I posted this thread on Twitter this morning:
Tax cuts are in the news as Tory party leadership candidates are talking about them as if tax was going out of fashion. It is very apparent that none of them know much about tax, so a thread to discuss some of the issues.
First, because all government spending is, as a matter of fact, funded by government money creation via the Bank of England, which was proved in the quantitative easing eras, the proper role of tax in the economy needs to be understood by these politicians.
That proper role of tax in the macroeconomy - which is what they're going to be responsible for - is to reduce inflation. Tax cancels government money creation. It takes government-created money resulting from government spending out of circulation.
There is no direct relationship between money creation and inflation. But it's clear that a government cannot spend without limit with newly created money and not create inflation as a result. So governments tax to reclaim the money that they spend.
This means that there are questions for ministers who want to cut taxes now.
The first one is how are they going to control inflation if they are going to cut taxes? We have an inflation problem. I favour selected tax cuts plus some big tax increases on the wealthy to tackle it. What do they propose?
The second is, if they do want tax cuts, come what may, with no other counter inflationary measures, are they as a result planning to cut government spending? As they all say they want growth, how do they think cutting government spending helps this?
For those of them who do not know, government spending is a key element in our national income. It is not money wasted. It is part of our national income. So, if they want to cut that part of our income, where do they think the replacement activity is going to come from?
I would be willing to believe that this growth might come from the private sector in some circumstances. For example, if there was a massive new technical innovation waiting to drive change and so growth. Or if people had money in their pockets waiting to be spent.
Maybe Tory party hopefuls think these situations exist. But all I see is the iPhone 13 (which looks like the iPhone 12, which is the state of play in all tech stuff now) and I see people suffering a massive cost of living crisis in desperate need of help to make ends meet.
This is not the scenario where a tax cut is going to help because it's not the scenario where private sector innovation is in the slightest bit likely. Businesses invest when they can see a return on their money. I know, because I've run them. And those returns are scarce right now.
It's also interesting to note that so far no prime ministerial hopeful appears to want to address the one issue that is the biggest impediment to investment in the UK at present. That, of course, is Brexit.
Our exports are down heavily because you can't sell from the UK. It's a fantasy to suggest there will be serious investment in the UK whilst we are outside the single market and maybe the Customs Union. It's just too expensive and uncertain to locate in the UK right now.
Let's look at some other dimensions to this. It could, for example, be argued that tax cuts would help stimulate the economy if they were targeted at the most vulnerable. Companies are not the most vulnerable. But national insurance cuts could help.
The only problem for ministers seeking to help the most vulnerable is that tax cuts are a pretty poorly targeted instrument to achieve this goal even if the right tax is chosen. Increasing benefits will almost always work better. But they don't want to talk about that.
What they do all seem to want to talk about is corporation tax. All of them seem to have fallen under the spell of Arthur Laffer, who long ago proposed that if you cut corporation tax rates then tax yields increase because more profits are made.
Laffer claimed that the increase in profits was so big that it more than compensated for the cut in rates. Now it so happens I have met Laffer. We confronted each other, head to head in a debate at the OECD in 2018. You can watch it here. https://www.taxresearch.org.uk/Blog/2021/10/07/the-day-i-took-on-arthur-laffer-and-won/
The debate was subject to a vote. I won. Those voting came from the American Chamber of Commerce in Europe. They weren't chosen for their left-of-centre credentials. I won because Laffer talks twaddle.
Tax cuts for businesses only increase revenues when the tax rate that is cut is very high. A corporation tax rate of something over 50% might be required for the effect to be seen. The current corporate tax rate is 19%.
Such tax costs also only work if regulation in other states let companies ultimately owned there move to the UK and take advantage of them. But US laws would already prevent US companies from doing that, and the OECD is moving worldwide tax in the same direction.
And then there is the problem that even if it seems that tax revenues rise because of corporate tax rate cuts that's only ever happened because people have shifted income into companies that was previously taxed in their own names.
If the corporation tax rate is 15% and the income tax rate is 20% which small business is not going to be set up as a company as a result? That's a massive gain to accountants and for tax avoidance but none to society at all.
And finally on this theme, the evidence is that when companies relocate for tax they do not bring large numbers of people and lots of new work with them. They bring a few head office personnel. And that's it. We win almost nothing as a result.
So, what all these Tory hopefuls are offering are big bungs to business and their friends in the tax avoidance industry, but what they are definitely not doing is offering any prospect of new work or growth as a result.
So, to summarise, these cuts will not help the least well-off. There is no chance of private sector innovation because the economy is already in the doldrums and Brexit is not being reversed. And corporation tax cuts just promote cheating. So what are they actually doing?
All these Tory party leadership candidates are doing is a) failing to tackle inflation b) creating big government deficits c) cutting growth d) laying the groundwork for massive cuts in government spending if they all remain committed to balanced budgets.
The last point is especially important, and I think what this is really all about. Cutting taxes is Tory leadership code for cutting the size of the state and yet in this country the only area where there is demand for growth is in the supply of state services.
We want more health and social care. We want a green new deal. We want education and functioning criminal justice. We want to see people working for the state properly paid or we know we won't get decent services. We know there is no viable private sector alternative to these things.
This is the issue we really face. Instead, Tory party hopefuls offer us higher inflation, low growth, cuts, despair and poverty. They ignore green issues because their idea of growth is carbon consuming, and mine is not. They offer disaster.
And why do they do that? Because they are slaves of a defunct dogma that denies we live in a mixed economy when they would like to pretend in a pure market economy, which has not existed in anyone's lifetime. They are fantasists, and we will all suffer for it.
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On the subject of small business, in your opinion, how could the tax system help a (fictional) small business that is doing quite well but needs to employ an additional member of staff.
They have done some back of an envelope sums and worked out they would be “cutting it fine”
How can businesses like this be assisted?
Reduce employer NIC
Create an alternative tax
I address this in The Joy of Tax
Is this a reference to the Carbon Usage Financial Transaction Tax?
I suppose that’s fair if true. We would actually like to get to a place in Great Britain where we do less of the things that are low carbon and more of the things that make us better off.
It is
I apologise for this being off topic. But I am angry about the way Johnson is being treated. The leadership candidates still seem to feel the need to praise him and seem to be prepared to indulge his desire to remain in office until the autumn.
Johnson spoke in favour of the EU in 2015. In 2016 he did the opposite. By 2022 we can see almost all the Brexit arguments have been disproven. The economy is taking a hit – up to 4% of GDP ( about £88 billion) a year. We can conclude Johnson & co did not understand the real world OR were prepared to lie to use a cause to get into power. Both are probably true and although lying is consistent with his character, it is more probable that it was to get power and impose a regime of cutting democratic freedoms, de-regulating and expediting the re-distribution of wealth upwards. He was also the instrument of the Tory press and its billionaire owners, and other oligarchic figures for a sort of coup.
There is no way he should remain in office or nominate for peerages as though he was a normal Prime Minister.
End of rant
An appropriate rant
Absolution
Thank you, Father!
I posted this Tweet to Stephen Kerr MSP, Conservative Chief Whip in Holyrood, opening by quoting directly from his own words in the Tweet to which I responded:
“Mr Kerr,
U-turns, waste of money. gimmicks, gimmies, PR; I a fair summary of your own sick, witless political Party; but you do not ‘do’ candour.
The Guff rolls on; a choice of PM from the hopeless, the spineless, and the self-serving. Good luck with that in Scotland”.
I have had frank, direct exchanges of correspondence with Kerr in the past (including an agreed exchange of correspondence in a blog I had published in Bella Caledonia a few years ago), without complaint. We do not agree, and I considered his politics superficial, populist and intellectually incoherent. As the Conservatives descended into the grubby mire descended into the mire, Kerr has frequently defended the indefensible, loudly and aggressively (while Douglas Ross – his Scottish so-called leader – dithered), including on Twitter.
My Tweet was successfully sent, but before it cleared I was asked by Twitter in a completely unexpected intervention, whether I wanted to change the wording because of potentially harmful or offensive language. I leave readers to judge.
Meanwhile, I consider this un-called for intervention a veiled assault on free political speech. Why is it happening? Is the spat between Musk and Twitter an unrelated event to this new Twitter censorship? It has neve, everr happened to me before, anywhere.
I am most surprised by that intervention by Twitter
I should observe I was replying to a tweet on his political Twitter feed (13.7k followers), which attracts responses (not surprisingly) from anonymous trolls from all sides; a lot of it angry. but his whole approach on his Twitter account is calculatedly confrontational, angry and divisive in the current difficult climate (while claiming division is nothing to do with Conservatives).
Alternatively, scrap NICs for under £20K, reduced rate @ 10% upto £40K earings then 15% for upto £125K then 20% for over that. employer pays the same for their workforce.
Increase tax threshhold to 20% then at rate steps of 10%, 15%, 20% 25% upto £125K after that tax at 35% upto £250K and then at 45% for anything over £250K
Abolish road tax on private cars repoalce by New Car tax @35% of new car sale price.
Scrap council tax on lowest bands A,B and C; D & E stay the same F &G double and the highest band is quardupled.
Reduce Business rates by at least 50% for smes with less than £200k profit and less than 50 employees.
Reduce VAT to 15% and introduce above average VAT to 20% for goods up to 15% above average selling price, 25% for goods between 15 & 25% above item average selling price and a 35% rate for goods above 35% of item average selling price, with a 50% rate for goods sold at 50% above item average selling price.
tax green produced domestic electicity at 0% and business at 10%.
I think that would take quite a lot of modelling
Howard Reed and I discuss doing such things sometimes but life is finite
You know, the more I look at them, the more I see a party that does not believe in anything at all – just their own survival.
They don’t even in my view believe in tax cuts other than it is a great ruse to get a vote. That’s it. It’s a transaction.
A deliberate ruse to get into power. The only difference between Johnson and the rest of his possible replacements is that he’s actually more honest about the contempt he holds the rest of us in; this shitty field of successors are in many ways worse because their lies are more subtle, more guarded. That is how low the Tories have brought us.
Is it still the case that eligibility for the State Pension depends on the number of years you paid National Insurance? If so, the temporary benefit to some of raising the threshold will disadvantage them in the future, with no way of making up the deficit.
Pesonally I would *lower* the NI threshold, but also reduce the rate paid to no more than 5%. I think it is important that even part time workers on minimum wage feel they have a financial stake in the country and its government and the things it funds as a public benefit.
And I would make total income taxation (i.e. income tax plus NI) truly progressive, applying to income from all sources, and with the top rate matched by capital gains and inheritance tax.
However I don’t have the ability to model the effects of such a system, nor do I appreciate where there might be technical challenges in implementation.
The qualification threshold is lower than the payment threshold so the problem is not as bad as you suggest, but give it time…..
NI and income tax integration would be immensely difficult to be fair
More interested in the chancellor than the prime minister. But who cares because nothing much will change. Central banks will not monetise deficits, and we will still run a structural deficit for fear of overtaxing to achieve that miracle LT growth rate. Can you explain to me how Sweden manages to create a low debt economy with no MMT?! It is actually possible. Soon to be emigrating
All countries run MMT
And there is no such thing as a structural deficit
In case you other readers have not seen it yet, Dan Neidle is putting up some interesting commentary on the tax affairs of the candidates for the Conservative leadership. Sunak, Hunt and Zahawi so far.
See https://www.taxpolicy.org.uk/comment/
The public information is often limited, but reasonable deductions can be made and further questions asked.
‘The Times’ website reprts today that: “An ally of Priti Patel has admitted sharing a ‘dirty dossier’ sent around Tory WhatsApp groups branding Rishi Sunak a liar who cannot be trusted on tax.”
Ah, the noble charm of the Conservative Party in its well known, oft repeated, lofty pursuit of the national interest……
Indeed
And she is apparently being advised by a former adviser to Pinochet
Gosh. I wonder what tax matters Sunak might allegedly have lied about.
And I wonder if Zahawi and Javid might have been somewhat, ah, economical with the transparency about their offshore tax affairs too …
The multi-talented Grant Shapps (Michael Green, etc.) also has questions to answer.
Patel went the policy wonk / PR route, rather than finance in the City, so perhaps there are fewer financial skeletons in her closet. But I wonder what PR work she did for BAT, for example – helping to deflect criticism of their factories supporting the military dictators in Burma, perhaps, or of child labour in Nigeria? https://www.theguardian.com/business/2015/may/30/priti-patel-worked-as-spin-doctor-tobacco-firm-burma-scandal
All good questions