The spectacular and unheeded failure of corporate tax cuts

“When corporate tax bills are cut,” Oxfam remarked matter-of-factly earlier this month, “governments balance their books by reducing public spending or by raising taxes such as VAT, which fall disproportionately on poor people.”

A 0.8% cut in corporate taxation across the 35 OECD countries between 2007 and 2014, the charity pointed out, was accompanied by a 1.5% increase in the average VAT rate. VAT (or sales tax in America) is a flat ‘regressive’ tax. When you buy a packet of chocolate digestives you pay the same amount in tax as Richard Branson, Rupert Murdoch or Bill Gates. This switch is, quite simply, a huge redistribution of wealth from poor to rich.

But while corporation tax has been reduced across the world in response to economic crisis and has been heading resolutely southwards ever since the 1980s, we are about to see corporate tax cuts on monster truck tyres. Donald Trump wants a US corporate tax rate of 15% compared to the current 35%. Theresa May’s ambition meanwhile is for the lowest corporate tax rate in the G20 (lower than Trump’s America, in other words, which is in the G20). Britain’s corporate tax rate is 17%, 11 percentage points lower than when the Tories took office in 2010 (the previous Labour government also reduced it).

This is the other arms race. Except in this one, governments fight to give money away, not accrue weapons.

I could spend paragraphs fulminating about the injustice of continually cutting taxes for the richest people on the planet while the poorest shoulder all the pain of a policy designed to repair the damage caused by a financial crisis they weren’t responsible for. I could waste energy pointing out the bizarre logic of claiming to cut a government deficit by deliberating slashing your income. But I’ll content myself with one salient fact – corporate tax cuts are presented as invigorating the economy, freeing more money for investment and jobs. They’re about making Britain ‘super competitive’, proclaiming we’re open for business, increasing research and development spending blah, blah, blah. But on that score, they’re a spectacular failure. An unexpurgated flop.  But it’s a failure almost everybody manages not to notice.

The fallacy

Because corporation tax cuts do not stimulate investment. Quite the opposite.  According to economist Michael Burke the private sector investment ratio in Britain (gross fixed capital formation as a proportion of firms’ operating surplus,) peaked at 76% in 1975, dropping to just 53% in 2008. By 2012, it had plummeted to 42.9%. By a strange coincidence in 1975 corporation tax in Britain, at 52%, was the highest it’s ever been. That’s at the same time as the peak in the investment ratio. In 2008 the corporate tax rate was 28% and in 2012, 24%.

According to Burke, corporation tax cuts are based on the ‘fallacy’ that they will ‘spur investment’. The investment rate has fallen by around a third in Britain since 1970, the same period that has seen corporation tax cut by more than 50%.

Other countries paint a similar picture. The investment ratio in the US peaked in 1979 at 69%. In 2008 it was 56% and it declined further to 46% in 2012. In Canada, which has undergone three waves of corporate tax ‘reform’ since the ‘80s, business investment has fallen steadily for two decades. In the words of one economist, Michal Rozworski, “For every dollar earned before tax, only about 60 cents goes back into maintaining and expanding business capital.  Compare this to 80 or more cents just a decade ago.”

But the political class of the western countries refuses to see the obvious. Decades of evidence that corporate tax cuts don’t work in the sense of producing more private sector investment, are met with renewed determination to institute even more drastic reductions. Even business seems to be saying, 'enough is enough'.

As Burke points out, a dynamic capitalist economy could well produce an investment ratio of over 100%, financed by borrowing in the expectation of greater profits in the future. So 69% (the US 1979 peak) is nothing to write home about, and 46% is “a sign of enfeeblement”.

The cash mountain

One rather glaring indicator that a further corporate tax giveaway won’t generate new streams of investment is that the corporate sector is already sitting on a mountain of cash that it is not using. Worldwide, this unused mass of money was estimated at $7 trillion in 2014. This year non-financial US corporations alone were judged to have $1.68 trillion in spare cash. All this while ‘underinvesting’  is the order of the day and there is pressure from shareholders to increase capital expenditure.

Apart from sitting in bank accounts, where does this mountain of cash go? The answer is in increased dividends to already bloated shareholders (which may be other companies), in share buy backs so that the company, in stock market terms, appears much healthier than it actually is, or in acquiring other companies. So the corporate sector comes across very active (mergers and acquisitions are at an all-time high), but this fevered activity just worsens inequality and increases the value of assets while producing very little of worth to society. Actual investment – new products, new machinery, new workplaces – is frequently perceived as too risky.

One theory that may tentatively rear its head at this point is that there is a negative correlation between reduced corporate taxation and investment – in other words, higher corporate taxation (and it was much higher in previous decades) is actually responsible, in some little known way, for greater levels of investment. The anthropologist David Graeber goes some way down this path in his essay Of Flying Cars and the Declining Rate of Profit, suggesting that the heyday of corporate research in the 1950s and ‘60s was really the outcome of high rates of tax – companies preferred to divert money into research, investment and rising wages rather than seeing it appropriated by the government. When that environment was transformed in the tax cutting, deregulating ‘80s and ‘90s the incentive, so to speak, for research and investment vanished.

“In other words,” writes Graeber, “tax cuts and financial reforms had almost precisely the opposite effect as their proponents claimed they would.”

Apple won’t make those ‘darn computers’ in America

Donald Trump’s proposed tax holiday for US multinationals repatriating cash gives credence to what Graeber is saying. Prior to 1986, corporations had to pay a 15% tax penalty for hoarding cash. Under Ronald Reagan, though, multinationals were allowed to hold unlimited amounts of cash provided they did so overseas. This produced a huge influx of money into tax havens. Rather than reinstituting the penalty on squirrelling away profits in other countries, Trump is proposing reduced taxation on repatriated cash as a way of incentivizing investment in manufacturing. The last time this trick was tried (under George W Bush in 2004), more than 90% of the repatriated money was used for share buybacks, increased dividends and larger salaries for executives. Another example, if one were needed, of corporate tax cuts having an altogether different effect to the one advertised.

But I think we have to look further than Graeber’s implicit suggestion that higher corporate tax is integrally linked to higher levels of private investment. If corporations are actively preferring alternatives to investment, such as share buybacks, bigger dividends or hoarding cash, the question is why has investment become so unappealing? Why has capitalism, which presents itself as a the apogee of a vigorous system transforming the world for the better, become so feeble?

Part two to follow

The price of freedom. Can we afford an unconditonal basic income?

This blog has previously scrutinised the case for a universal basic income and how it might play out in practice. But in a sense these are subsidiary to a more fundamental issue– namely how could a basic income be financed? An unconditional income for everyone might be theoretically desirable, a sympathetic sceptic would object, but what’s the point in speculating about how it could work when the astronomical costs of implementing it render such speculations idle fantasy? In any event, through austerity, society is furiously paddling in the opposite direction.

Firstly, it should be remembered that a basic income would likely save lots of money in certain areas. It would mean the abolition of many social security benefits and the end of the current obsession with checking up on people’s work seeking activities. No job diaries, no Work Programme, no Work Capability Assessment. There wouldn’t be any ‘benefit cheats’ under a basic income, because if the money comes without conditions, it’s impossible to cheat.

In addition, there would be less direct savings, too. I think a basic income would quickly produce a healthier society, both physically and mentally. The space, choices and ‘de-pressurisation’ it would afford, would lead to a smaller financial burden on public health services and fewer drug prescriptions. If the current neo-liberal capitalist society is, in essence, a social problem generating machine (and one which rudely lumbers society with endless disturbances to deal with), basic income is a problem reducer. Fewer problems, less expense.

But, even if all this is borne in mind, a universal basic income would seem, on the surface, to be monumentally expensive. In 2009, the economist Harry Shutt estimated, based on figures from the UK Citizen’s Income Trust, that the cost of a basic income in Britain was equivalent to an income tax rate of 57% or “around double the current basic rate of tax and national insurance”. The economics editor of the UK’s Channel 4 News, Paul Mason, believes, on a rudimentary calculation, that a subsistence level basic income of £6,000 a year would cost £290 billion. This contrasts with a current UK ‘welfare bill’ of £167 billion or 23% of government spending (memo to the British public: nearly half this amount goes on pensions). Mason factors in the benefits of a basic income: no tax relief needed for those on low or moderate incomes and lower health spending, but concedes that a “fiscal gap would be closed through raising tax – so this is not a cheap or easy solution”.

And while there are other kinds of taxes that can be utilised – a land value tax or a financial transactions tax for example – closing this fiscal gap invariably centres on one suspect, income tax.

And in the Mason case, we are talking about an income floor type of basic income. Wouldn’t the more generous kind of basic income, US$30,000 or £20,000 per person, be decisively beyond the bounds of affordability?

But it’s interesting that if you put the question of financing the basic income to the people that have thought most deeply about it, the Swiss group, Generation Basic Income, they come up with a very different solution. And Generation Basic Income aren’t proponents of a half-hearted basic income either. They advocate what might be called, ‘basic income max’ –  an annual rate of around £21,000 for every adult and half that amount for children. They will be taking that proposal into a referendum on the issue in Switzerland in 2016.

One of Generation Basic Income’s spokesmen, Enno Schmidt, is adamant that a universal basic income should not be funded out of income tax. “Whoever wants to fund basic income with income tax, has not understood it,” he says.*

Schmidt’s argument is that a basic income funded from increased income tax would be passed on in prices of goods, thus producing an endless demand for a greater basic income and generating spiralling inflation. Moreover, funding a basic income through income tax will reinforce the impression of those with well-paying jobs subsidising those without this income. “The people who earn money with their work will say: we work and pay our labouriously earned money to others who are lazy,” Schmidt argues.

His answer is that a basic income should be granted through an annual tax-free allowance and funded through a consumption tax, the equivalent, I guess, of VAT in the UK or the sales tax in the US. A consumption tax, incorporating the financing of the basic income, would, Schmidt estimates, need to be set at around 50% of prices. This is obviously much higher than it is at present – VAT is currently 20%, in the UK, for example.

Schmidt believes that, with the introduction of a ‘basic income max’ for everybody of £20k annually, prices, including wages, would fall dramatically. But with the introduction of the basic income consumption tax, prices would rise again to their original level. “Prices remain with this tax as high as they were for the consumer,” he says.

His argument is that consumption tax is a fair way of funding the basic income because how much a person contributes is determined by how much they ‘take’ in consumption. “The consumption tax is not unjust,” he says. “Whoever buys a lot, pays a lot for basic income elsewhere,” he says. Whoever takes a lot of performance from others for their benefit, contributes greatly to the basic income.”

I can certainly see the immense problems that ensue from trying to fund basic income from income tax. Over and above everything, this method involves paying for basic income in mammoth tax rises, before the benefits of unconditional income can be seen. They have to be taken on faith.

The consumption tax method of funding basic income is new and, I confess, I don’t understand all its ramifications. Two issues do immediately spring to mind, however. One is that consumption taxes are, nowadays, regressive – everyone, the billionaire and the homeless person, pays them at the same rate. In the past, (in the UK in pre-EU days for example), luxury items had a larger tax rate attached to them. Should a consumption tax for a basic income have graduated rates for more expensive goods?

The other question that arises is whether this kind of arrangement would lead to an enforced frugality? Because many people would deny themselves consumption, and thus paying the accompanying tax, if that’s where it would mostly be applied. Would a basic income, ironically, put basic goods out of the reach of most people? It’s important to remember that basic income would not, automatically, redistribute income. There would still be immensely rich people on the basis of their wage income and ownership of assets. Huge inequality could remain.

Ultimately, I’m not convinced that a universal basic income is possible without tapping the immense wealth that exists at the summit of society, held by corporations and a tiny minority of individuals. The charity Oxfam has famously estimated that a mere 85 people control as much wealth as half the population of the world. And the situation is rapidly getting worse. Oxfam says that the wealthy have captured opportunities from the poor and middle classes, skewing the political and economic system in their favour.

Real progress will not arise through tax redistribution, through increasing tax on the wealthy, as the clamour for a basic income tacitly acknowledges. It has to go deeper than that. "If change is ever to occur," asserts Gar Alperovitz in his 2002 book, America Beyond Capitalism, "an assault must ultimately be made on the underlying relationships that have produced the inequality in the first place - especially those involving control and ownership of the nation's wealth."

One of the earliest advocates of a basic income, the French thinker, Andre Gorz, thought an unconditional income would enable people to refuse work because it would bring about "the pooling of socially produced wealth". I still think we need to concentrate on the difficult part, the socialist part, which is how to produce the pooling.

*From correspondence with the author

Here is Part One

And Part Two