Redistributing ... to the rich

Andrew Fisher, LEAP co-ordinator looks beyond the fluff to discover the real issues in the Budget. (This article first appears in the May 2012 edition of Labour Briefing)

Pasty tax, charity tax, granny tax and even caravan tax – if you live too much of your life on planet Twitter then you’d be forgiven for thinking these were the main issues in the Budget.

I admit, as someone who doesn’t tan I was initially perturbed about #pastytax until I realised it referred to Cornish pastries rather than a lack of cutaneous pigmentation.

But the real stories of the Budget – involving the big billions – were about the more commonly known income and corporation taxes. Osborne gave corporate Britain another cash giveaway: taking corporation tax down from 26% to 24%, and committing in his statement to reduce it further to 22%, with the aspiration of reducing corporation tax even further.

"So that by 2014, Britain will have a 22% rate of corporation tax ... And a rate that puts our country within sight of a 20% rate of business tax that would align basic rate income tax, the small companies rate and the corporation tax rate."

This largesse to big business will cost the Exchequer an extra £3.76bn in the period covered by the spending review. This is on top of the £25bn in tax breaks for business announced in 2010 which included Osborne's commitment to cut corporation tax from 28% to 24% over four years.

Now Osborne will cut taxes for big business to 22% over the same period. It is not as if the previous government had been loading the tax burden on business either. Under the New Labour, corporation tax fell from 33% to 28% – which LEAP estimated cost the exchequer £50bn over 13 years.

So how does Osborne's new corporation tax rate compare with other countries? He was kind enough to tell us in the Budget:

"A headline rate that is not just lower than our competitors, but dramatically lower. 18% lower than the US. 16% lower than Japan. 12% below France and 8% below Germany. An advertisement for investment and jobs in Britain."

 So more like ... Ireland? And by coincidence that is a country that Osborne deeply admires. It was Osborne who said in 2006, "Ireland stands as a shining example of the art of the possible in long-term economic policymaking". The problem isn’t that Osborne said that in 2006, but that he still believes it now!

Ireland has been through an even more adverse austerity shock doctrine than Britain, and has slipped back into recession this year. Slashing corporation tax simply undercuts the tax base and hinders recovery.

But it does something else – it redistributes wealth. Lower corporation tax means larger net profits, so instead these larger profits go to large shareholders in dividends and directors in bonuses.

Those same directors will be laughing all the way home from their banks thanks to Osborne slashing the top rate of tax from 50 to 45 per cent. That will cost £3bn per year, which will stay in the pockets of the richest 1% in the country.

This was the issue that Ed Miliband led on when he rose in the House of Commons to challenge the Chancellor’s Budget. It was an uncharacteristically forceful performance, coruscating Osborne for cutting taxes for his Cabinet mates and their chums, while doling out austerity for the 99%.

Of course, Ed Miliband went from that to photo opps in Greggs, and jumped on every bandwagon (or should that be caravan?) going. Now he leads the charge against cutting tax reliefs for wealthy philanthropists – from class warrior to woolly liberal in two weeks. It is a snapshot of his leadership – vacillating, inconsistent and ultimately inconsequential.

So back to the Budget. The lost corporation and income tax revenue requires other taxes to rise to make up the void and/or public spending is cut.

In a throwaway remark, Osborne casually added that to balance the books “we would need to make savings in welfare of £10 billion by 2016”. This is on top of the £20 billion in welfare cuts already set out and being implemented with much misery and resistance.

What was unique about this comment, was that when you delved into the Budget Red Book (the lengthy tome that accompanies that parliamentary pantomime) there was no detail. In fact all you could find is that the precise figure is £10.5bn and neither Treasury nor social security ministers could say where a penny of these new cuts would fall.

The Budget highlighted that we have an incompetent government waging class war let off the hook by a pallid (some might say pasty) opposition.

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Squeezing ordinary people's finances always leads to disaster

Prem Sikka

The UK economy is flatlining, unemployment is rising and around 13.2 million people live below the poverty line. The prospects of building a sustainable economy remain distant. The common factor behind these grim statistics is that the purchasing power of ordinary people has been severely eroded and without adequate resources people cannot buy goods and services produced by businesses.

The UK gross domestic product (GDP) has increased from the 1976 figure of £621bn to around £1.5tn, but the share going to employees in the form of wages and salaries has declined. In 1976, the amount of wages and salaries paid to UK employees, expressed as a percentage of GDP, stood at 65.1%. By the end of 2011, it was around 54% (see table D of the Quarterly National Accounts). This rate of decline is unmatched in any other developed economy. With many people now facing wage freezes and loss of pension rights, the employees' share of national wealth is set to fall below 50% of GDP.

The above figures are not the whole story, because a disproportionately large slice of the shrinking cake has been taken by wealthy elites. A study by the Resolution Foundation noted that in 1977, for every £100 of GDP, employees in the bottom half of the earnings distribution received £16. But by 2010 it had fallen to £12, and after taking out bonuses their share declined to just £10. In contrast, the top 10% of earners increased their share from £12 per £100 of GDP to £14, and after taking account of bonuses, it rose to £16.

In principle, the state can boost the spending power of low and middle-income households through redistribution, but that possibility is constrained by the erosion of tax revenues. In 1981-82, tax revenues expressed as a percentage of GDP stood at 45.5%, but by 2011-12 they had declined to 37.8%.

So where has the national wealth gone? Well, it has been transferred from employees and the state to corporations and their controllers. In the mid-70s the average rate of profitability before interest and tax at current replacement cost stood at 3.9%. Now, despite one of the deepest recessions, it is still averaging around 11-12%.

The seeds of the disastrous position were primarily sown by the policies pursued in the 1980s and 90s. Mass unemployment and government-led attacks on trade unions severely eroded the ability of employees to maintain their share of national wealth. The current UK trade union density of 26.6% of employees is considerably less than 69.2% for Finland, 68.4% for Sweden, 66.6% for Denmark and 54.4% for Norway. Unlike Scandinavian countries, UK employees and unions are not permitted to elect directors and are excluded from corporate governance arrangements, therefore they have not been in a position to protect workers' share of national wealth.

The comparative demise of manufacturing has resulted in the disappearance of reasonably well-paid skilled and semi-skilled jobs. These have been replaced by less well-paid service-sector jobs. Privatisation and outsourcing of work has contributed to low wages.

Successive governments have appeased corporations and wealthy elites through tax cuts. The rate of corporation tax has declined from 52% of taxable profits in 1982 and will reach the lowest ever rate of 22% in April 2014. The top marginal rate of income tax has declined from 83%, plus a surcharge of 15% on investment income, in 1978-79, to 45%. Rather than effectively tackling organised tax avoidance, successive governments have shifted taxes to labour, consumption and savings, as evidenced by higher national insurance contributions, higher VAT and the failure of tax-free personal allowances and income tax bands to keep pace with inflation. The result is that households in the bottom 20% of income bracket pay 35.5% of their gross income in direct and indirect taxes, compared to 33.7% for the top 20% of households.

The massive transfer of wealth is camouflaged by government rhetoric on the need to rebuild the economy and control inflation. Here are some reflections from Sir Alan Budd, a key economic adviser to the Thatcher administration: "My worry is … that there may have been people making the actual policy decisions … who never believed for a moment that this was the correct way to bring down inflation. They did, however, see that it would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes – if you like, that what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed the capitalists to make high profits ever since."

In his analysis of the 1929 Wall Street crash and the ensuing economic depression, liberal economist JK Galbraith identified "bad distribution of income" as the biggest cause of the crisis. Yet history is repeating itself. It is hard to discern any government policies that are designed to increase the employee share of GDP.

Despite the banking crash, the government's not-so-bright idea for economic recovery is that by 2015 ordinary people will somehow increase their personal borrowing by another 50% from £1.5tn to £2.12tn. Clearly, no lessons have been learned from history.

• This article first appeared on Guardian Comment is Free
  

Quantitative Easing isn’t working

There is an economic crisis, yet those who advocate quantitative easing as a solution have misunderstood both the nature and the magnitude of it. This blog has consistently criticised Osborne's austerity programme and his evidence free belief that the public sector has been ‘crowding out’ the private sector.

Now I want to look at the Bank of England’s monetary policy: quantitative easing.

Quantitative easing (QE) is often referred to as ‘printing money’. In fact it is more accurately described as giving banks cheap credit (see BBC guide to QE). The use of QE is based on the assumption that our economic system is in crisis due to a lack of available credit (a credit crunch) and a lack of lending.

The same intellectual malaise is evident in the ‘soft Keynesians’ who advocated bailing out the banking system, but now reject an economic stimulus. Their unspoken slogan is ‘save the banks, fuck the people’.

These people failed to foresee the crisis, and now fail to offer viable solutions for resolving it – in fact (if one assumes their policies are advocated rationally) they seek to make it permanent by institutionalising declining real pay and hoping the private sector will magic some jobs soon (crowding out theory)

There are several collective nouns for this group: Chancellors, Treasury ministers, leading economists or business leaders.

Today the economy does not suffer from a lack of credit. It suffers from a lack of demand. Unemployment, underemployment and wage constraint have all produced a situation in which living standards are falling.

Separately, the government has massively cut its capital spending, sucking further billions out of the economy.

Vincent Cable whinges that the banks are not lending to small businesses yet why would they in a climate of falling demand, and wider financial uncertainty? Regular pay is increasing at only 1.1% per year, outstripped by inflation at over three times the rate. It is no surprise that retail sales volumes fell 0.8% in February 2012 (incorporating a 1.5% decline for non-food items).

Some, to make the case that QE is necessary, have pointed to statistics showing that the number of small business loans rejected by the banks has quadrupled since the crisis. This ignores two very salient factors:

1. Businesses are now making more loan applications to cover (what they hope are temporary) shortfalls, rather than to invest
2. Banks, whose reckless lending practices played a major role in causing the crisis, are now more rightly more cautious
3. The same business plan in 2006/07 at a time of high employment and rising real wages was a lot more attractive to invest in than it is in 2012/13

The real need for the UK economy is not more credit, but more demand –and that means putting more not less money in people’s pockets. It would mean doing the exact opposite of what George Osborne is doing – redistributing £30bn from benefits and tax credits into the pockets of businesses via tax breaks. It would mean ending pay constraint and reversing the VAT hike (a tax on consumption). This could be funded by reinstituting the 50% rate and closing down on the loopholes used by the super-rich and big business to avoid their obligations.

Meanwhile the Bank of England’s now £325bn quantitative easing programme has clearly not been used to extend credit to meet any growing demand. Instead, the banks have used the extra liquidity to speculate in derivatives markets and to invest in safer foreign markets.

This is not to say quantitative easing is always a bad policy. It’s not, but in the current climate it has long outlived its utility. Part of the problem is the limited policy options open to the outsourced (independent) Bank of England and the lack of any coherent strategy from HM Treasury.

Instead of botched austerity, we need investment based around a new industrial policy to create jobs in sectors that meet people’s urgent needs, including housing, energy, and transport.

Measuring the economy - rethinking the growth obsession

Yesterday the OECD predicted the UK economy would contract in the first quarter of 2012. It led the news for a while (pre-Galloway), vying for contention with pricier pasties and petrol pump panic.

The state of the economy is a vastly more important issue than both of those things, yet the way in which it is reported perhaps explains why people are more interested in pasties - and perhaps why they're right to be.

Firstly, we should define 'recession'. A technical recession is widely agreed to be two consecutive quarters of 'negative growth'.

Negative growth is a ridiculous term: economists' jargon when the English language provides ample alternatives: contraction, shrinkage, reduction. I personally favour 'contraction'.

At the end of each quarter (of a year, i.e. three months), the government (and indeed governments around the world) announce the level of economic growth - the change in our gross domestic product (GDP).

GDP is value of all the goods and services produced which includes private and public consumption, government expenditure and investments, as well as exports less imports.

So if there is economic growth then GDP has risen (relative to the last time it was recorded). If GDP has declined, then there is contraction (aka negative growth).

So back to the OECD, which predicted that in the first three months of 2012 the UK economy will have contracted by 0.1% - following a contraction of 0.3% in the last three months of 2011.

Leave aside that many close watchers of UK economic trends think the OECD has got it wrong anyway (especially after the economic boost of all the panic petrol buying), but even if the UK economy has contracted by 0.1%, what does that mean?

Well we know what it means technically: that the value of all the goods and services produced has contracted by 0.1% in the last three months. And if that is for a second consecutive quarter, as would be the case in the UK currently, then it would be a technical recession.

Somewhat illogically the economy is not in recession if it contracts by 2% in one quarter, grows by 0.1% the next and then contracts by 1% the one after. Yet two consectutive quarters of 0.1% contraction are a 'recession', even though the former case is worse.

So it's clear to me we should change our definition of recession to something that more accurately tells us the state of the economy: so how about a technical recession being redefined as contraction over an annual basis. In other words, if we look at the average of the last four quarters (or year, as most people know it).

But what does any of this mean to anyone personally or - to be less individualistic - to a community or to the economy?

Is growth that relevant? What does Mr Wilson or Ms Patel do when they hear the economy has contracted by 0.6%? A: About the same as they do when they hear the FTSE has dropped 1%. Fuck all, because it doesn't really much matter (and there's not much they can do about it).

What matters to people is their own living standards, the inequality in their community, the level of unemployment. And surely we (as fellow socialist readers of this blog) want an economy and economic measures that treat people as paramount.

So here's what's important: how does the change in your income relate to the change in inflation? That matters whether you're in waged work or receiving out of work benefits. It measures whether your living standards have risen or fallen.

Or what about the gap between rich and poor? Numerous researchers including Wilkinson & Pickett and Danny Dorling have shown the damaging effects of inequality on life chances through a variety of metrics.

And then there's unemployment - undoubtedly bad because of what it means for the individuals concerned, and also economically inefficient because it means we are paying for talent to be left idle (receiving benefits) instead of enabling that person to contribute to the economy (pay taxes).

So instead of measuring badly what matters less, why not prioritise measuring what matters most:

• Living standards
• Inequality
• Unemployment

Because next month (on 25 April), despite the OECD's prediction, I suspect that the news will be reporting that the economy has returned to growth (probably only 0.1-0.4%) and Osborne will be welcoming it as a new dawn and an endorsement of austerity - only for the economy to contract in the second quarter.

This obsession with growth encourages politicians (as those from all parties did) to ignore rising inequality and do nothing about unsustainable debt-fuelled growth.

As Ann Pettifor said on Newsnight (watch online) (discussing the OECD prediction) the government should have used the budget "to spend on infrastructure, which would create jobs to create the income to pay back the debts".

That way, we'd reduce unemployment, increase living standards, reduce inequality and, also, generate stable economic growth.

The reality is that Osborne's austerity policies mean rising unemployment, falling living standards for most, and rising inequality. Bad for people and bad for the economy.

If we, as the left, want a new economy then we should be emphasising new ways of measuring its performance too.

Relaxed planning rules are not the key to growth

Press release from the Labour Land Campaign

The government claims that its new slimmed down planning guidelines will give new momentum to economic recovery.

The Labour Land Campaign says there is a far better way to free up land for housing and business development.

It is outrageous that new large scale developments could be more easily allowed on green land when so many sites in our towns and cities are underused or lay idle.

And house builders have no right to complain about planning constraints when they currently hold land with permission for the building of 300.000 new homes.

The Labour Land Campaign says we need a mechanism that brings idle brownfield sites and land banks into their full permitted use to protect our countryside from urban sprawl with developments in areas where the required infrastructure, health care or education provision is not in place, where there is poor public transport and where people are even more reliant on cars to take children to school and to go shopping and to commute to work.

The Labour Land Campaign advocates a fundamental change to taxation whereby taxes are shifted off labour and investment and on to natural resource wealth including all land according to its permitted use value.

Eleanor Firman, Chair of the Labour Land Campaign, says “we need an Annual Land Value Tax (LVT) on all land which will act as an incentive to bring the numerous empty and underused commercial and residential sites and buildings in our towns and cities into full use, providing much needed affordable homes and business premises. LVT will discourage urban sprawl, unnecessary long distance commuting and will use urban land more efficiently.

By eliminating or reducing other negative taxes such as Stamp Duty Land Tax, Business Rates, Council Tax, VAT, Corporation Tax and Income Tax, LVT will encourage economic revival in depressed areas of the country as marginal costs for businesses will reduce. We need to put a stop to property speculation where irresponsible and greedy land owners are only interested in taking land wealth that is created by the whole of society and care nothing about the impact their behaviour has on local communities or on the environment.

Land is a precious natural resource and should be used sparingly; urban sprawl damages our environment in so many ways.”

ENDS

PRESS RELEASE: Questions to answer over Osborne’s dodgy dossier

This press release was issued today, following our post yesterday on the HMRC's publication on the 50p tax rate.

PRESS NOTICE:

FOR IMMEDIATE RELEASE:

Questions need to be answered over Osborne’s Budget Day dodgy dossier

LEAP has raised several serious questions about the dossier used by Chancellor George Osborne to justify cutting the 50% tax rate at the Budget last week. The dossier, published by HM Revenue & Customs (HMRC) ‘The Exchequer effect of the 50 per cent additional rate of income tax’ was published on Budget Day, and makes the case for the 50% tax rate to be scrapped and replaced with the 45% rate.

Today (26 March) is the last day of the post-Budget debate, culminating in a vote on the Budget. LEAP Chair John McDonnell will be raising this issue in Parliament, which has led to a tax cut for the highest 1% of earners at a time of austerity.

LEAP’s analysis raises questions about a numbers of issues, including: political interference in drafting the dossier; the efforts made by HMRC in maximising compliance with the 50% rate; and why HMRC based its assumptions on different Taxable Income Elasticity measures in 2009 when the tax was announced.

John McDonnell MP, LEAP Chair, said:

"There are serious questions to be answered by George Osborne about the political impartiality of this document, in light of the analysis by LEAP – which raises massive doubts about the conclusion that the 50% rate will raise only an additional £100m.

"I will be raising this issue in Parliament because it is of deep significance to the both the justice of our taxation system, and to the integrity of the civil service."

Andrew Fisher, LEAP Director, said:

"This dodgy dossier is deeply flawed in its analysis of the tax avoidance associated with the 50p rate. Its politically convenient and economically dubious conclusions seem more like the work of political placemen than politically neutral civil servants. There are several questions that need to be answered if taxpayers are to have any faith in the tax system.

"Osborne claimed that the 50% tax was bad for Britain’s competitiveness, yet in the Budget debate he justified cutting it by claiming other measures would raise five times as much from the same group. The Chancellor is spinning both ways, but we need to get to the truth."

-Ends-

The LEAP analysis can be read in below on the blog

The coalition's dodgy dossier - Questions that need to be answered

Waking up this morning, Cameron's government has more immediate concerns than the fall-out from the Budget. Cash for access is nothing new (Greg Palast exposed LLM and New Labour ministers in 1998), but it will further batter Tory poll ratings ahead of the May elections.

However, I think there's another scandal about to emerge, which also has echoes of another New Labour previous: a dodgy dossier.


The document is the publication by HM Revenue & Customs (HMRC) used to underpin Osborne's case for reducing the 50% tax rate to 45% in the Budget. (Richard Murphy has also raised questions about the dossier and its conclusions)

Now we know the HMRC has form (e.g. tax deals with Vodafone, Goldman Sachs, and numerous other multinationals and wealthy individuals). But it is still an executive agency of HM Treasury and staffed by politically neutral civil servants.

There are echoes again of HMRC's lax attitude to tax avoidance in this statement, which bears deeper analysis:

"there was a considerable behavioural response to the rate change, including a substantial amount of forestalling: between £16 billion and £18 billion of income is estimated to have been brought forward to 2009-10 to avoid the additional rate of tax. This behavioural response is entirely legitimate, and difficult to prevent using anti-avoidance legislation."

The first issue with this statement is the value judgement that avoidance activity is "entirely legitimate". It's true to say that New Labour was stupid in signposting with a year's notice a tax rise to the super-rich, but what does it tell us about the culture of HMRC at the highest levels, that they believe rich people avoiding tax is "entirely legitimate"?

The second issue with this statement is what it - and the dossier throughout largely - doesn't say: that this was a single year effect. It is obvious that high earners would bring forward bonuses, dividends etc by a year to avoid paying so much the following year when the 50% tax rate came in. But that cannot be repeated, so the £16-18bn in years two and subsequent would give us an extra £1.6-£1.8bn in revenue.

Although the document is largely carefully couched and liberally littered with pharses like "the estimates above are subject to a wide range of uncertainty" that is not reflected in either a) what Osborne said the Budget; and b) it's own ridiculous conclusion.

Cunningly, the dossier's conclusion is not to be found in Chapter 6: Conclusions. Instead, the real conclusion is to be found in the extra-dodgy Annex A - Table A2 of which contains Osborne's highly dubious claim that reducing the rate to 45% will only cost the Exchequer £100m (allowing him to claim his stamp duty changes will raise five times as much).

Much of the document is based on an academic concept: Taxable Income Elasticity (TIE) which in simple terms looks at the responsiveness of taxable incomes and tax revenues to different tax rates. Again in simple terms, the lower the TIE score the lower the opportunities for avoidance.

For the purposes of the document, HMRC uses a TIE of 0.48 (see Chapter 5), yet the calculations used in 2009 (when the 50% rate was announced) were based on a TIE of 0.35.

But HMRC is not a neutral academic observer of TIE. Its role - surely (at least in theory) - is to maximise tax revenues, a large part of which is to mitigate against tax avoidance. Even Osborne in his Budget statement said "I regard tax evasion and – indeed – aggressive tax avoidance – as morally repugnant".

So if HMRC identifies a higher TIE, it should not be simply reporting it, or worse suggesting tax rates should fall in response, but producing a practical strategy to minimise avoidance.

So the questions that need to be asked are these:

1. Was there an earlier draft (or drafts) that was less conclusive?
2. What input was there from ministers or their special advisers?
3. Who signed off the final document?
   
4. Why was the HMRC commissioned to do this analysis and not the 'independent' OBR?
5. Why was a TIE of 0.35 used (presumably by HMRC) in 2009, but a TIE of 0.48 used in 2012?
6. Why did HMRC not suggest practical steps for reducing this avoidance?
7. Will HMRC and HM Treasury publish all correspondence relating to the commissioning and drafting of this dossier?
8. What behavioural analysis has HMRC or HM Treasury completed or commissioned on the effects of the new changes to stamp duty?