Cutting corporate taxes is quack medicine

From the Treasure Islands blog:

Felicity Lawrence has an important article in the Guardian about corporation taxes, which looks at the loopholes the UK government is inserting into the corporate tax code in order to hasten the country's descent into full-blooded tax haven activity. It's aptly entitled Britain's tax rules – now written for and by multinationals.

Among other things, the changes will cost developing countries an estimated £4 billion per year. Oh, and there's this small snippet, too:

"Over the lifetime of this parliament, about £20bn will be lost in tax receipts as a result, according to the Treasury's own estimates."

The article follows on from George Monbiot's more polemical curtain-raiser on some of these issues last year, and Richard Brooks' understated and more technical, yet incredibly powerful description of these changes in a submission to the UK parliament last year.

But there is another aspect to all this.

Cutting corporate taxes - whether by cutting the headline rate, or by inserting more loopholes into the corporate tax trough -- is economic quack medicine. As I noted on the LSE blog recently, this course of action is quite insane. UK government policy making appears to have been taken over by schoolchildren - from the Chicago School. They are following what I have politely called horseshit economics, or what others have called voodoo economics, and some have called (in slightly different contexts) zombie economics. It's time the media woke up properly to the basic fallacies behind their approach.

I also now have an article, co-authored with John Christensen, on the Liberal Conspiracy blog, entitled Why Cutting Corporate Taxes Won't Help the British Economy. This article was actually shortened from the version I sent them, so I hope they don't mind but I will provide the original longer article here, below. There's a little overlap with Felicity Lawrence's article, and a bit more overlap with my LSE blog, but there is new analysis in here too.

Cutting corporation taxes: pushing on a string

As Budget Day approaches the UK Chancellor is vowing to press ahead with cuts in the UK corporate tax rate and to create new loopholes for corporations using offshore tax havens. The 2010 budget announced four annual drops in the main rate of corporation tax from 28 percent in 2010 to 24 percent in 2014, with the stated aim of making Britain more ‘competitive’.

But this strategy to chisel away at corporate tax revenues is founded on elementary misunderstandings about Britain’s plight.

Here is the first problem. British corporations are sitting on oceans of cash: a stunning £750 billion or so at the last count, and growing fast. (In the Eurozone and the U.S., the figures are about €2 trillion and $1.7 trillion respectively.)

Corporation tax cuts, then, take money from a sector (government) that puts it straight to use – building roads and schools, running universities, keeping the courts open, and so on – and handing it to a sector (corporations) that lets it sit idle. This is exactly the wrong thing to do.

Cuts are the wrong medicine, whether you think Britain needs stimulus or austerity.

If you like stimulus, then cutting corporation tax is the worst way to get it. The U.S. Congressional Budget Office concluded fairly recently that corporate tax cuts (and tax cuts for high income earners) were the least effective of all the options for stimulating economic activity. Far better to stimulate in cleverer ways, such as by investing more or by lowering taxes only on firms that do invest while preserving or raising taxes on those that don't.

If you favour austerity, then corporate tax cuts boost the deficit directly. (All the evidence of the last few decades suggests that tax cuts do not pay for themselves, as some people claim.) The purpose of austerity is not to inflict pain but to cut the public debt; since corporate tax cuts are so ineffective in stimulating economic activity, the result will be more pain and more debt: the worst of all worlds.

This is not just a short term issue either. For most corporations deciding where to invest, tax rates are usually fairly low on their agenda, beneath things like a productive and healthy workforce, access to markets and good infrastructure, and political stability. Would you site a car plant in Somalia if it offered a juicy tax break? (Tax-cutters might also like to explain why real investment and economic growth were so much higher during the quarter century after the Second World War, when tax rates were much higher than today.)

The corporations most sensitive to tax rates are the most mobile ones – which mainly means financial firms. So corporate tax cuts may boost profits in the City of London, but without stimulating activity elsewhere. If you want to rebalance Britain’s economy then this is, again, precisely the wrong direction to take. (And financial firms have to be in London anyway, whatever the tax rate.)

Worse still, the UK government in this budget plans to let corporations get away with a tax rate of just 5.75 percent on certain kinds of income that they shovel into tax havens. This loophole, created under a ‘liaison committee’ filled with the tax and finance directors of some of Britain’s biggest multinationals, is a free gift to corporations already in the UK and will attract little real new economic activity. The cumulative cost of this, plus the corporate tax rate cuts, has been estimated at £6.7 billion up to 2015. After last year’s budget Accountancy Age called it “a £6.7bn gamble to attract businesses to the UK.”

But it is worse than a gamble, because we know Britain will lose. So far, only a handful of companies have promised to relocate to the UK as a result, with Aon and WPP the biggest scalps. Aon has said it will bring 20 jobs (that’s right: 20.) WPP may create none at all. This activity is not real business, but the economically unproductive shuffling of paper profits.

Finally, what does it mean for Britain to be ‘competitive?’ Many people lazily conflate competition between firms in a market with competition between jurisdictions on tax. But these are two wholly different economic beasts. Think about it like this: if a firm cannot compete it goes bust, and despite all the pain involved this ‘creative destruction’ can be a source of economic dynamism. But what do you get if a country cannot ‘compete?’ A failed state? Greece? Tax ‘competition’ is a far less savoury creature, and when politicians talk of a ‘competitive’ tax system – don’t fall for it. Corporate tax cutting will damage Britain’s economic health, and what is ‘competitive’ about that?

If Britain wants a balanced and competitive economy it will put money into the hands of those who will use it, instead of whittling down precious taxes on the basis of ideology, woolly economic thinking and effective carte blanche to large corporations to write the some of the UK’s tax laws.

END
Nicholas Shaxson is author of Treasure Islands, a book about tax havens. John Christensen is director of the Tax Justice Network.