Thursday 13 September 2012

Looking beyond the scare-mongering

There’s at least a little scare-mongering in some of the statements made by Labour AM Mike Hedges on the devolution of tax-varying powers to Wales earlier this week.  That’s a pity, because some of the points he makes are far from being easily dismissed.
His claim that money and people will flow across the border if the tax rates are different is clearly nonsense.  Most of the countries in the EU have free movement of people and money, and manage to retain different tax rates without some countries emptying as people flow to other, lower tax regimes.  And there is no hard evidence that people are moving between local authority areas in Wales to seek out the lowest council tax relative to the value of their homes. 
The claim that a higher rate for one tax will drive people elsewhere is something often heard from those who want their own tax bill to remain low, but few actually act on it.  The reason is, or should be, pretty obvious; decisions on where people choose to live aren’t based on a simplistic comparison of a single tax rate.  They’re based, rather, on a range of factors (including a sense of identity and belonging) and, insofar as the reasons are financial, on a comparison of the overall financial position, not the difference in rate between a single tax.
So far, so invalid.  But, if the only difference between two jurisdictions is the rate of a single tax, and if the difference in that tax rate is substantial enough to mean more than a few pounds over a year, and if there are no cultural, family, or other reasons to select one jurisdiction rather than another, then there may be the germ of a point there somewhere.  The problem is that many opponents of devolution of tax-varying powers are looking at each tax in turn in isolation, rather than looking at the overall fiscal position.
It’s not a wholly invalid stance to take; in an environment where any tax devolution is going to be reluctant and gradual, probably involving one or two taxes only at any one time, the opportunity to rebalance the raising of revenue across different taxes to suit Wales’ needs will not be there.  I’ve written before that limited devolution of tax powers would well turn out to be a double-edged sword.  If governments fear the consequences of setting different tax rates to such an extent that the powers become unusable in practice, then there is little point in having the power.
I share his concerns about the potential impact of devolving the power to set Corporation Tax.  Again, looked at in isolation, there is a real danger of a ‘race to the bottom’.  If it’s not part of a wider devolution of a range of tax-raising powers, then there is much to commend the alternative put forward by Gerry Holtham, which is that the UK Government sets the rate, but sets it differentially for the different parts of the UK based on relative GVA per head.
If we’re serious about the Welsh Government taking more responsibility for raising the money it spends, and attempting to create a fiscal climate which does more to localise and diversify the Welsh economy, then we need a whole range of tax-varying powers, not a very limited set.  My own preference is for all taxes to be set in Wales, with, for as long as Wales remains part of the UK, remission of an agreed sum to London each year for ‘central services’, offset by a degree of redistribution to allow for differential need.  The ‘block grant’ could then be positive or negative, depending on relative need over time - that would be real financial responsibility, as well as providing a needs-based alternative to Barnett.


Anonymous said...

It's a pity Labour AMs like Mike Hedges (who he?) are so ingorant of other sub-state nations.

The Basques (similar population, history, langugae etc etc) raise all their own taxes and send a portion to Madrid. The Basque Lands, are the wealthiest and most productive parts of Spain. It's not coincidence. Their manufacturing sector employs some 30% of the population - above the EU average. But hey, the Basques are nationalists and speak a funny language so, what could they teach a Great Britisher like Mike?

Maye if Mike and others took time to look at 'small countries' not just 'big economies' they may learn something.

Anonymous said...

The 'tax harmonisation' rules in the EU had specific exemptions and I, amongst others, used them in the 1990s and early 2000s. It was the ability of IT contractors to trade as a 'sole' or 'partnership' and then go the 'grand tour'. The 'grand tour' was contracting on IT projects from one EU state to another, using your personal income tax threshold in each state as a way of avoiding punitive income tax in that state, before moving on to a contract in the next EU state. A longer contract would allow the 'employer' to pay the 'firm' any surplus over personal allowances. It would be in the chosen state which would attract lower corporation tax, usually Ireland, It was the UK, prior to the IR35 change. Many EU states still have favourable small corporate 'loopholes' like SAS in France. It had the advantage of allowing small enterprises with specific intellectual property based earnings to earn abroad, but pay tax at home, albeit at a reduced rate. Without such a 'loophole' that enterprise would have just migrated completely. What Mike Hedges AM fails to grasp is that the power over corporation tax not only involves rate setting but also rule setting. Wales could use this. It's true that the UK exchequer is war with other major states in the EU like Germany, Sweden, France, etc over corporation tax of multinationals and tailors the national corporate rates accordingly. But currently Wales, as a small nation, is prevented from 'cheeky tinkering' of the rules for small enterprises, which small states like Ireland, Finland, and Belgium take advantage of, to great effect. Not only that, it's these small enterprises in Wales which will be the savoir of the Welsh economy. It would certainly be cheaper to 'loose' a portion of corporation tax from these small enterprises at growth stage and it would certainly be less than the millions we pay over in location grants for major corporates to locate in Wales.

Mike Owen said...

Leanne's policies are very similiar to the Democrats in the USA, creating a clean, green economy by increasing public investment in the economy, and spending it not on things like highways but on things that are necessary for a sound and sustainable ecology,spending on public transport, new energy sources, etc.

Wales's economic underdevelopment is the biggest hurdle to our progress.Our economy has been in decline for 20 years thanks to Thatcher and Major, Wales is the poorest nation in the UK, things have got change.

Did you know that Wales is a net exporter of energy at the moment and that amount of energy will increase.

Why not create our own financial system, so that more of the money raised in Wales stays in Wales.Income tax should be devolved. Finance Wales could be become a real development bank.Public sector pension funds have billions in assests, £6 billion in total, hardly any of which is invested in Wales.Why not offer tax breaks similar to those currently available in Canada to those pensions funds willing to invest in there own communities.Investing 2 or 3% of our own workers assets in
Wales would transform the Welsh economy while representing no risk at all to the future returns of scheme members. Without those job creating levers its going to be very difficult turning the economy around. Leanne Woods focus on the economy and job creation should be applauded.

Changing the head of UK plc will make as much difference to Wales as changing the head of Barlcays has done to the culture of the city of london, personalities come and go in Westminster, but the policies, priorites and the problems persist. As someone once said "It is Wales alone that can lift Wales from the dust."

Anonymous said...

I haven't seen exactly what Mike Hedges wrote, but the Holtham Report looked at the possible 'migration response' to tax variations between Wales and England. Holtham's thought experiment concluded that although relatively few people would be likely to move in response to an income tax increases in Wales, those who did would probably have high incomes.

A small migration response amongst this group could have a significant effect on the Welsh budget. If the Welsh Government raised the higher rate of income tax by only 1p, and only 150 of Wales' highest earners moved out afterwards, then that would be enough to cancel out the additional revenue!

Similarly, consider fuel duty. Half of the Welsh population live within 25 miles of England, 5 million people live within the same distance on the other side, and around 100,000 people commute across the border each day for work. If the Welsh Government increased this tax then many of us could simply pop across the border to fill up (or vice versa).

These examples sum up the key 'problem' for Wales - it isn't very self-contained. Whether you look at traffic flows, migration or phone call data (MIT published an interesting study on this recently), you can see that while Scotland is a place apart, in many respects the Anglo-Welsh border is meaningless.

As Holtham said, in this context differential rates for many key taxes open the door to distortion and avoidance. That's not to say that no taxes should be devolved - there's a powerful case from both an accountability and efficiency standpoint, even for non-nationalists - however, it does mean that the devolution of taxes has to be considered on a careful case-by-case basis.

John Dixon said...


You make a number of very good points, particularly about the porosity of the English-Welsh border - and then jump to a conclusion (namely that devolution of taxes has to be considered on a case-by-case basis) which seems to bear little relation to the points made.

For certain, that porosity is a potential problem with differential tax regimes (although it's not unique to Wales-England. Consider for example France-Belgium or Germany-Netherlands, both with free movement and no border posts; it's only from the insular GB perspective that lengthy land boundaries are perceived to present a formidable obstacle).

The argument that "differential rates for many key taxes open the door to distortion and avoidance" is a valid one; but the conclusion that I'd draw from that is that there has to be more or less complete harmonisation of taxes across the EU, not that local exercise of discretion can only be considered one tax at a time.

Considering one tax at a time actually encourages people to use that one single taxation rate as a basis for decision-making, whereas local control of all taxation encourages people to look at the whole regime, not the constituent parts.

Of course, for those who oppose deevolution of taxation, using the differential argument one tax at a time to oppose it suits their case...

Anonymous said...

John, perhaps I didn't state the argument clearly enough: because the high degree of economic integration between England and Wales means that tax devolution could generate avoidance and other economic distortions, we should look to devolve those taxes which minimise the latter. Hence 'case by case basis'. This is really only a restatement of the Holtham Report's recommendations.

Remember that the word 'devolution' implies that we're still working in a UK context. We cannot seek a devolved fiscal settlement that would either:
1. disrupt the single economic area within the UK (note: this concept is *different* to the EU single market - the UK has a single currency, a common framework of employment law, social security, trade regulations, professional standards etc. etc.)
2. give us advantages at the expense of other parts of Britain - the old 'beggar thy neighbour' / 'race to the bottom' issue.

There may be a case for some harmonisation of taxes at an EU level - I remember some countries were unimpressed by Ireland's low rate of corporation tax in the boom years. However, at the larger spatial scale there's much less mobility and scope for tax avoidance (apart perhaps from multinational companies and the super-rich) and besides there's no single economic area across the EU, as there currently is in the UK.

John Dixon said...


I'm not entirely sure what you mean by a "single economic area" in this context, but the concept seems to be key to your perception of how and where taxation regimes can differ. That is, if I read your argument correctly, there is more scope for differences between "single economic areas" than there is within them.

I'm not sure that it is quite as simple as that. Would you feel that Germany, for instance, is a single economic area? Tax rates can vary significantly across the country, and their approach is, basically, that which I advocate - namely that Wales should collect all taxes and remit a proportion to the central authorities.

I accept the basic point that the more porous the borders between tax regimes the more likely it is that there will be an element of "avoidance and distortion" as you put it; but I suspect that that danger is being overstated when compared to what actually happens elsewhere. And, insofar as it is a problem, it is surely something which might place a constraint on the extent to which a government felt able to use its powers to vary taxation rather than an argument for it not to have those powers?

Anonymous said...

John, you aren't proposing the German model. The Lander don't collect all taxes in Germany: some taxes are collected by the federal government, some by the Lander and some by the municipalities.

The model you're proposing is different: full fiscal autonomy. A subject of some discussion in Scotland, but rarely mentioned in Wales (presumably because of the weakness of the Welsh tax base). Full fiscal autonomy is interesting: according to MacDonald and Hallwood's chapter in 'New Wealth for Old Nations' (a 2004 book about the Scottish economy), at the time it didn't exist in *any* nation state, unitary or federal.

The reasons for this state of affairs are:
* the national / central level is the most efficient scale for organising certain kinds of tax and social security;
* the pooling of risk in a fiscal union provides more vulnerable regions with a degree of insurance against revenue volatility and economic shocks;
* central governments are interested in minimising tax competition between regions, which damages the overall tax take.

Many people regard full fiscal autonomy as just another way of saying 'independence'. You seem to suggest continuing redistribution within the UK even if Wales had full fiscal autonomy… but this would seem to me to be complex, costly, unstable and probably unpopular all round.

Anonymous said...

I don't really see why we are talking about a "German model" or "full fiscal autonomy". What we need is a Welsh model.

We have the findings of the Holtham Commission. Those findings suggest that a degree of fiscal autonomy- not "full fiscal autonomy"- is both possible and desirable.

Holtham argues that UK redistribution could be enhanced in Wales (through a needs-based formula) and taxes devolved on top. Then you have a pay-off or compromise between Wales being fairly funded, and accepting some risk and responsibility.

John Dixon said...

I haven't read the study from which Anon 23:04 quotes, but will do so in due course. The quotes are interesting ones, but without understanding the arguments behind them, they are open to differing interpretations. That is, not least, because the definition of 'central' and 'region' is an open one. In this context, it is being applied to the UK; but there's nothing natural or inevitable about the UK. One could apply the same arguments to an independent Wales or to the EU, and the results would look very different.

Key to your argument seems to be teh question of what is, or is not, a single economic area. That's a valid point; but there's nothing inviolable about economic areas.

I tend to agree that 'full' fiscal autonomy is unlikely to be achievable within a unitary state, but part of what I was trying to do was to look at things from a different perspective. The prevailing view seems to be to look at tax and argue about why it should be devolved; I'm suggesting that we start by assuming everything should be devolved and look at what needs to be excluded. And from that eprspective, the fact that a devolved government might decide - might feel forced to decide - that it should retain the same rate for a given tax as its neighbour is an argument for not using a power rather than for not devolving it.

Anonymous said...

John, there may be nothing "natural and inevitable" about the UK, but that can be said about every country in the world. If you were starting with a blank slate and looking at the MIT phone data or traffic flows to draw a new administrative map of Britain, you probably wouldn't 'invent' Wales!

The literature, including the book I mentioned earlier (and even Alec Salmond admits this) show that regional business cycles in the UK are closely correlated - there's more integration *within* the UK than *between* it and other EU states. This is even more pertinent for Wales than Scotland, because as I said before, and as Holtham pointed out, our level of economic integration with England is much greater.

Starting from a point of 'devolving everything' is essentially full fiscal autonomy or independence by any other name, and is incompatible with the maintenance of the economic union and a single welfare state.

Anonymous said...

"Starting from a point of 'devolving everything' is essentially full fiscal autonomy or independence by any other name, and is incompatible with the maintenance of the economic union and a single welfare state."

I can accept this personally. But I don't know why we need to have full fiscal autonomy, or none at all.

Can't we have something in the middle? I.e the Holtham recommendations?

John Dixon said...


"Starting from a point of 'devolving everything' is essentially full fiscal autonomy or independence by any other name, and is incompatible with the maintenance of the economic union and a single welfare state."

I'm not entirely convinced that the two are indeed essentially the same thing, but it's a bit academic in the sense that I'm in favour of both fiscal autonomy and independence; so arguing about the precise diffeerence between them might be a little like arguing about the number of angels that can dance on a pin head - an interesting question, but largely irrelevant. So, let's agree to disagree on that. We should recognise, however, that the "maintenance of the economic union and a single welfare state" might be something on which we are not placing the same emphasis!

"that can be said about every country in the world. If you were starting with a blank slate and looking at the MIT phone data or traffic flows to draw a new administrative map of Britain, you probably wouldn't 'invent' Wales"

Absolutely true. And I also agree with your point about the higher degree of integration within the UK. All state and national boundaries are in a sense artificial; they're a product of history, and in most cases war. They're an entirely human construct. So too are nations an entirely human construct, and a particularly difficult one to define, which is why many people tend to conflate state boundaries (which are at least tangible) with national boundaries. And both sorts of boundares move over time, again for a variety of reasons.

The reasons why some of us prefer to build around one set of boundaries rather than another are complex - and deserve more attention that they can get in a brief(?) comment in a discussion thread, but they mean that we start with different perspectives.

Those diffeent perspectives colour our views about the short term as well as the long term; and what independence might mean isn't the same as what devolution can mean. So, Anon 15:40 says nothing that a devolutionist couldn't agree with; but searching for a compsormise between autonomy and responsibility is very much a devolutionist, not a nationalist, position.

What I seek is both responsibility and autonomy.

John Dixon said...

Anon 14:56,

Firstly, apologies for not having published your comment earlier - for some reason, it didn't appear in the usual place and I missed it.

If you believe, as I do, that sovereignty belongs to the people, then we can exercise as much of it, or as little of it, as we choose at the Welsh level, as long as we can create a consensus around that proposal. So, there's nothing at all wrong with the idea that we can have 'something in the middle', if that's what draw support. I'm clear, though, that it's not my preferred option. That doesn't mean that I wouldn't be able to support a cohesive set of proposals (rather than a cobbled-together set), but it does mean that I'd see it just a a step along a road leading to something different. Others. of course, might well see it as an end in itself.