), CCCTB (OK, not strictly UT, but a fellow traveller), etc.
If you’re saying that the IFS is wrong to push in this direction, are you moving away from supporting UT?
Sales is one part of a formula for UT – and rightly so
BUT it apportions profits
It does not charge a VAT
AND sales are ideally split source and destination in my view and labour and assets are also in the equation
So as usual you are wrong Andrew
UT is a million miles from this proposal
The quote from Rachel Griffith is “A preferable way to tax corporate income would be to tax profits at the destination of sales”.
That is, it is a profits tax, in the same way as UT is a profits tax.
So if this is behaving like a VAT then UT is also behaving like a VAT.
Now the only similarity I can see between destination-based CT and VAT is the concept of looking at destination rather than source, and of course VAT is not entirely destination-based either. So I suspect that the BBC report is heading off up the garden path slightly.
If the lecture says something different I am happy to be proved wrong
But past IFS suggestions on this issue look like VAT – and abolishing CT altogether as such
Read Mirrlees and Devereux
And UT is not remotely like that: it’s based on profit
Excellent, succinct explanation of the IFS agenda there, Richard. Thanks.
Another extremely cogent analysis, Richard. (May I call you Richard? You don’t seem the type to be bothered about titles.) Someone has to point out the differences between these two camps so the neoliberal trolls don’t pretend they’re the same.
I am pretty indifferent to titles
Richard, I know you are critical of MMT but there is a good post on the problems with fiscal multiplier:
http://www.3spoken.co.uk/2013/05/the-misuse-of-fiscal-multiplier.html
“Rather than saying how much output can we get for £10bn of government action, we should be saying given we have a GDP output gap of £80bn how much do we need to deploy on the various policies to get that – given the multipliers and savings/income distribution of those policies.”
“As I said – cart before horse.
The issues are what is the output gap, what are the current savings distributions and what are the desired savings distributions.
Government then does functional finance to hit that.”
This “corporate tax” proposal would appear absurd for the reasons that you have listed. There is also the additional burden and proliferation of tax collection (at point of sale). The proposal as you describe it makes no sense. I would imagine that Griffith would try to argue that it is somehow a tax on corporate income and not a sales tax, although I can’t see how that would work in effect.
The studies on her page on the IFS site are full of archaic, orthodox methodology & pseudo-scientific modelling jargon. That much is consistent with your description of the IFS.
I still don’t understand how this sales tax proposal would tax ‘corporate income’
but then again it may not be worth the effort in finding out.
No one I know can see how Devereux’s proposals work
Let’s put it another way: they can only work in the fantasy of an Oxford academic’s mind
IFS =
Institute of
Financial
Sophistry
We’ll have the political left and right for the foreseeable future. It’s natural the left will want more progressive taxes on income and wealth and that the right might prefer less taxes generally and that the taxes which are levied should be on spending.
That shouldn’t really be a problem in an economic sense. Economists shouldn’t be too partisan. A left economist can very well explain to the Tory government how to achieve its goal of a smaller government without crashing the economy for example.
A major problem arises when the neither the right nor the left understand how the system works. The left aren’t immune from the wrong headed thinking of neo-liberalism but the right have swallowed it big time. They are convinced that they can cut the deficit by cutting government spending and increasing general taxes like VAT.
To show that just isn’t possible I’ve written a simple spreadsheet computer program which shows that government deficits simply can’t be reduced this way. The simple ‘economy’ is quite right wing too. No income taxes or wealth taxes. Just VAT!
https://petermartin2001.wordpress.com/2015/11/23/a-simple-spreadsheet-model-of-government-spending/
Thank you Richard. In my naivety I had always thought the IFS were indeed a ‘neutral think tank’ (but I’m going to carry on believing in Santa Claus)
far from it
The lecture on as dire, to be kind to it
far from it
The lecture on as dire, to be kind to it