Tuesday, October 17, 2006

Capital isn't working

Most economists in the UK agree that we are currently at the peak of the economic cycle. Returns to capital are high by historic standards, but according to our analysis corporation tax paid as a proportion of gross domestic product has remained static at 3.2 per cent over the past 7 years. This is evidence of the fact that an increasing share of national wealth is being retained by the wealthy, and the tax burden is inexorably being shifted to the less well-off.

This has happened during the tenure of Mr Gordon Brown. Today he will be meeting with representatives of the City of London. Last year was the City's most successful to date. 2006 is likely to repeat this success. But instead of sharing their success - and the massive bonuses they pay themselves out of our pension funds - the City will be demanding tax cuts, including abolition of stamp duty on share transactions, lower corporate tax rates, direct consultation on tax changes, and a more benign attitude towards tax avoidance. Ever anxious to prove himself the friend of capital, Brown is unlikely to resist, despite the fact that the City's growth in recent years completely contradicts the case for tax cuts.

In today's FT, Brown talks about the need for a competitive tax environment. In fact the environment is already competitive by international standards. Where the UK does not compete is in the quality of its education - tenth in international league tables according to the OECD - and the remarkably poor quality of its infrastructure. This requires more investment by government, ergo this is not the time to be cutting stamp duties (an efficient tax as William Pitt observed) or conceding lower tax rates to companies enjoying record profit levels. Nor is going soft on avoidance a good idea. Company directors should compete on the quality of their goods and services and the efficiency of their production. Competing on tax is a short term fix, which takes the pressure of directors to perform better.

It becomes increasingly clear that capital is unwilling to pay its way in society. So much for corporate social responsibility.

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