Tuesday, 3 March 2015

Competition and races to the bottom

One of the reasons which have been given for not devolving Corporation Tax to the Assembly is the fear that it could lead to a ‘race to the bottom’ as the countries of the UK compete with each other to attract industry by lowering taxation.  And one of the arguments put forward by the Tories for devolving Income Tax to Wales is that it would allow Wales to compete with the other countries of the UK by lowering income tax rates.
I find it difficult to see much difference between a ‘race to the bottom’ and ‘competition’ in this context.  The potential effects certainly look very similar.  The point, however, is surely that for devolution of taxation to work, it has to include a sufficient range of taxes so that governments can raise money using taxes in different combinations to suit differing circumstances.  Picking on individual taxes seems almost guaranteed to limit the usefulness of the power, since reducing them simply reduces revenue, in the short term at least.
The Tories genuinely seem to believe that promising to reduce the level of income tax is a vote winner which will transform Wales from a country where the Tories have a respectable and fairly consistent level of minority support to one where they will somehow sweep the board.  I say ‘seem’; but I wonder.  If they were really confident that this approach was going to transform their fortunes, they would have had more sense than to make it dependent on a referendum which is unlikely to be called any time soon and unlikely to inspire much of a turnout if it does get called.
Perhaps it’s some sort of double bluff.  They know that the amount by which they could reduce income tax in isolation in Wales alone is very limited; they also know that the number of voters likely to be swayed by it is not large either, and they just want to sound like a party of lower taxes, knowing that they’ll never have to deliver on any promises.  But is talk of lower taxes really the vote winner that they believe?
The Tories’ pitch on taxation is based on the assumption beloved of economists which is that we are all, ultimately, selfish and will act in ways which maximise our own individual benefit.  Whether that’s a valid assumption is an open question; the evidence is mixed.  Opinion polls seem to suggest that many people would be prepared to see taxes increase if it meant that the money was spent on things dear to their hearts.  But there has also been some research suggesting that the way people talk when asked openly and the way that they vote in the privacy of the ballot box don’t always match.  Public altruism can sometimes hide private selfishness.
The Tories certainly believe that their take on the motivation of the electorate is valid.  Given the willingness of the Labour Party to accept the same assumption, much of the UK’s political debate is framed within the assumption that we are all motivated by selfish and competitive impulses.  It seems to me that that’s what some people mean when they refer to ‘post-ideology’ politics – but all it really means is that the main political parties now share the same ideology.


Anonymous said...

Like all tax regimes, the corporation tax rate has an ‘optimum point’ depending on the business environment. For example, when the Irish Republic dropped it’s corporation tax rate to the lowest in the EU, rather than discovering that this would leave a hole in treasury income, the net income to the state actually increased. This is because many multi-nationals decided to headquarter there, and although the rate was low the taxable corporation profits domiciled was high. Conversely, in Scandinavia, where corporation tax rates are high, an optimum point is reached, as the regime provides for tax exemptions on R&D or investment in high tech subsidiaries wholly domiciled. You pay high tax on declared profits but a larger share is exempt if you spend it on advanced technologies and employee training. The issue you describe, John, is not a ‘race to the bottom’ but whether the optimum corporation tax regime for Wales is the same as that for England. It is evidently not as there are differences in scale, inertia, and prevalent industrial base. While Labour governments in Westminster are inherently anti-Wales, I still do not understand why Tory governments in Westminster cannot grasp that devolving corporation or commodity tax means that both nations can crystallize their relevant ‘optimum point’ and even if this remains within UK sovereignty. Perhaps her majesty thinks we’ll throw some tea bags into a tidal lagoon?

John Dixon said...

I agree that setting tax rates to meet the needs of different countries isn't a 'race to the bottom' - that isn't my term, it's one being used by opponents of devolution. Perhaps, and not only in this context, they could more properly be described as 'opponents of difference'. And I agree, of course, that we should be free to set different rates to meet different contexts; that's why we need powers over all taxes, not just one or two.

I'm much less convinced about the idea that there's an 'optimum point', Goldilocks style, for any tax regime at which tax take is maximised. That looks like the output of economic theory rather than a value judgement about what's best for a country. I don't think that your example of multinationals putting their headquarters in Ireland is a very good one, in the sense that the headquarters were, in some cases, more about putting a brass plate on a door than about actually doing anything very meaningful in the country. From an Exchequer point of view, perhaps that doesn't matter, but from the point of view of the countries where the real profit was being made, it looks a lot like tax avoidance.

For corporation tax in particular, the challenge isn't about setting a rate which maximises tax take, it's about setting a rate which encourages domestic economic activity, and that means that lowering the tax rate (if that's what a government decides to do) needs to be accompanied by measures which prevent the 'relocation' of profit away from the underlying activity which generates it.

Anonymous said...

On corporation tax, it was interesting to see Nicola Sturgeon modify the SNP policy of a cut across the board, in favour of a "targeted" approach.

The BBC reported it- http://www.bbc.co.uk/news/uk-scotland-scotland-politics-31700448

As did other sources- http://www.theguardian.com/uk-news/2015/mar/03/scotland-abandons-alex-salmonds-cut-corporation-tax-nicola-sturgeon

For whatever it's worth, some vocal business groups didn't actually like the previous SNP policy.

A targeted approach rather than a blanket cut would actually be more suited to Wales as well, in my opinion, as long as it is part of John's suggestion of a range of taxes.

The Tory suggestion of devolving individual taxes one-by-one and setting tokenistic/dog whistle rates is not sound economics or sound policy.