Judging by recent opinion polls, it is clear to the majority of people in the UK that austerity isn't working and that George Osborne is hopelessly out of his depth. However people can't really articulate why, other than by making simple observations about the lack of economic growth, or Osborne's abject failure to meet any of his economic targets. One of the main reasons George Osborne and the Tory party have been able to get away with repeated, brazen examples of economic illiteracy (claiming that the debt and the deficit are the same thing, conflating fiscal policies with monetary outcomes, debt fearmongering...) is that the public really struggle to engage with economics. This is not because economics is a particularly complex subject, but because the "national curriculum" education system doesn't provide the majority of people with basic economic literacy.
This lack of economic literacy is great for organisations like the major Tory party donors Wonga.com, that have built their lucrative business model on hawking 4,212% APR loans to the economically illiterate. This lack of public economic literacy has been great for successive governments too (Tory, Neo-Labour, Coalition), who have all demonstrated abject economic illiteracy, but managed to get away with it because the public are unable to grasp the scale of their economic mistakes, and because the corporate mainstream press have been unwilling to properly explain it. One could assume that this reluctance to explain is because simplistic tittle-tattle and shallow political rhetoric sell more papers than concerted efforts to explain seemingly complex economic theories to the general public. However there are also the possibilities that the corporate mainstream press are unwilling to explain economic mistakes because they are unwilling to rock the establishment boat or because the majority of journalists are as economically illiterate as the public, and couldn't explain economic ideas in an accessible manner, even if they wanted to.
Take the mainstream media silence over Gordon Brown's PFI economic alchemy schemes. The press gave Neo-Labour a free ride on PFI, with the magazine Private Eye practically the only source of reason on the subject for the best part of a decade. In 2011 the Treasury Select Committee finally got around to admitting the obvious, that PFI is as an "extremely inefficient method of financing [public infrastructure] projects". Even then, the mainstream press failed to run with the scandal, or to question why the Tories insist on maintaining Gordon Brown's accounting trick of hiding PFI debt legacies off the national debt calculations.
There is plenty of evidence that high profile members of Neo-Labour were economically clueless, and that the media just gave them a free ride. However, there is even more evidence that the current Tory led coalition are either startlingly economically illiterate, or that they have such faith that the public are too economically illiterate to understand anything and that the corporate press are unwilling to explain it properly, that they think that they can get away with repeating any old economically absurd cobblers in the hope of creating a convincing narrative to justify their actions.
I've already written articles that demonstrate that the Tories spout economically illiterate gibberish, that they brazenly lie about the economy, that they invent narratives rather than present economic evidence, that they conflate their fiscal policies and the monetary outcomes of the Bank of England's bond market distortion scheme, and now the backbench Tory MP and former candidate for the Tory leadership, John Redwood has provided me yet another opportunity to nail the Tories for their economic illiteracy.
Redwood was speaking on the BBC Radio 4 Today programme on the 8th of December 2012, attempting to defend the immoral tax dodging behaviour of companies like Starbucks, the extremely lax UK tax code that allows such huge scale tax-dodging (98 of the 100 FTSE 100 companies have established tax haven based subsidiaries) and the fact that the HMRC now seem to be operating a "pay what you like" tax regime, where tax-dodging corporations can make a voluntary "token tax" contribution in order to deflect public criticism of their tax dodging activities.
It is hardly surprising that a high profile Tory would defend corporate tax-dodgers and the refusal of any of the establishment political parties to deal with the £30 billion+ annual corporate tax avoidance scandal by closing the loopholes with the kind of legislation I (and many others) have proposed. Neither is it surprising that Redwood used this tax-dodging scandal to promote the familiar Tory agenda of slashing corporation tax and tax rates for the wealthy elite.
The essence of Redwood's message was that "best" way of getting more revenues is by cutting tax, thus encouraging the transfer pricing tax-dodgers to extract their multinational profits in the UK, rather than in Ireland or other corporation tax jurisdictions, as is the case now.
Here are some specific quotes fro the interview:
"The lower the tax rates (which is the way the current government is going) the more income I think will be booked into out country as a result, because there is a competition between the main jurisdictions of the world to be able to tax profits, and obviously countries with the lower rates tend to win because there is quite a lot of scope to switch income around for tax purposes."He reiterated this stance several times, here are another two examples:
"I'm very happy for our country to try and get more of the tax revenue into the United Kingdom by cutting the [Corporation Tax] rate"
"The single thing a country can do to win is to have lower rates"These statements are outright admission that Redwood favours the "race to the bottom" strategy of enticing multinational tax dodgers with super-low corporation tax rates. However they've got a lot more slashing to do if they are going to compete with the extremely low rates in Ireland, Switzerland, Canada and Hungary, or to undercut the corporation tax rate of 0% in the Bahamas.
Redwood then tried to defend multinational transfer pricing arrangements that allow companies to extract hundreds of millions of pounds from the UK economy by creating the legal fiction that all their £billions of international profits were generated by a subsidiary in Ireland with just a few dozen workers, or by a tax haven based shell company based in a building that hosts dozens (or even hundreds) of other tax-dodging shell companies. here's what he said:
"They don't avoid profit tax completely, because the profit has to come out somewhere."Redwood's intention is that the UK slash corporation tax rates to such low levels that the global tax-dodging corporatocracy decide to extract their profits in the UK. He wants the UK to behave as the economic pirates of the global economy, soaking up the tax revenues on profits that were generated elsewhere in the world. That senior Tories openly enthuse about winning the "race to the bottom" in order to hoover up dodged tax revenues from elsewhere in the world is bad enough, but there are some gaping economic flaws in this ideology too.
The first objection relates to the Laffer Curve; the theory that there is an optimum amount of tax to be levied to maximise tax returns. The idea that tax cuts always increase tax revenues is theoretically flawed. This is easy to see. If corporation tax was set at 0%, tax avoidance could be eliminated, but at the cost of eliminating all corporation tax revenues too. The same goes for setting tax rates at 100%, nobody would even bother to go to work if the government enforced a 100% tax rate. The optimum point obviously lies somewhere between. What is certain is that the more the tax rate is slashed, the more likely it is that the revenues are going to "fall off" on the left side of the Laffer Curve.
The next objection is the sheer scale of tax cuts that would be needed to lure companies into engineering their profits to appear in the UK. Given that several other European economies are running 10% Corporation Tax rates, the UK would need to halve their corporation tax rate in order to compete in the transfer pricing piracy game. I'm not sure that the public would approve of the slashing of corporation tax at this time of "austerity" for everyone else.
The last, and most important objection is the fact that Osborne's decision to slash Corporation Tax rates from 28% to 24% since 2010 has actually led to a huge fall in tax revenues, even though corporate profits are soaring. In July 2012 it was announced that Corporation Tax receipts have fallen by nearly 20%. What is Osborne's answer to this fall in revenues? Cut the rate even further to 21%, ensuring that even more revenues are eliminated. It is quite clear from the economic evidence that Osborne's corporation tax cuts are pushing the tax rate further down the left slope of the Laffer curve, and that the benefits of winning the "race to the bottom" wont be felt until corporation tax rates fall well below 15%. Even then it is debatable whether the transfer pricing revenues from the global corporate tax-dodger brigade would ever exceed the more than halving of tax revenues from within the UK economy.
Not only is there strong economic evidence (from the IMF and the OBR) that Osborne's ideological austerity experiment harming the UK economy by destroying strong fiscal multipliers, his corporation tax cuts have further reducing government revenues and forced him to miss his hugely over-optimistic borrowing targets. It has been estimated that in 2013 Osborne will have to borrow at least double the £60 billion that his department projected in 2010. In any other walk of life, such a spectacular miscalculation would surely be punished, but Osborne is left free to continue the same policies of tax cuts for corporations and the wealthy establishment elite and austerity for everyone else. Exactly the policies that have forced him to row back on his deficit reduction plan.
It is quite clear that Osborne and the Tories are intent on cashing in on the transfer pricing windfall by winning the "race to the bottom", rather than expending any real effort on ensuring that profits generated in the UK are not "magicked away" through complex tax-dodging scams. Not only is this stance immoral, it is also extremely dubious that their stated goal of turning the UK into a tax-haven for tax-dodging corporations to extract their profits would ever generate as much revenue as simply ensuring that profits made in the UK are taxed in the UK.