It’s been another glorious, sunny day today. So, naturally(!), I decided to spend an afternoon researching figures and playing with tables to find out whether yet another ideology/policy combination of the current government held water any better than your average sieve. (I did at least decide to do it in the garden with good coffee and an unplanned but steady stream of great barbecue food from my very kind Iranian and and Pakistani neighbours, proving that I’m not a complete idiot but that xenophobes and bigots are!)
The area that’s been tugging at my curiosity the last couple of days (ok, given the wonderful weather maybe I am a bit weird! 🙂 ) has been the interrelation of tax levels and employment. The Tory component of the coalition government has a strong commitment to reducing tax levels for both wealthy individuals and for corporations.
Faced with the obvious accusation that reducing tax is either insane or hypocritical – or quite possibly both – when they claim they have to ‘sort out the mess Labour left’ (see http://skwawkbox.org/2012/05/23/the-myth-of-the-inherited-mess-52/ for just how sieve-like THAT claim is!), Tories claim that reducing tax makes Britain an attractive place for companies to do business – in other words, that cutting taxes creates employment. The idea is that if UK taxes are low, companies will want to operate here, while rich owners and executives will want to live here – and in doing so will create jobs that benefit the country as a whole by creating employment, increasing tax take, reducing welfare costs and so on.
In justifying his recent budget decision to reduce the top rate of personal income tax from 50% to 45% when ordinary people are increasingly facing economic hardship, Chancellor George Osborne claimed:
“No chancellor can justify a tax rate that damages our economy and raises next to nothing.”
By the Tories’ own admission in other statements, ‘next to nothing’ is at least £500 million (!) but we’ll leave that aside for the moment. Osborne claims that high tax-rates for the wealthy are counter-productive, discouraging investment, entrepreneurship and growth, and driving wealth-creators out of the country to less tax-heavy locations. In the same budget in which he cut the top rate of personal taxation, Osborne also announced a cut in corporation tax and flagged plans for a further cut, on the basis that this will encourage companies to invest in the UK.
About 18 months ago, I sat in a studio with the excellent Chukka Umunna and Tory rising star Claire Perry, as guest ‘pundit’ on John Pienaar’s Sunday evening politics show. I argued on air that the Tory government had a one-sided view of deficit reduction, because there are two ways to reduce debt: reduce spending – and/or increase income. In terms of a national economy, one of the main and most obvious ways to increase income is to increase taxation on the wealthiest. Naturally, Claire Perry was in vehement disagreement with this point of view. Off-air, as the discussion continued, Claire pulled out a list of spending cuts the government had made or was planning to implement, and admonished Chukka that the Tories were the only party to be aggressive on spending cuts – plainly she felt this was something to be proud of, while I would have been far more impressed to see something like a balanced plan that would have evidenced some serious, non-ideological thought. Claire was a very pleasant lady, even going so far as to tweet that she was leaving the studio with me (my first real encounter with Twitter), but I felt and feel that her political imagination is lacking.
That aside, the point of this little illustration is this: if you believe (or want people to believe) that increased taxation is going to damage the economy, then you only leave yourself with the option of cutting spending. The problem is – as we’ve seen from recent economic reports and forecasts and the double-dip recession – cutting spending only sucks money out of the economy and worsens the debt spiral.
So, let’s take a look at some figures and see whether the evidence backs up the Tory dogma that you have to cut taxes to attract employers, and that increasing taxes will be worse for the country by driving away business.
The graph above shows the top rates of tax charged by countries on their highest earners, alongside their rates of unemployment. To keep the information readable and to maintain a degree of ‘comparing like with like’, I’ve only included countries from the European union, but the sample is certainly large enough to be illustrative, The UK is shown at the current top rate of 50%, as the new lower rate hasn’t yet come into force.
Far from showing that high personal taxation drives away so-called ‘wealth creators’, we see that in fact the situation is the opposite. The 5 countries with the highest top tax rate have among the lowest unemployment, while the countries with higher employment are predominantly at the worse end of the unemployment scale. Take out the ‘crisis’ countries of Greece, Spain and Portugal, whose unemployment situations have nothing to with taxation rates, and the picture is even clearer:
All of the countries with over 10% unemployment are in the cheapest half of the distribution in terms of tax on the wealthy, while countries with the highest top tax rates have the healthiest employment situations. One might argue that some of these countries are relatively small – but in fact that makes the situation even more striking. Small countries don’t have large populations that may attract companies to take the tax ‘pain’ to operate there.
Having established that the numbers show that Tories are wrong to claim that maintaining/increasing tax rates on the wealthy will be bad for the UK economy, let’s look at the same kind of data with regard to corporate rates:
Here we see the same unemployment data, but this time set against the rates of corporate tax for the same set of countries. Once again, in order to clarify the picture, I’ve excluded the 3 EU crisis countries whose problems go far beyond taxation rates.
And guess what? We see the same picture – if anything, even more clearly. Not only do the countries with the highest corporation tax rates not have worse unemployment, but there’s a definite progression the other way – the lower a country’s corporation tax, the more likely it is to have higher unemployment.
Of course, for any individual country, one can find arguments that explain why it has a particular combination. But the very least these figures prove is that there’s no justification for the Tory claim that lowering taxes boosts the economy while increasing it will damage it. Unless of course, you discount employment as a measure of economic health while considering an increase in the wealth of a tiny minority as economic growth. £155 billion increase in the wealth of the richest top 1000 people, anyone? (http://michaelrosenblog.blogspot.co.uk/2012/05/billions-were-not-allowed-to-talk-about.html)
Now, I’m no economist, just an interested amateur. But the government has any number of economists at its disposal, and it can’t possibly be unaware of these facts. Yet it continues not only to claim the opposite, but to use the patently false claim to justify the policy of tax-cuts that line the pockets of its friends, backers and paymasters. Call me cynical, but I can’t help but interpret that as meaning that they’re much more interested in enriching themselves and their ideological/financial allies than it is in the health of the country and the welfare of the British people as a whole.