David Gauke: Is Britain really set to become a low tax, less regulated, free trading, buccaneering country?

13 Mar

David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the recent general election.

Conversations about tax policy can take unexpected turns. It was during one such conversation in the late 2000s – I was the shadow tax minister at the time and developing our plans for corporation tax – that a senior tax lawyer at a city firm recommended a series of books on naval battles.

Peter Padfield’s Maritime Trilogy is, in truth, somewhat broader than that. Padfield alternates accounts of the most important maritime confrontations since the Spanish Armada with a broader account of the social, economic and constitutional development of the great powers.

His central argument is that there is a distinction to be drawn between maritime nations – with linked strengths of sea-fighting, trade, financial innovation and constitutional constraints – and land-based empires. The later relied on closed domestic markets, rigid hierarchies and centralisation, the former distinguished by liberty, flexibility and enterprise.

It is an analysis that many British Conservatives would share and, the argument goes, makes the UK well suited to the era of globalisation. We are historically and culturally accustomed to trade and with that comes a recognition that trading partners have other options. Our prosperity is dependent upon those partners wishing to continue to trade with us. Political stability; the rule of law; paying our debts; limited government; competitive and predictable taxes – all qualities that are necessary to succeed as a maritime nation and in the era of globalisation.

It was in this spirit that the Prime Minister’s first big speech following our departure from the EU was at the Old Naval College in Greenwich where – in extolling the virtues of free trade – he talked of recapturing “the spirit of those seafaring ancestors immortalised above us whose exploits brought not just riches but something even more important than that – and that was a global perspective”.

So how are we doing? Are we on course to be the open, outward-looking nation of which the Prime Minister spoke? Are we becoming a more flexible, enterprising, maritime nation?

My last column assumed that corporation tax rates would increase and argued that this would be a mistake. When I heard Government ministers defend the rise by saying that our corporation tax rates remained the lowest in the G7, I was reminded of my conversation with the tax lawyer.

The lawyer’s argument (which I found persuasive) was that we became economically successful from the 1690s onwards because our model was more like that of a small country dependent upon foreigners choosing to trade with and invest in us, taking inspiration from the Dutch rather than the French. Our modern tax system should seek to emulate this, he argued, encouraging international businesses to locate activities and investment in the UK. Our rates may be lower than other G7 economies but, if we see ourselves as nimble and competitive, our ambitions should be greater than that. A better corporate tax regime than France is not a proud boast.

How about freeports? The name could not be more evocative of our trading and maritime traditions. But the evidence suggests that they will achieve little other than displacing activity from one part of the country to another. And if we were really ambitious about a deregulated, low tax, low customs solution to our economic woes, why give these advantages to some places, why not everyone?

The emphasis on freeports reveals an approach to the levelling up agenda that I worry is more about creating grateful localities in exchange for pots of spending rather than a clear sighted vision for improving productivity. The suspicion must be that the preference for ad hoc ministerial decisions over a more defined industrial strategy will lead to a less economically rigorous approach. The suspicion will linger that party political considerations will be to the fore.

There is one surprising, if qualified, bright spot. We are becoming more open to talent. It was already the case that the requirements to get a work visa were much less restrictive than previously, and the Chancellor’s announcement on the skills visas is worthwhile. The qualification, of course, is that it is still much more bureaucratic for EU citizens to work here than it was – which brings me to Brexit.

Our history as a maritime nation is one often identified by supporters of Brexit – like the Prime Minister in his Greenwich speech. Even the word ‘Brexiteer’ evokes the naval escapades of buccaneers (although the Oxford English Dictionary also defines ‘buccaneer’ as ‘a person who acts in a recklessly adventurous and often unscrupulous way’). Liz Truss tops the ConHome Ministerial popularity charts largely on the basis of her energetic advocacy of Global Britain and for free trade as a benefit of Brexit.

The reality is that Brexit involves the erection of trade barriers with our largest market, as January’s appalling trade numbers suggest (although, to be fair, a clearer picture will only emerge over time). Given the Prime Minister was willing to agree to the Northern Ireland Protocol, it even involves trade barriers within the UK.

While good progress has been made by the Department of International Trade in completing free trade agreements with third countries, these have primarily rolled over existing agreements that we had as members of the EU. There was a flurry of excitement last week when the US dropped punitive tariffs on UK products that were in place because of a longstanding dispute with the EU over Airbus and Boeing. Brexit supporters rushed to declare it a triumph due to our new status, the Trade Secretary wrote a self-congratulatory piece in The Daily Telegraph. A day later, the US announced that it was dropping the punitive tariffs against the EU, too. The search for a trade benefit from Brexit continues.

What about regulatory flexibility? It is nearly five years since we voted to leave the EU, but there are still no bold plans to regulate in a different way. Plans to review workers’ rights have been dropped on the basis that this would be politically unpopular.

If the hard Brexit delivered by the Government has made trade with the EU much harder, the combative manner of our dealing with the EU has not only reduced trust but even undermined a key attribute for a trading nation – the rule of law. Having threatened to breach international law for three months over the autumn, Lord Frost has now decided to extend the grace period before internal checks come into place – unilaterally changing the terms of our agreement with the EU. A second breach of an international treaty only recently agreed begins to look like a habit. It does nothing for our reputation for trustworthiness.

The attributes of an outward-looking, open, trading nation are ones to which we should aspire. But in terms of our openness to trade, competitiveness on tax and adherence to the rule of law we are going backwards. In terms of the State telling businesses what they should do and where they should do it, we are becoming more centralised and more arbitrary.

For years, many in the UK have characterised the EU as centralised, interventionist, uncompetitive and protectionist. It would be a sad irony if our departure from it makes us more like the type of inward-looking, land-based power that we once used to disparage.

Looking back at the Budget a week on, its plan for growth is not convincing

12 Mar

The only worse judgement about a Budget than a snap article is an opinion poll – and we write that regardless of the reception that polls gave last week’s.

For just as a snap view can be based on less than the full picture (a particular feature of Gordon Brown’s), so a polling one tells one nothing about whether a Budget will work, or indeed will be as popular a month after its release rather than a day after.

Our own snap take was largely restricted to asking whether the tax rises announced for future years will really happen at all – or whether Boris Johnson will be able to take advantages of higher revenues to cancel them, and then seek a quick general election.

The end of the week after the Budget may be a better time to take a fuller view.  It would start by trying to understand the position that Rishi Sunak is in.

The post-Budget piece on this site by his Treasury colleague, John Glen, set out the scene as the Chancellor sees it in the latter’s first presentation since Brexit was done in full, and vaccines gave us hope that the pandemic will end.

The economy has shrunk by 10 per cent, the largest fall in over 300 years.  And our borrowing is the highest it has been outside of wartime.

That suggests going for growth in the short-term, as this site has recommended, with fiscal consolidation taking place later, as it will have to do in spades if the growth doesn’t come.  The timing of Rishi Sunak’s measures suggest that he agrees.

We believe that tax rises inevitably have to play some part in that consolidation along with spending cuts, and recognise that the run-up to an election is a difficult time to do either: the Chancellor is cursed by the economic and electoral cycles being out of kilter.

Certainly, government will always have to tax something to pay for public services, and the sensible view is that that something should be spending rather than income (or business).

Which explains why early Thatcher and Osborne budgets alike put up VAT, and why the latter wanted two new council tax bands on more expensive properties – as he confirmed to ConHome last year.

However, Sunak is boxed in on VAT.  The final headline pledge of the last Conservative Manifesto was “we will not raise the rate of income tax, VAT or National Insurance”.

We may know more about his plans for property taxes if any on tax day, March 23rd.  There is a plan on the table to replace council tax (and stamp duty) with a new property tax, but it is revenue neutral.

Since it would already create losers in more expensive properties in London, Sunak is unlikely to adapt it to create even more of them there and elsewhere.

Business rates were a dog that didn’t bark during the Budget, and any eventual reduction to them looks to come largely from a digital sales tax, not a residential property tax.  Some who would pay it belong to an interest group with little direct leverage: foreign companies.

But unable to turn to VAT and unwilling to turn to property – or so it appears – Sunak targeted income tax allowances and business in his Budget, via corporation tax (assuming, as we say, that these hikes ever happen at all).

On the first, the Office for Budget Responsibility says that the allowances freeze will haul a million more people into the higher rate band.  Fiscal drag is scarcely new – as the Institute for Fiscal Studies noted two years ago – but the move will do nothing to improve incentives.

On the second, there are some detailed arguments for the increase, as set out by Anthony Browne on ConservativeHome recently, but a general one against, which is based on certainty.

In essence, lower rates of corporation tax have been a feature of Conservative policy from Thatcher through to Osborne and beyond – together with an emphasis on lower income tax rates, supply side reform and a smaller state.

If these higher ones ever come in, the Chancellor will essentially be trading off higher corporation tax from some companies for the new super deduction for some companies.

That would mean a shift from a relatively simple and neutral system to a more complex and partial one, which would be more likely to help firms in the Midlands and North, according to sources that this site has spoken to.

We are not convinced that such a switch, if it ever happens, is a net plus for Britain.  But now that Sunak has turned on the super deduction it would be best for him, in order to help provide that certainty, not to turn it off in two years.

Elsewhere, those Thatcher-to-Osborne orthodoxies are also in flux.  They were first challenged in recent times not by Johnson, but by Theresa May, with her mantra of “the good that government can do”.

The Industrial Strategy was a product of her approach.  We are all for one in principle if it has a clear aim, namely turning pure research into translational research.

As Greg Clark, who had charge of it under May, conceded yesterday on this site: “it may have tried to do too much in one White Paper”.  His successor, in his swashbuckling way, dismissed in the Commons this week as “a pudding with no theme”.

That directness is a part of what makes Kwasi Kwarteng such an engaging politician, and it may be that he plans a slimming down of the strategy that will deliver results.

But one source close to the process worries that “individual policies will continue anyway but without consistency, ownership or scrutiny”.  And Clark has a point when he says that any strategy must be linked to place as well as sector – in other words, to levelling up.

We’re concerned that the Government has come to see such levelling up as incompatible with supply side reform and institutional change.  We can’t see much of the former in Build Back Better – the Government’s “plan for growth”.

It’s big on intrastructure and net zero; smaller on skills and innovation: as May said in the Commons this week, there’s a limit to how many times Ministers can review research and development tax credits.

If it really wants to go for sustainable and more even growth, the Government will need to devolve more power.  As a former senior Minister put it to ConHome recently: “we can’t deliver levelling up, a skills revolution, an industrial strategy and zero carbon from the centre”

“The new mayors have a convening power: they can get local businesses, the Chief Constable, the NHS bigwigs, the university vice-chancellors, the local enteprise partnerships round the table, and come up with a plan.”

On supply side reform, we understand why Kwarteng killed a planned review of workers’ rights.  But what is the plan to ease supply elsewhere – especially on housing?

On institutional change, there are commitments to reform the civil service and the courts, but almost none that apply to the major public services, especially health.

To date, tax rises are taking the strain of future consolidation, and the danger for the Chancellor is that he finds himself boxed into that position permanently – with Downing Street spooked by the consequences of a proper spending review for Tory red wall seats.

The Budget promises infrastructure spending, possible tax rises, pots of money from the centre for those provincial seats, limited localism, plus some levelling-up but little reform.  That’s a mix of pluses and minuses, but not a plan for growth.

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.

Iain Dale: The EU has no interest in Northern Ireland’s future prosperity. It just sees it as a mechanism to exert its power.

5 Mar

Iain Dale presents the evening show on LBC Radio and the For the Many podcast with Jacqui Smith.

Most budgets are curate’s eggs. Good in parts. This one was no different.

Politically, it was a triumph for Brand Rishi. It was well delivered. His post-Budget press conference was slick and smooth. He comes across as a transparently nice and competent individual. That’s because he is.

But was it a budget with a narrative? Was it a “reset” budget? Was it a transformational budget? No, it was not.

It is possible to argue that it couldn’t be anything else than be a budget for the short term, given we have no idea where we will be this time next year, but even if you accept that argument, it disappointed on a number of levels.

The super-deduction measure was innovative and will have a massive event on investment over the next two years. And then it ends. It’s too short term, and should have surely been tapered.

Did corporation tax really need to be increased in one go by six per cent in two years’ time? Wouldn’t a gradual approach have been better, even if you accept it needed to rise. Which I do not.

It’s a tax rise which will inevitably make this country less likely to attract the levels of foreign inward investment in the long term. You can’t argue one day that lowering business taxes is a good thing and makes us more competitive, and then argue that by putting up corporation tax by a quarter still means that we are just as competitive.

Leaving the EU certainly gave some companies pause for thought about locating here, or increasing their presence here. We are lucky that most decided to go ahead anyway, but we do not need to give any company an excuse not to do so.

We may still have the fifth lowest rate of corporation tax among G20 countries, and yes, as Sunak argues, our rate will still be lower than in American, Canada, France, Germany and Italy.

But I’m afraid that argument cuts little ice in a world where the last thing the British government needs to do is do anything to put off businesses considering building a presence here.

Having said all that, two snap opinion polls show that the public approve the Budget with only 11 or 12 per cent disapproving. So from a political point of view, it was job done for the Chancellor. But I still wonder whether a bit more long term, “reset” thinking was needed and that both Sunak and the Government might come to regret that it was largely absent.

– – – – – – – – –

If the pandemic hadn’t happened, surely this Budget would have been all about the post Brexit economy. Brexit wasn’t mentioned directly once in the Chancellor’s speech, although towards the end we heard a few oblique references.

What we needed was a pathway to the future, not just over the next couple of years, but over the next couple of decades. We needed a vision.

Businesspeople needed to be reassured about the future of our trading patterns, not just with the rest of the world, but with the EU. Too many businesses seem to be finding that the so-called “free trade agreement” with the EU is nothing of the sort. The inevitable bureaucratic teething problems in trading with EU countries are still there, two months on.

OK, there are no queues at Dover, but the attitude of (particularly, but not exclusively) of French customs officials leaves something to be desired. I hear time and time again reports that countries deal perfectly happily and efficiently with the US, China or even Russia, yet find it that deliveries to European customers are being returned to them by couriers with no explanation and on multiple occasions. They feel powerless to do anything about it.

And don’t get me started on the Northern Ireland protocol, whose only effect so far as I can see has been to effectively annexe Northern Ireland to the EU. Just as Martin Selmayr threatened.

The EU has no interest in Northern Ireland’s future prosperity. It just sees it as a mechanism to exert its power. It is a constitutional outrage that British companies are not free to trade without restriction to all parts of the sovereign United Kingdom. The checks that are now being demanded by the EU are so disproportionate as to be totally unreasonable. The British government bent over backwards to make a compromise to meet EU concerns that the Single Market could be compromised, but its goodwill has been exploited at every turn.

At some point this has to stop, and the unilateral extension of the grace period is the inevitable consequence of EU inflexibility. It is not, as the Irish government unhelpfully says, a breach of international law. What it is, is a sign that Britain’s patience with the EU on this issue is about to expire.

– – – – – – – – –

I’ve been watching a new documentary on how Donald Trump won the 2016 presidential election called The Accidental President.

It’s made by the British film maker James Fletcher, who is now based in New York. Fletcher will be familiar to many for his work filming David Cameron for the WebCameron project back in the day.

It’s a fascinating account of Trump’s rise to the presidency. There was no narration, no voiceover, just 90 minutes of original campaign footage together with lots of testimony from political commentators, eye witnesses and vox pops.

The most powerful moment was when commentators were asked to name Trump’s campaign slogan. They all trotted out “Make America Great Again”. They were then asked for Hillary Clinton’s campaign slogan. None of them could recall it, bar one, who recalled it was “Stronger Together”. He then followed it up with “whatever that means”.

If proof were needed that political slogans can be all powerful, then we now have it.

Andrew Gimson’s Budget sketch: The Chancellor quotes Tennyson and delivers a lesson in levelling up

3 Mar

“That which we are we are,” the Chancellor declared as he reached the end of his Budget Statement.

Could heavens! Could this prosaic figure be about to raise our spirits by launching forth into the final lines of Tennyson’s Ulysses?

There can be little doubt those words were in the mind of whoever drafted Rishi Sunak’s peroration:

…that which we are, we are;
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.

Sunak has the benefit of a traditional English education, and will surely have spotted the reference.

But Tennyson’s ending was presumably felt to be at once too lyrical and too modest. For although the Chancellor admitted the economy has suffered its largest fall “in over 300 years”, he had no desire to suggest we have been “made weak by time and fate”.

He adopted instead the manner of a teacher addressing a mixed ability class whom he intends to “level up”, as he put it, even though most of us are not much good at maths, and economics is dismal science we do our best to avoid.

So Sunak had to be slow, and lucid, and conceded that if we would rather leave the economics to him, that would be fine.

“I do want to be honest about what I mean by sustainable public finances,” he assured us, and then, a moment or two later, “I have and always will be honest with the country about the challenges we face.”

Not long afterwards, he said of the changes to corporation tax, “I recognise that they might not be popular but they are honest,” and announced that he wants to be “honest about the challenges facing our public finances”.

Even the dimmer members of the class were starting by now to get the message that the Chancellor wishes us to accept that he is honest, but not all of us were sure we fully understood what he meant by “challenges”, a term other politicians often use when they mean “insurmountable difficulties”.

The Chancellor proceeded to give us a geography lesson. He said that a Treasury which acts for the whole United Kingdom “demands a different economic geography”. In this way, he explained in a level tone, we shall achieve “the levelling up” which we require.

There followed the grand recitation of the eight new freeports in England, stretching from Plymouth to Teesside, after which we hoped to get Tennyson, but were disappointed. Perhaps the speechwriter just had a bet with a friend that he could get a line of the poet into the speech without anyone noticing.

Boris Johnson will certainly have noticed, for his head is full of poetry. He sat listening in a supportive way, emitting audible “hear hears” from behind his mask, but jiggling his right knee up and down in a manner suggestive of unbearable mental tension.

Sir Keir Starmer rose to reply, and was rather good: in a different league to Jeremy Corbyn. Insofar as it is possible to hold an almost empty Chamber, he held it.

But if he is to be Prime Minister, he needs this Government to fail, and Sunak spoke with the self-confidence of a man who has not yet failed at anything.

David Gauke: My Budget advice to the Chancellor. Raise income tax, not corporation tax.

27 Feb

David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the recent general election.

If there is one tax that the Chancellor is likely to increase when he stands up to deliver his Budget on Wednesday, it is corporation tax. Speculation that the corporation tax rate is going to rise has been running for months and if the Treasury wanted to dispel such speculation it could have done so. In contrast to George Osborne’s time as Chancellor – when reductions from 28 per cent to 17 per cent were announced – Rishi Sunak is expected to announce a Corporation Tax rate in the region of 23 to 25 per cent.

Is this a good idea? My view – as the Minister of Tax throughout the Osborne Chancellorship – is that it is not. But it is worth examining the arguments for and against such an approach.

The first argument that will be made is that we might not need tax rises at all. I wish that this was true but sadly this is unrealistic. It is true to say that we can live with higher levels of debt than was the case in the past. Interest rates are low and likely to remain so. Even if they increase, the long dated maturity of our debt gives us a chance to respond. The markets are happy to lend to us, the risk of a sovereign debt crisis is remote. The Covid crisis is the type of event in which governments should be willing to borrow and the consequences can and should be dealt with over a long period of time. In short, we needn’t be in a hurry to pay off the Covid-19 debt.

Even accepting all of this – that ‘this time is different’ – there is still an issue. Even after we are put the economic consequences of Covid-19 behind us, the OBR forecasts a deficit of £100 billion or 4 per cent of GDP. Our debt to GDP ratio would continue growing. Given these forecasts assume tight control over public spending that will be hard to deliver and the significant demographic challenges that face the country in the 2030s, some kind of fiscal tightening in the form of tax rises will be necessary eventually.

The second argument is that now is not the time. I would agree that now is not the time for a fiscal tightening. The economy is currently shrinking and unemployment is likely to increase substantially in the months ahead. The markets are not jittery so there is less of a pressing need to take action. Nonetheless, the Government could increase some taxes without engaging in a fiscal tightening if long term tax increases are accompanied by short term tax cuts or spending rises. So one can announce and even implement tax rises without engaging in an immediate fiscal tightening.

There is also a political issue. Delaying action on fiscal consolidation might make economic sense but it would push tax increases into the last years of a Parliament. Leave it a year or so and the Chancellor might find that his Parliamentary colleagues – not least the Right Honourable Member for the marginal seat of Uxbridge and South Ruislip – might become rather resistant. Now might be the last chance to take action.

The third unconvincing argument is that cutting corporation tax has not cost us any money and increasing it will not raise you any money. Look at how corporation tax revenues have increased since 2010, the argument goes. Sadly, life is more complicated than that. Yes, rates have fallen and revenue has increased but corporation tax receipts reflects where we are on the economic cycle (in 2010, businesses were not making much by way of profits and if they were they had big losses to offset). Furthermore, the post-2010 reforms were Lawsonian in their approach in broadening the base at the same time as lowering the rate (so these were not simply cuts). In addition, lower corporation tax rates have unintended behavioural changes in that more people pay themselves through companies (diverting tax revenues from income tax and national insurance contributions). To put it another way, increasing corporation tax rates really will bring in more revenue.

So, to summarise, it will be necessary to increase tax revenue, it is reasonable to make a careful start on that process now (albeit in a way that does not tighten fiscal policy in the short term) and that increasing the corporation tax rate will bring in additional revenue. I could also add that, of all the potential revenue-raisers, this is likely to be politically less painful than other options. Even businesses will not squeal much because, for many of them, making a profit appears to be a remote eventuality and paying more tax on those profits would be a relatively nice problem to have.

It would still be a bad idea.

Why? If we are going to raise more in taxes – and we are already at historically high levels – we need to have a debate about which taxes are least damaging to economic growth. Over the long term, corporation tax ranks as being one of the worst.

Corporation tax is a tax on profits. Profits are the return on investment; the higher the tax on profits, the lower the rate of return. All other things being equal, the lower the rate of return on investment, the less investment you get.

There is also a tendency to think that corporation tax is something that is paid by, well, corporations. At one level that is true but – to state the bleeding obvious – all taxes are paid by people in the end. Corporation tax is ultimately paid by shareholders in lower dividends, consumers in higher prices and employees in lower wages. There is plenty of evidence to suggest that in an open economy like the UK, it is the workers who lose out the most. Investment goes elsewhere, productivity does not increase as quickly as it would otherwise do and, in the end, wages and salaries reflect productivity.

It is no coincidence that, in the era of globalisation, corporation tax rates have fallen around the world. I spent much of my time as a Treasury minister trying to persuade international businesses to locate more investment and activity in the UK as a consequence of the competitiveness of our corporate tax system. We were starting to see success but there was always a question as to whether the UK was truly committed to corporation tax competitiveness in the way that, say, the Republic of Ireland was. Given the current speculation, it was a fair question. On top of Brexit, a sharp hike in corporation tax rates will be yet another blow to our international reputation as a place in which to do business.

If we need more tax revenue – and we do – we have to make use of our big, broad-based revenue raisers – income tax, national insurance contributions and VAT. The manifesto pledge made in 2019 not to increase the rates of these taxes was unwise at the time but it was made in good faith. However, much has happened since and the Government would be justified in recognising that. Attempting to fill the fiscal black hole by swingeing increases in corporation tax will reduce business investment and damage our international competitiveness. Not for the first time, the politically expedient choice will come with a painful economic cost.

Iain Dale: Teaching unions are loud but wrong on vaccines. Besides, what about those without powerful public advocates?

26 Feb

Iain Dale presents the evening show on LBC Radio and the For the Many podcast with Jacqui Smith.

The Coronavirus pandemic has shown how true the maxim is that those who shout the loudest get the most attention.

Take teachers, for example.

And before I go on, I should say that originally I was going to be a teacher (of German, since you ask) and I have the highest regard for the teaching profession.

However, the very thought that teachers should be vaccinated ahead of other groups is for the birds.

There is no evidence that teachers are more likely to either contract or die of Coronavirus than anyone else.

Indeed, the league table of occupations with the most Coronavirus deaths put teachers almost at the bottom.

But the teachers unions have a very loud voice and they used it to persuade the Labour Party to press the Government to put teachers at the top of the next round of vaccinations.

It would have been easy to give in, but they didn’t. And quite right too.

This week the Joint Committee for Vaccination and Immunisation (JCVI) declared that teachers were no more at risk than other people.

What about those who don’t have powerful public advocates – refuse collectors, people who work in funeral parlours, taxi drivers (who top the death list), bus drivers? I could go on.

The JCVI is absolutely right to say that once the 1-9 groups are complete, the rollout should continue to be largely based on age bands.

– – – – – – – – –

Clickbait headline of the week has to go to Pink News, which came up with this gem: “Horny thief steals £600 of sex toys – including a vegan bondage kit”.

The mind boggles. I mean, a leather gimp mask made out of Quorn? Whatever next.

I’m afraid clickbait headlines are not just the province of tabloids. I’ve noticed even The Times has started to get down dirty in the hope of attracting more hits.

This week a headline tried to persuade us that prisoners (at least they didn’t call them “lags”) were going to queue jump and get the vaccine ahead of teachers and police officers.

What a shame the words underneath the headline said nothing of the sort.

Headline writers have a job to do, but that job is not to exaggerate the truth or reality.

– – – – – – – – –

All attention is now turning towards Rishi Sunak’s budget on Wednesday.

In some ways this could be seen as the most important budget for a generation.

It will set the tone for the next decade of rebuilding our economy.

It cannot be business as usual and has to show a huge degree of imagination and understanding of what is needed to recreate an enterprise economy.

Everything must be geared to encouraging economic activity and new business startups. Tinkering with the odd tax rate here and there won’t be enough.

It is also an important day for the Chancellor personally. His popularity ratings are rightfully very high, but this budget will define him for a lot of us.

Has he got what it takes, or will this it all be a bit of a damp squib with decisions delayed and a sense of “meh-ness” pervading the country?

We all accept that debts have to be repaid. But now is not the time to start putting up taxes.

It is rumoured he is thinking of increasing corporation tax.

For a party which traditionally can’t see a tax without wanting to put it up, it is supremely ironic that Labour has declared it would be against a rise, however minimal, in corporation tax.

But it’s a good bit of opposition politics, however opportunistic it is.

To put up corporation or any business tax at the moment would be a complete slap in the face for those businesses who, just as they see a degree of normality (and hopefully profitability) to return, they are told the first thing they will have to do is pay more tax.

There are plenty of people who have done well out of the pandemic, the most obvious being Amazon. It’s fair enough to think of ways of finding new ways of taxing them, but however that is done, it’s important to ensure that it’s not the paying consumer who is hit.

I’d like to see a national insurance holiday for a year for any new business startup. As I said last week, I’d like to see IR35 and the loan charge abolished. This war against the self employed has to stop.

But most of all I want to see a truly radical budget speech.

We are about to find out of what metal Sunak is made.

– – – – – – – – –

I hope you’ve all got your popcorn ready for Alex Salmond’s appearance before a committee of the Scottish Parliament this lunchtime.

It promises to be quite an event.

I don’t profess to be an expert on the internal affairs of the SNP, but I have a feeling that an implosion is imminent.

And at last the English media has woken up to what could well become one of the biggest political stories of the year.

If the worst were to happen (for the SNP, I mean) and Nicola Sturgeon was to be forced out of office, it’s difficult to see who the ready replacement is.

Succession planning was something Salmond did well. He groomed Sturgeon for the job, and few could say with a straight face that she has made a hash of it (although if you work in Scottish education, or parts of the Scottish NHS you might contest that assertion).

She, however, has failed to do that. There is no natural successor.

And that’s a real concern, both for the SNP and for Scotland more generally.

David Green: When it comes to economic rejuvenation, there’s no alternative to cutting Corporation Tax

9 Feb

David Green is CEO of Civitas.

With a Budget due on 3 March, the Government has been floating the idea of a windfall tax on ‘excess profits’ made during the Covid crisis. But instead of pondering how to punish companies that adapted successfully to the lockdown, it would be better to ask how we can most effectively accelerate our economic recovery

The case for some resolute tax cutting in the Budget is overwhelming. Excessive taxation can dampen the resolve of the most determined entrepreneurs. Top of the list should be a cut in corporation tax to ten per cent. At 19 per cent the rate is still high compared with several OECD members, and within the EU several countries charge much less. In Hungary it’s only nine per cent, in Bulgaria ten per cent and Ireland’s main rate is 12.5 per cent.

The low rate in Ireland has attracted a long list of international companies with at least a major office in Ireland, and often their European headquarters. Facebook has its European head office in Ireland, as does PayPal, while Google has a major presence. Airbnb has 500 employees, eBay has 900, and Microsoft 2,000. Other big names include LinkedIn, Accenture, HP, Apple, IBM, Pfizer and Pepsi.

It’s true that tax-avoidance shenanigans were heavily implicated in the location decisions of some of these companies, but the low headline rate was the clincher.

What would a cut mean for the public finances? In 1919-20 UK revenue from corporation tax was £63.2bn. If the rate were cut from 19 per cent to tern per cent this figure would be significantly lower, perhaps around £30bn.

However, we can predict a large increase in jobs, which in turn would increase revenue from income tax and national insurance. Both are far more important than corporation tax. In 1919-20 total HMRC revenue was £633.4bn, with income tax producing £193.2bn and national insurance £142.8bn. Revenue from both can be expected to go up sharply. Increased economic activity resulting from the cut in corporation tax would also raise the take from VAT, which brought in £129.9bn in 2019-20. If the revenue from these three taxes increased by only seven per cent it would more than make up for lower receipts from corporation tax.

Cutting the headline rate of corporation tax would also reduce tax avoidance and encourage companies operating primarily in the UK. It is notoriously easy for international companies to shift profits to overseas subsidiaries and pile costs onto their UK branches to reduce taxable profits. It’s much harder for companies whose operations are mainly in the UK to hide their profits, and a cut in the headline rate of corporation tax would be a just reward for their patriotism.

For many years the OECD has tried to reduce the scale of avoidance through its Base Erosion and Profit Shifting (BEPS) project. Member countries invariably give it lip service but little has been achieved. There is a huge literature about the devices deployed to avoid tax via controlled foreign subsidiaries, including strategies based on transfer pricing, the allocation of interest payments, and charges for intellectual property.

The lower the tax on profits, the less it’s worth spending on an army of accountants and lawyers to shift profits without breaking the law. And if international companies engage in fewer tax dodges, the Treasury can spend less on prevention. HMRC now has over 67,000 staff. Some could be transferred to more productive activities.

To make it clear that the aim is to incentivise job creation, the Government could also abolish capital allowances. At present when a company builds a factory or adds a production line it can’t treat the outlay as a cost that can automatically be deducted from taxable profits. Expenditure has to go into a special pool and is deducted from profits over time. It has long been recognised as a perverse incentive against investment, and in 2019 and 2020 the Government increased the capital expenditure that is deductible from £200,000 to £1m. Some want to increase this ‘annual investment allowance’ still further and to add to the list of items covered by the ‘first year allowance’, which is over and above the annual allowance.

But it would be lot simpler just to scrap the whole system and allow all investment in new productive assets to be a deductible cost. Such a dramatic step could easily lead to the multiplication of Nissan-style factories and well-paid jobs throughout the left-behind regions.

Cutting corporation tax would upset the European Commission, which may renew its protests against the evolution of the UK into Singapore-on-Thames. But having learnt nothing from the row over vaccine distribution, it will find itself vainly huffing and puffing again.

The Government is determined to spread prosperity to every corner of the land, but it should not be content with measures like posting civil servants to the North and redistributing infrastructure spending outside the South East. Improving roads, rail, ports and the internet is an essential component of a strategy of economic rejuvenation, but it’s no substitute for cutting corporation tax. Combining the two could be transformative.

Neil O’Brien: Introducing the new Levelling Up Taskforce – and its first report on how we can measure progress

7 Sep

Neil O’Brien is MP for Harborough.

Were you still up for Penistone? One of joys of election night last December was winning so many seats we’ve not held for decades.

The constituencies we won over in 2019 are quite different from the party’s traditional base, in the deep red bits of the map above. Seats we gained last year don’t just have lower earnings than the seats we held, but earnings five per cent lower than Labour seats. Of the bottom quarter of seats in Great Britain with the lowest earnings, more are now held by us than Labour. Compared to seats we gained, homes in Labour constituencies are a third more expensive.

Many of the places we won have felt neglected for a long time. And led from the front by the Prime Minister, the new Government has committed to “levelling up” poorer places. But what does that really mean? How can we measure if we are succeeding? How can we get the private sector growing faster in these places, making the country stronger overall?

To help the Government answer these questions, I and 40 other Conservative MPs have formed a new Levelling Up Taskforce.

Our first report is out today, looking at how we can measure progress. It also examines what’s been happening in different parts of the UK economy over recent decades.

Income per person in London (before paying taxes and receiving benefits) grew two thirds faster than the rest of the country between 1997 and 2018: it’s now 70 per cent higher in London than the rest of the country, up from 30 per cent higher in 1997.

While the divergence seen since the 90s has been a story of London pulling away from all of the rest of the country, it follows decades in which former industrial areas in the north, midlands, Scotland and Wales fell behind. Between 1977 and 1995 South Yorkshire, Teesside and Merseyside saw GDP per person fall by 20 per cent compared to the national average, and most such areas haven’t caught up that lost ground.

Why does this matter?

It matters, first, because opportunity is linked to the economy. There are fewer opportunities to climb the ladder in poorer places. Not just fewer good jobs, but less opportunity in other ways.

In London, over 45 per cent of poorer pupils who were eligible for free school meals progressed to higher education in 2018/19. Outside London there were 80 local authorities where richer pupils who were not on free school meals were less likely than this to go to university. Overall, more than 60 per cent go to university in places like Kensington and Chelsea and Westminster. But less than a third go places like in Knowsley, Barnsley, Hull, and Thurrock.

It also matters because more balanced economies are stronger overall. In an unbalanced economy, resources like land and infrastructure are overloaded in some places, even while they are underused elsewhere. This might be particularly true where cities have seen population shrinkage, and have surplus infrastructure and land. If there are greater distances between workers and good job opportunities that makes it harder for people to get on: not everyone can (or wants) to move away from family to find a better job.

More balanced is stronger overall, but on a wide range of measures the UK is one of the most geographically unbalanced economies. In Germany 12 per cent of people live in areas where the average income is 10 per cent below the national average, while in the UK 35 per cent do. It is very striking that there is no industrialised country that has a more unbalanced economy than the UK and also a higher income, while all the countries that have a higher income have a more balanced economy.

What are we going to do about it? Well, that’s the question our new group will try to answer.

The answer isn’t any of the traditional Labour ones: pumping public sector jobs into places, or subsidising low wage employment, or trying to hold back successful places: we’re interested in levelling up, not levelling down.

Different things will work in different places.

For example, transport improvements might make a bigger difference for remote areas. The ONS defines certain places as “sparse”: the north of Devon and Cornwall, most of central Wales, Shropshire and Herefordshire, most of Cumbria and the rural north east, along with large parts of North Yorkshire, Lincolnshire and North Norfolk. In these places income levels are 17-18 per cent lower. Even controlling for the qualifications and age of people living there, these sparse areas have income levels between £600-£1,300 a year lower, likely driven by poor connectivity.

In other places, the answers are different. I’ve written before about how the way we spend money on things like R&D, transport and housing is skewed towards already-successful areas, creating a vicious circle. We should change that.

But tax cuts could also play a bigger role in helping poorer areas. There’s actually been convergence between regions at the bottom end of the earnings distribution, driven by things like the National Living Wage, tax cuts for low income workers, and things like Universal Credit, which have reduced the differences between places by levelling up the poorer areas more. In poorer places, more people benefit from these policies.

The reason there are growing gaps between areas overall is divergence higher up the income scale.
Looking at the gap between earnings for full-time workers in London and the North East, the pay gap shrank for the bottom 30 per cent of workers, but grew for those higher up. For those at the 10th percentile the pay gap between the two places shrank from 32 per cent to 20 per cent. But for richer folks at the 90th percentile, it grew from 62 per cent to 88 per cent.

So how do we get more good, high-paying jobs into poorer areas? There are a million different specific opportunities, but one that’s relevant in a lot of Red Wall seats is advanced manufacturing.

Over recent decades, Chancellors have tended to cut capital allowances (a tax break for investment) in order to lower the headline rate of corporation tax. I’m not sure that was a good idea: Britain has a lower rate of fixed capital investment than competitors and our tax treatment of investment is stingy. But either way, this change has had a pronounced regional impact: it favours services over manufacturing, so helps some areas more than others.

One way to blast our way through the current economic turmoil would be to get businesses investing again by turning capital allowances right up (“full expensing” in the jargon). That would be particularly likely to help poorer areas. Indeed, when we have tried this in a targeted way before it worked.

Government should think more about how tax and spending decisions can help us level up. It should produce geographical analysis of all budgets and fiscal events, setting out the different impact that tax and spending changes will have on different areas. The Treasury’s Labour Markets and Distributional Analysis unit should have geographical analysis added to its remit.

This whole agenda is exciting. But a lot of people are cynical, because they heard New Labour talk the talk – but not deliver. We’ve got to deliver. So let’s hold ourselves to account, and set ourselves some ambitious goals.

Let’s get earnings growing faster than before in poorer areas. Let’s get unemployment down in the places it’s worst. They say that “what gets measured gets managed.” So let’s “measure up” our progress on levelling up.