Yes, we can reshape the state – if corporations pay more tax
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Version 0 of 1. If companies in Britain paid, proportionally, as much tax as they did in the last year of Mrs Thatcher’s prime ministership, the country would be £30bn better off. There would still be a deficit, but the fiscal situation would be transformed. The crisis talk of the unprecedented reshaping of the state to the same level – in terms of percentage of GDP – as it stood in the 1930s would recede. It would not be necessary. The chancellor has nothing if not sensitive political antennae. This kind of claim cannot be allowed to get any traction. It is a political imperative that he and his allies keep the national conversation away from the structure of the tax base. Instead they need to concentrate firmly on the shortcomings of the allegedly inefficient state and featherbedding of the welfare system – always taken as axiomatic – and thus the inevitable necessity for their reshaping and downsizing. The Conservative party’s brand is toxic enough without being seen as being soft on companies and tough on the poor and average citizen. So last week Mr Osborne announced the popular profits diversion tax, or Google tax. It is widely advertised that he is doing all in his power to increase the tax take from rogue multinationals who artificially organise their affairs to reduce their British taxes. Company directors have a new duty to notify Her Majesty’s Revenue and Customs every year if, in their opinion, their tax arrangements qualify as artificial: instead of paying 21% corporation tax they would pay a penalty 25%. It was left unsaid in the accompanying documents, but any financial officer who did not notify the tax authorities of what his or her company was doing would risk being disqualified from holding office. Tax “experts” will self-interestedly say the measure will raise little tax and is futile: my contrary expectation is that most financial directors will value their reputation, professional certification and right to retain directorships– and comply. The measure is estimated to raise only a projected extra £360m when fully operational in two years’ time. My hunch is the yield will be very much larger if it is implemented with any bite. But its real importance is that it will deter more companies from following the American IT sector’s lead in routing profits through a complex network of overseas tax havens, and so shore up the UK corporate tax base. It is long overdue. Even 10 years ago companies were contributing proportionally around £20bn more to the UK exchequer than they are now. If the reduction in corporate tax rates engineered by Mr Osborne had been matched by a surge of investment and high wage jobs, the foregone tax revenue might have been justified. Instead, investment rates languish, rising only very slowly from a very low base – while the British state faces a generational fiscal crisis. The profits diversion tax marks the end of 35 years of politicians chasing the chimera of a hoped-for economic nirvana from cutting corporation tax – from 52% in 1980 to 21% today. Then, corporation tax generated around 10% of all tax revenue: by 2018/19, on the Institute for Fiscal Studies’ projections, the proportion will have fallen to under 6%, the collapse in the rate partially compensated by withdrawing some allowances. This cannot go any further. Nor is that where the bending of the tax system – and the state – to accommodate companies’ chosen behaviour stops. Over the same years there has been a monumental bidding down of wages as the share of company profits has risen by 6%, in terms of GDP, with wages falling by a commensurate amount. Britain in 2014 has over 13.5 million people living on incomes at or below 60% of the median. In 1978 the comparable figure stood at 7.1 million. The government’s finances have been profoundly affected. In order for this desperate army of disadvantaged people, 6.5 million higher than in 1978, to pay their rent or service their mortgages, have clothes on their back and not go hungry, the state’s spending on housing benefits and tax credits for those in work has exploded from around 1 to some 3% of GDP. The profits model of too many British companies, and the quintupling of directors’ pay in relation to the average over this period, has thus relied on a huge reshaping of the state. By topping up disposable incomes the state has allowed companies to freeze or cut real wages without workforces being provoked into organising themselves into trade unions. Indeed, arguably the state is paying part of what should be workers’ wages if they were remunerated properly. By cutting corporate tax rates for the consequent rising profits, the state endows companies with yet more cash for dividend distributions and share buy-backs. The total bill for additional income support and reduced corporation taxes compared with the 1980s runs at around 4% of GDP a year. There is no alternative, argue this system’s defenders. In an open economy wage rates and company tax rates are set by international competition. Only up to a point. What is striking about the international system is the variety of tax regimes, wage and profit shares – and the lack of convergence, as the IFS’s exhaustive review of the tax system, led by Nobel Laureate Professor James Mirrlees, pointed out. There is plenty of scope for redesigning our tax system to make it fairer, increase its yield and refashion the bargain between companies and the state if we choose. Mr Osborne’s profits diversion tax is a classic example of the freedom governments have: all they need is the will to exercise it. To do that there has to be a belief that public activity is not endemically inefficient so that tax pounds are inevitably wasted – and a greater readiness to demand concrete quid pro quos from companies for tax reductions, credits and rebates. At the very least, when companies receive incentives to undertake investment or new research, directors should be placed under a parallel duty to declare that the consequent revenues will pay UK tax at the required rate. And as someone, like many readers, who has spent many hours waiting for private internet providers, retailers, banks and satellite TV companies to deliver on time or fix whatever fault, I think it would be great if we could drop the fiction that the state is always inefficient and the private sector always perfect. That is not to say the state does not need to change. But the reshaping should not be a one-way street. Our companies need to change too. |