Robert Palmer: To support the levelling up agenda, the Government should follow Biden’s plan to tackle corporate tax avoidance

19 Apr

Robert Palmer is the Executive Director of Tax Justice UK.

Few issues annoy Conservative voters more than Facebook, Google and other global companies paying ultra-low levels of tax in the UK.

Whether it’s pensioners, Brexiteers, Red Wallers, people with degrees or those who failed to get a single GCSE, polling shows that they all unite in frustration at companies that avoid their obligations on tax.

Conservatives like Kevin Hollinrake, the MP for Thirsk and Malton, and Anthony Browne, who represents South Cambridgeshire, understand these frustrations. Companies like Netflix have been hauled over the coals in parliament, with MPs across parties demanding it explain why it paid so little UK tax.

Netflix, famous for box sets like The Crown, hit boom times during the pandemic. Even before Covid, the entertainment tech giant booked £860 million in subscriptions from UK customers alone via its Amsterdam-based subsidiary, but paid very little tax here. MPs are understandably concerned to make sure the likes of Netflix pay a fair share in the UK.

In a parliamentary debate last year, Browne said: “What any fair-minded person objects to is aggressive tax avoidance which results in companies or people paying less tax than is clearly their fair share.”

In its 2019 manifesto, the Conservative Party pledged to continue to lead “the international fight against aggressive tax avoidance and offshore tax havens”.

Last week President Joe Biden announced a plan that could end the “race to the bottom” on corporate tax. It comes just a month after Rishi Sunak pledged in the March Budget to increase corporation tax to 25 per cent by 2023.

The US President is proposing that companies should pay at least 21 per cent on their profits as part of a package of global reforms. This would make it much harder for global companies, like Amazon, to get away with paying very low rates of tax by stashing their profits in offshore tax havens.

Far from stifling UK businesses, the Biden plan would give companies a chance to compete fairly against the global giants and their clever accounting.

Areas of the UK that lost out under globalisation, could reap the rewards from the overdue reform of the way global multinationals are taxed. There’s nothing buccaneering about keeping our antiquated global tax system in place.

Research shows that the plan for a global minimum corporation tax could raise £13.5 billion a year in the UK.

Raising corporation tax is popular among Conservative voters and the rest of the voting population. Bringing in more money from companies is also compatible with the levelling up agenda.

The centre-right think tank Onward, recently called for the Government to level up the tax system. Its research highlights that corporation tax receipts are concentrated in the wealthy South East of the country. This is partly skewed by the fact that many companies are headquartered in London. However, even with this factored in, over the last decade the corporate tax take has declined in the North and Scotland, while it has risen in the South.

Red Wall voters are desperate to see investment in their communities. The £13.5 billion that could be raised through adopting Biden’s plan, much of it likely to be paid by tech giants, would help us invest in things like broadband to bridge the gap between rural and urban areas.

It’s clear that the Conservatives’ new electoral coalition is more left wing on economic issues. This is in part driven by increasing support in the Red Wall constituencies in the North and Midlands. These voters want to see higher levels of public investment and support tax increase to help deliver this.

So far there’s been some indication that the UK government is interested in the idea of a global minimum corporate tax rate, but won’t yet sign up to Biden’s proposed 21 per cent rate.

On Wednesday, the Treasury Minister Lord Agnew responded to a question in the House of Lords about Biden’s plan from the Green Party’s Baroness Bennett. The Minister said that “the UK was at the forefront of initiating global action on international tax”. He backed global efforts to reform the global corporate tax rules and said that the Treasury was looking at the US proposals.

In June, Johnson will show leadership to the world as the UK plays host to the world’s richest countries at the G7 summit. Getting global agreement for a global minimum corporation tax will be near the top of the agenda for the US President.

The 2013 G8 summit in Northern Ireland saw a Conservative-led government push through a global agreement to tackle tax evasion and avoidance. Those changes have made a real difference and ended some of the more egregious practices.

A G7 summit in our own backyard will be front page news in the UK. It’s in this government’s interests to support President Biden’s plans to tackle corporate tax avoidance. This would be good politics given the popularity of cracking down on tax loopholes and the billions that could be raised to support levelling up.

Anthony Browne: The Government’s Covid-testing policy for schools seems strange, but rests on good science

12 Mar

Anthony Browne MP is a member of the Treasury Select Committee and former CEO of the British Bankers’ Association.

The usual reaction – not just among those affected, but headteachers and senior politicians – is to bang your head against the wall in incredulity, and shout it is “nuts”. The Times reported one parent denouncing it as “illogical and psychologically cruel.”

The BBC reported it was ruining the return to school, and said the government couldn’t explain it. Matt Hancock, the Health Secretary, and Gavin Williamson, his counterpart at Education, have both been robustly challenged on it.

The source of all the anguish is the Government policy that if a child tests positive for Covid on the less-accurate lateral flow device (LFD) test at school, but subsequently tests negative by the more accurate laboratory PCR test, then the more accurate second test does NOT over-ride the less accurate first one: the child and their close contacts at school still need to self-isolate for ten days.

It happened at a school I know this week, where 18 A Level students missed their mocks because one student tested positive on the LFD test on Monday despite subsequently being cleared by the PCR test on Tuesday.

I was bombarded by apoplectic parents, and went into battle. Dredging up my maths degree, I created an algorithm for the problem and last night locked horns with the Department of Health mathematicians, plugging in all the real world data.

The headline is that with the virus at its current prevalence (0.5 per cent of people have it nationwide) then the proportion of people who test positive on the first LFD test and subsequently test negative on the PCR test but are actually infected is astonishingly high: 30 per cent. In other words, nearly one third of pupils with a negative
result from the second PCR test after a positive LFD test are actually infected – and that is a big enough risk to justify them being required to isolate.

However, as the prevalence of the virus falls, then that risk goes down rapidly as well. When the prevalence of the virus is down to 0.1 per cent (i.e. one in a thousand people have it), then the proportion who get a positive LFD result then a negative PCR result who are actually infected will be eight per cent – i.e. more than 90 per cent won’t be. So as the virus becomes rarer, we can rely more on the PCR result, and the Government policy will change.

Now, I can almost hear you thinking “this makes absolutely no sense”. The PCR test is much more accurate that the LFD tests. End of. Rely on it. But this is the world of false negatives (a result saying someone doesn’t have a virus when they do) and false positives (saying someone does have the virus when they don’t), and all I can say is that this is a time when good old common sense is a very false friend.

The mathematics is deeply counterintuitive, to the extent that many people even when they do understand the maths cannot bring themselves to believe it. To take a much simpler example than the two tests, imagine a world where 0.1 per cent of people have a virus, and a test which is 99.9 per cent specific (i.e. produces 0.1 per cent false positives), then what proportion of people who get a positive result are actually infected?

It is just 50 per cent. A test is 99.9 per cent accurate but only half of people tested positive are actually infected? Nuts! But true.

In our real world example, it is true that the PCR test is far more accurate than the LFD test, both in producing far fewer false negatives and false positives (it has higher sensitivity and specificity, in the jargon). But – and this is critical – the PCR test is nearly 200 times more likely to produce a false negative result (i.e. tell an infected person they are not infected) than the LFD test is to produce a false positive.

If the PCR test did not produce any false negatives, or if the LFD didn’t produce any false positives, then in either case we wouldn’t have this problem, but they do, and we have.

So crunching through the numbers (and frankly I am amazed you are still reading this), using current real world data from the NHS and ONS, if you test one million people with the LFD then 2,804 will get a positive test result (and 89 per cent of those will actually be infected). If they all go on to get the laboratory PCR test, then 2,375 will be confirmed as positive (i.e. they definitely have it), but 429 will come back negative.

But because about five per cent of PCR results are false negatives, of those 429 in fact 130 will actually be infected and only 299 be true negatives. That is, 30 per cent of those with the second negative PCR test will actually be infected. With millions of kids tested every week, that means there are many hundreds being confounded – and forced to isolate – by this paradox.

You might point out that if the first LFD test is done at home, then the Government allows the second PCR negative result to override it. But LFDs done at home are far less accurate, and full of so many uncertainties (have the identities been mixed up?) that it can he justified relying on the laboratory test alone.

It is mind-boggling, it is not common sense, and it is definitely infuriating. But this policy of not allowing a second PCR negative test to override a school done LFD positive test is based on sound statistics. We are definitely being led by the science, and I am glad we are. As the virus gets rarer, the statistics will change, and the policy can then revert to being common sense. Amen.

For the mathematicians among you, who want to work it out yourselves, here is the data: For the LFD, the sensitivity is 50.1 per cent (i.e. 49.9 per cent false negatives) and specificity is 99.97 per cent (i.e. 0.03 per cent false positives). For the PCR, the sensitivity is 94.8 per cent (i.e. 5.2 per cent false negatives) and specificity is 100 per cent (i.e. if the PCR test says you have the virus, you do, no ifs or buts).

Anthony Browne: Why the Chancellor is right to increase Corporation Tax

5 Mar

Anthony Browne MP is a member of the Treasury Select Committee and former CEO of the British Bankers’ Association.

There is a change of direction in the Budget that is causing murmurings on the low-tax side of the Conservative Party: the increase in Corporation Tax (CT).

A decade of sharp cuts to CT were justified by saying that they not only boosted investment and growth but also actually increased tax revenues. Ireland too is cited as an example, where the sleepy Celtic moggy cut CT rates to 12.5 per cent, the lowest in the industrial world, and was transformed into a Celtic tiger.

I too want low taxes, and this Laffer curve argument is appealing because it suggests that tax cuts can pay for themselves. But the Government is now planning a sharp rise in CT from 19 per cent to 25 per cent in 2023 for the most profitable firms, with the Budget Red Book showing the Treasury expects this to raise more than £17bn extra a year by 2025. But hang on! If lower CT rates increases revenue, then raising them can’t. Why the change?

So, in technical language, just what is the peak revenue-raising rate on the Laffer curve on Corporation Tax?

Laffer curves exist for all taxes, and their peak rates depend on many factors, such as the substitutability of the product, the elasticity of demand, mobility of production, the fungibility of capital and labour, and what other tax authorities are doing. Tax on sugary drinks probably has a very low Laffer curve peak because a small tax just prompts people to drink otherwise identical zero-sugar drinks. The Laffer curve on fuel is very high – well over 100 per cent – because people can’t do without fuel to drive.

On Corporation Tax, the Laffer curve would be lower for highly mobile sectors that can shop around for the lowest tax regimes in the world, and higher for ones that can’t easily move.

It is absolutely true that CT receipts have increased dramatically since George Osborne started cutting the rates, from £36.3bn in 2010-11 to £55.1bn in 2018-19. But that is largely because corporate profits were hugely depressed in 2010 in the wake of the deepest recession for a century. Corporation tax profits – and so CT revenues – are super-cyclical: exaggerated versions of the underlying economic cycle. Aggregate company profits on which CT is charged fell from £203.6bn in 2006/7 to £151.6bn in 2010/11, and then bounced back to £267bn in 2018/19.

After both the 1990/91 recession and the dotcom crash, CT revenues took just three years to return to their long run average as a percentage of GDP, but after the financial crisis, it took eight years, presumably because of the lower rates. Other changes have also increased CT revenues since the financial crisis including the corporation tax surcharge on banks (about £2bn a year), and widening the base of corporation tax. As it happens, CT revenues also rose sharply before the financial crash, and that had nothing to do with their rates because they were static throughout the entire period.

But CT is one source of tax revenue – what about the others?

Lower CT rates leads to lower cost of capital for companies, and so should increase investment and thus increase jobs, wages, GDP growth and consumption, leading to higher rates of income tax, VAT and so on. HM Treasury started doing dynamic modelling on the effects of cutting CT tax, to take into account the overall effects. In 2013, HMT and HMRC published a detailed analysis from the dynamic modelling, showing an increase in investment, in GDP (between 0.6 per cent and 0.8 per cent) and wages (£405-£515 per household). That lead to greater tax revenues, but only enough to reduce the loss of direct revenues by between 45 per cent and 60 per cent.

In other words, even a Treasury analysis, presumably designed to support Treasury policy, admits the CT cuts reduce overall tax revenues rather than increase them. It also surveyed the academic literature from around the world on this, and they all estimated that between 45 per cent and 90 per cent of the revenue loss would be made up – not enough of an impact to actually increase revenues.

There are other reasons to cut CT taxes than raising revenues. Another argument used is that cutting CT increases investment, but that also isn’t really supported by the evidence. Business investment is the same now when CT is 19 per cent as it was in the late 1990s, when CT was 30 per cent. Between 1997 and 2017, we had the lowest CT in the G7, but also the lowest average non-government investment at 14.3 per cent of GDP (compared to G7 average of 17.3 per cent).

Whatever the impact of low corporation tax in Ireland, it is really not comparable to the UK. When it introduced them, it was a much more agrarian economy with little inward investment and a major exporter of skilled people. There was not a big corporate base, and so it had little to lose from cutting CT.

If you want to use tax policy to increase investment, then it is better to target the tax cuts directly at investment decisions, as the Budget is doing with its “superdeduction” on investment, which will mean the Government will write off 25 per cent of any investment any business makes against its tax bill. Here is a suggestion for the corporate world: cutting corporation tax has not lead to a surge in investment, and it is now it is going back up. If you want to keep the “superdeduction” investment relief and make it permanent, prove to the Treasury that it works.

Opposition to new national lockdowns is growing on the Conservative backbenches

22 Sep

Boris Johnson will speak to the Commons this afternoon and to the nation this evening about the Government’s latest Coronavirus measures.  We wait to see exactly what he will announce, but the thrust of his proposals seems clear enough. Essentially, he wants to separate work and home life.

The Prime Minister aims to keep work going in as normal a way as possible – with face covers, hand-washing and social distancing in place to help make this possible.  This is government “putting its arms” around the economy, to borrow a phrase he likes to use.  It is the part of the policy aimed at protecting livelihoods.

Meanwhile, home life and leisure will take the strain of reducing the growth in Covid-19 cases.  There is a rule of six.  Pubs and restaurants will shut at 10pm.  There will be marshalls as well as fines.  Not to mention lockdowns – like those currently now in place in Merseyside, Greater Manchester, Birmingham and elsewhere. This is the half of the policy intended to save lives.

Whether this scheme will last long is doubtful.  We’ve explained previously on this site why many schools may not stay open fully, or may close altogether.  That will have a knock-on effect on the economy, since parents with younger children will often have no alternative but to stay at home, and provide the childcare themselves.

Furthermore, the division between work, home and leisure isn’t always clear.  The first and third meet in retail: some shopping is leisure; all staffing is work.  As the debate within government over the new 10pm closing time for pubs, restaurants and outlets indicates, non-essential shopping is vulnerable to new closures.  And Ministers are already backing off the push to get workers to return to offices (since they will be more relucant to use public transport).

It looks as though we’re on the way to another national lockdown – in effect, if most cities are locked down; or formally, if the Government eventually declares one.  Tomorrow, in the wake of the Prime Minister’s broadcast, we will return to the big questions.

Such as: what’s the fundamental aim of the policy?  If it is no longer to protect the NHS, is it to suppress the virus?  If so, are the healthcare trade-offs that would arise from such a policy worthwhile – let alone the wider economic ones?  Why isn’t testing and tracing, rather than lockdowns, taking the strain of reducing the disease, as intended?  For today, we want to probe what happened yesterday during Matt Hancock’s Commons statement.

Chris Grayling, Greg Clark, Harriet Baldwin, Simon Fell, Simon Clarke, Alec Shelbrooke, Anthony Browne, Graham Brady, Andrew Percy, Jason McCartney, Shaun Bailey, Marco Longhi, Edward Leigh, Pauline Latham, Bernard Jenkin, Duncan Baker, James Davies, William Wragg, Steve Brine, and Anne-Marie Trevelyan spoke.

Of these, Grayling, Clarke, Brady, Leigh, Latham, Baker, Wragg and Brine were all, to varying degrees, hostile to another national lockdown.  Browne’s question was perhaps in broadly the same camp.  We are beginning to see resistence to new national shutdowns intensify on the Conservative backbenches.