Just before the Brexit vote we quoted Adam Posen, President of the Peterson Institute for International Economics, about what might happen in a post-Brexit Britain:
“If you’re anti-regulation fantasists to begin with, you start going down the path, ‘Oh we can become an even more offshore center. We can become the Cayman Islands writ large, or Panama writ large.’ And this frankly is the way I think this also spills over to the rest of the world, is that the UK decides, ‘Hey, regulatory arbitrage, letting AIG financial products run in London, actually destroyed the US financial system, but didn’t hurt us – made us a lot of money. Let us continue down this path. Let us be the ‘race to the bottom’ financial center. And I think this that’s where this going, because they’re not going to have any other option. It’s not good.”
And this is already being played out. Take a look, just for example, at this quote from Chris Cummings of the extremely peculiar and powerful TheCityUK (and by extension the City of London Corporation), illustrating Posen’s point very exactly:
“It is vital that action is taken to reinforce the global competitiveness of the UK as a place in which and from which to do business. This will help to mitigate the risk of prolonged uncertainty while a new relationship with the EU is negotiated.”
Or calls from London’s mayor to turn London into a mini-state, which would have appalling race-to-the-bottom effects.
And we noted yesterday that this applies to tax, particularly corporate as well as financial regulation.
The fools’ gold of corporate tax cuts
The Financial Times this morning is running a headline Brexit: George Osborne to slash corporate tax rate:
“In his first interview since Britain voted for Brexit, Mr Osborne said he wanted a leading role in shaping Britain’s new economic destiny, laying out plans to build a “super competitive economy” with low business taxes and a global focus.”
Or, in the area of taxing rich individuals, take a look at this Financial Times story:
“Brexit could lead to the scrapping of tax rises for wealthy foreigners living in the UK . . . some people may benefit from the need to shore up the UK’s appeal to mobile investors, as well as greater freedom over the design of tax incentives.
And former World Trade Organisation boss Pascal Lamy, kind of uses the more menacing language of tax wars:
“The UK is already activating one of the weapons in this negotiation, which is tax dumping, tax competition.”
As we have pointed out many times in the past: corporate tax cuts, particularly in the current climate, are the worst kind of stimulus. They reduce economic growth – for several reasons, including these:
a) Corporate tax cuts don’t attract useful investment! This Chancellor, George Osborne, has already cut the corporate tax rate, again and again, over this parliament and the last. As we’ve identified, his government’s own advance assessments, and those of the independent Office of Budget Responsibility, have predicted zero impact on the tax base – that is, no new investment or at least no profit from any new investment that is made. This is consistent with analysis from the US Joint Tax Committee, that profits are only really shifted in response to much more dramatic cuts: you have to get the rate down to 5% or even 1% to compete with the big boys of Luxembourg or Ireland for profits shifted in from elsewhere. Real investment, meanwhile, is driven by fundamentals like infrastructure, labour skills and (yes) market access – tax rates just aren’t a primary concern.
b) Corporations are sitting on cash piles: profits are high but they aren’t investing, because demand isn’t there. Tax away some of those useless cash piles, spend it, and increase demand, thus increasing investment – and growth. Corporate tax cuts are like pushing on a string: if they aren’t investing their cash piles, why would corporate tax cuts help?
c) The lower corporate taxes go relative to income taxes, the more rich people convert their income into corporate forms, to escape relatively higher income taxes. This is a pure, inequality-boosting redistribution – and as the IMF and many others remind us, higher inequality means lower economic growth.
d) The ‘incidence’ of corporate taxes falls largely on capital owners/shareholders: and many of those shareholders are foreigners: over 50 percent in the case of the FTSE 100 firms. The leakage from corporate tax cuts is tremendous. Not only is there this ‘external’ leakage to other countries: but there is upwards leakage too, from ordinary taxpayers to a relatively much wealthier group: corporate shareholders.
e) When they say ‘competitive’ they mean showering goodies on large players, at the expense of smaller, less mobile local players. This hurts the small and boosts the large: increasing monopoly – with the counter-intuitive result that ‘competitive’ tax policies reduce competition. With all the market-harming, inequality-boosting results.
f) Doing this provokes others to follow suit, in a continuous process of ‘tax wars.’
The list does not stop here: also read
- Tax haven route won’t work for post-Brexit UK, OECD says – Tom Bergin, Reuters.
New research: ‘competing’ aggressively on tax reduces growth – Fools’ Gold.
It follows from all this that an increase corporate taxes will boost economic growth. Corporate tax hikes are the one component of austerity that is painless: it’s corporate tax cuts that deliver the pain.
Those who have advocated for tax cuts before – and even KPMG, for goodness’ sakes, one of the top lobbyists for corporate tax cuts – don’t think this is a good idea.