Britain's industrial policy
“maintain the future pre-eminence of the UK’s international financial services markets”
We don't always agree with Wolf (we often do, however) but today Wolf gets right to the point about what competitiveness means in terms of jurisdictions:
"Alas, a competitive advantage in the supply of global “bads” is really a disadvantage."
Just as we have been saying all along.
And Wolf adds another note on this: he calls it "an industrial policy perspective on finance." (that is, government planning to decide which sectors to support.) Now one can have a debate over whether industrial policy is a good thing or not - many countries have done very well out of planning the structure of their economies to a degree as noted by, among others, the Korean economist Ha-Joon Chang (whom, as an aside, Wolf praises as "probably the world's most effective critic of globalisation".) The point is that industrial policy is not regarded as part of the "Anglo-Saxon" economic canon and it seems somehow ironic that it should be used to support the ultra-free market playground that is the City of London.
TJN's John Christensen at a recent public debate at the Oxford Union challenged Michael Devereux of the Oxford Centre Against (sorry, for) Business Taxation (whom we've just talked about in depth) on his advocacy of a "competitive" tax policy for Britain - asking Devereux where the intellectual roots of this kind of "competition" theory lie. Devereux could not respond - for there is no such intellectual underpinning: only ideology.
Later, speaking (in the Thatcher Room, ironically again - see the photo) at the launch at the UK Parliament on 14th July of Our Taxes, Our Lives - a new alliance of civil society organisations, Christensen delivered this important paper explaining what Martin Wolf might have meant by the supply of social "bads" being in reality a disadvantage.
"By shaping our tax system to subsidise investors and attract Russian billionaires, we have arrived at the bizarre situation whereby, under the current government, the poorest 10% of the population pay proportionately more of their household income in tax than anybody else, while the wealthiest 10% pay less than those on average incomes."
This is partly a result of what we have discussed before - crowding out and the Dutch Disease effects of a large financial sector on the economy. And Christensen added:
"Britain has played a lead role in promoting tax competition. Just to remind you, tax competition does not benefit consumers. It doesn’t create additional employment. It doesn’t encourage enterprise or innovation. The only beneficiaries of tax competition are the companies, who can cut their tax bills by forcing a race-to-the-bottom in corporate tax rates. But instead of cooperating with other countries to resist these tax competition pressures, Britain takes the lead in blocking cooperation and protecting our tax haven economy."
What has been the result of Britain's "competitive" tax policy on Britain itself? The result has been this: Britain has failed to leap ahead of other rich-world countries in terms of average income per capita, as one might have expected from a policy that has attracted half the world's money to the islands - and yet it is a far, more unequal society: look at the astonishing effect that inequality has. In other words, British people are worse off than their peers in other countries - and its industrial policy in support of the free-wheeling City is squarely to blame. And this was true even before the economic crisis took hold. Now things are going to get worse. (Tax Haven Ireland next door is arguably in an even worse situation.) Christensen continues:
"A complete change of direction is needed. As a starting point, we should recognise that tax concessions to rich people and companies do not encourage enterprise or long-term investment. Real investors look for strong domestic markets, productive workers, reliable sources of raw materials, good transport and communications infrastructure and economic stability. All of which requires public investment."
There is another word for these concessions: subsidies. And who in Britain would argue that these are the routes to a more competitive economy?
Now here's another tantalising question, raising the role of the BBC, which has largely failed to open its eyes on these issues:
"Almost daily we read that such and such a company has threatened to shift their corporate base from London to Dublin, Luxembourg, or Switzerland. BBC’s Today programme interviews endless numbers of corporate pundits lobbying for tax breaks to keep the City of London competitive: interestingly the interviewers never ask why City lawyers and bankers don’t reduce their massive fee rates in order to stay competitive – its always a case of “we need more tax breaks, or our most talented people will shift to Monaco or Guernsey.”"
Back to the FT now: Martin Wolf also looks at the mess Britain is in (see the graph below) and points to a new paper for the Liberal Democrat think tank CentreForum which proposes, among other things, that:
"the next government should take a fresh look at the way in which property wealth is taxed. The private sector in the UK owns over £3 trillion in housing assets – a figure that dwarfs the national debt. The wealthiest members of society have gained a great deal from the active fiscal policies deployed to protect their assets from the destruction wrought by a much deeper recession."
It's certainly worth examining, though going as far as to propose "that the rental value of land should be collected and used as the principal source of public revenue, as a replacement for present taxes on wages, profits, goods and services," as one pressure group wants to, is going way, way too far - we believe in a broad, multi-faceted and just tax system, not a narrow one.
And the new Liberal Democrat paper adds that the next government, likely a Conservative (pro-offshore) one:
"should drop their plan to virtually eliminate inheritance tax; this does little either for economic efficiency or social justice. Nor is their pledge to cut taxes on savings income either appropriate or socially just."
Now there is something we can all agree on.