by Alan Hutchison · Published on his Matches in the dark website on 27th September 2018 · Updated 20th November 2020
Most people in the UK, both on the Left and on the Right, subscribe to the mainstream economics description of the monetary system. In particular, they believe that taxes pay for government spending. The conventional view is that government spending is constrained by tax revenue, that the taxation must happen before the government can spend and government shouldn’t spend more than it taxes.
Modern Monetary Theory shows that this is not the case for a country which, like the UK, is sovereign in its currency. Not only does spending come first (taxes are a secondary operation), but government can spend more than it taxes (indefinitely, if necessary).
The misunderstanding about the relationship between spending and taxes leads to an array of incorrect beliefs, many of which are strongly held and define what it is to be a ‘progressive’. For many self-described progressives, those beliefs include misconceptions about who needs to be taxed more in order to ‘pay’ for improved public services. It usually boils down to three options: tax the rich on their income, tax the rich on their savings or tax corporations on their profits.
Taxing the rich on their income to ‘pay’ for increased government spending doesn’t work because there are not enough rich people. However, taxing the income of the rich because we don’t like them being rich is fine (we don’t like inequality and we don’t like the excessive political power enjoyed by the wealthy). Taxing their savings is more complicated and really only makes sense when they die.
Corporations are different, though. Ideally, we should not tax corporations at all.
Now, that’s just the sort of statement which gets progressives all hot and bothered, and which MMT’s detractors delight in using out of context. And I must admit that I am feeding on that indignation by giving this piece a click-bait title. Read on to see that it’s not as bad as it sounds.
To understand why taxing corporations is a bad thing we first need to understand that the state has no need for the tax money — tax doesn’t pay for spending. But tax is still necessary and can be a very useful tool. One of its uses is to encourage good things and discourage bad things. Corporations do both good and bad. Here are some of the good things:
- They provide employment (which gives people an income);
- They provide training (which increases people’s skills and productivity);
- They invest in capital formation (which increases the nation’s stock of factories, plant and machinery);
- They research, develop and innovate (which increases productivity and the stock of human knowledge).
Corporations also do bad things:
- They exploit workers;
- They use up the earth’s resources;
- They pollute the environment;
- They adopt a short-term, profit-driven approach for the benefit of shareholders.
A blanket corporation tax doesn’t do anything to address specifically the bad things corporations do, but it does reduce significantly their ability to do the good things. Taxing corporations 19% (the current UK rate) on their profits means they have 19% less to spend on wages, training, capital formation and research. And given corporations’ shareholder-first ethos, the tax may encourage them to exploit workers, use resources wastefully or pollute the environment.
So, what should we do? Well, we could drop corporation tax altogether — that would free up funds for wages, training, capital formation and research. However, there is no guarantee that corporations will use the extra money in this way and it does nothing to stop corporations doing all the bad things.
Furthermore, abolishing corporation tax is just the sort of thing that Liam Fox dreams about in the morning. His concept of a low tax nation is one where corporations set up here, make a lot of money doing all the bad things corporations do — particularly worker exploitation — and bugger off when they find lower-tax opportunities elsewhere.
It would be far better to use corporation tax and a range of tax incentives to encourage corporations to do all the good things and refrain from doing the bad things. If a firm does enough of the good things and none of the bad things then it should be able to get its tax ‘burden’ down to zero. So, we start off by offering tax incentives for those corporations which:
- Pay all of their employees significantly more than a Living Income;
- Pay their senior managers no more than, say, five times their lowest paid workers;
- Offer shares to their employees;
- Encourage union membership;
- Have employees on the board and encourage all employees to be involved in decision making;
- Provide ongoing training opportunities and can demonstrate a commitment to continued professional development;
- Invest in automation (no, automation is not a bad thing);
- Invest in permanent infrastructure (meaning that they won’t want to leave in a hurry);
- Invest in research and development;
- Reduce their energy and resource usage;
- Take steps to reduce pollution, both directly and indirectly (such as reducing plastic use in their product packaging);
And so on. Notice how the list includes all of the main points (and much more) from John McDonnell’s speech to the Labour Party Conference earlier this week.[1] The only difference is that the tax incentive method gets the job done without the need for complex legislation, without the need for compulsion and enforcement, and without the right-wing press having a field day.
Notice also that a Job Guarantee would put pressure on corporations to address at least the first few items in the list.
We add more conditions to the list once the majority of corporations are behaving as they should. This ensures that getting their tax liabilities down to zero becomes a Sisyphean task for the corporations and in the process it makes the UK a much better place to live and work.
We can also use corporation tax incentives to encourage firms to invest in those neglected sectors which we decide are in the national interest (shipbuilding or train manufacture, for example). This would be an excellent way to encourage foreign direct investment, particularly when coupled with a government commitment to buy the resulting products. After all, the main reason why Germany and Japan have large and successful train construction companies is that the German and Japanese governments guarantee to buy lots of new trains from domestic producers.[2]
And it’s a neat way to get around accusations of state subsidy. We’re not giving money to corporations, we’re just not taking as much away.
Some of you will have spotted that there is absolutely nothing new in these suggestions. In fact, they describe exactly what happens now. For example, the thriving film industry we have in the UK is due, in part, to the tax breaks we give any production company which makes films here and British production companies which make films elsewhere.[3] That’s why the Star Wars films get made here and how Three Billboards Outside Ebbing, Missouri came to win the BAFTA award for Outstanding British Film.[4]
Some will say that this is just corporate welfare, subsidies for shareholders. But consider how it can be used to encourage the film-making corporations to do good. The Labour Party announced recently how they will do just this if they are elected. Labour has said that they will address the lack of diversity in the film industry by ensuring that film tax relief is ‘dependent on a fairer, more inclusive mix of cast and crew’.[5]
The only difference between what I am proposing and current practice is that the present arrangements are always accompanied by a load of tripe about the purpose of tax.
Labour may understand the benefits of tax breaks for the film industry, but then they go and ruin it with a rant about taxing corporations in order to ‘pay’ for public services. This is what John McDonnell had to say shortly after Labour’s plans for film industry tax relief were announced:
The last eight years have been a bonanza for big business and a catastrophe for our communities. The Tories, aided and abetted for years by the Liberal Democrats, have handed out billions of pounds in tax giveaways, while slashing funding for our vital public services.
They have left our schools so starved of cash teachers are begging parents for money, taken police off the streets, and left our NHS and social care in crisis…
We will invest in our economy and we’ll pay for it by taxing the super-rich and big businesses…[6]
This sort of guff is just playing to the crowd, giving the supporters what they want (except in this case a little bit of what you fancy doesn’t do you any good).
One of the problems with the ‘let’s tax big businesses’ argument is that it mistakes corporations for sentient beings. A corporation may be a ‘legal person’, but that doesn’t mean that it walks around with a smile on its face, thinking about all the money it has in the bank. Corporations are not people. But they are run by people and people are the ultimate beneficiaries of corporate endeavour. ‘Corporation’ gets used as a metonym for those people and it causes no end of confusion.[7]
When the public hear John McDonnell going on about ‘big businesses’, which people do they think about? Is it the CEOs or the shareholders? Do they ever consider the other beneficiaries: the workers, the suppliers, the consumers? Probably not.
And is there a touch of xenophobia in their thinking? Ask someone to name a few corporate ‘tax dodgers’ and the chances are they will come up with a US company: Google, Facebook, Starbucks, Amazon. It’s interesting how the politicians who go on about corporate tax avoidance rarely accuse a British company. Better to blame the Other.[8]
When putting together a new corporate tax regime — one based on encouraging good and discouraging bad — we need to be clear that the tax is going to benefit people directly. It’s not a case of taking money away which will be used somewhere else. And we need to be clear which people are going to benefit — it’s about making sure that corporations operate in the best interests of their workers, suppliers and consumers.
We need to be careful that it isn’t open to abuse and the people running the corporations certainly shouldn’t have the upper hand in designing the system. For example and as has happened in the past, we wouldn’t want any of the big four accountancy firms being the lead developers of any new tax proposals.[9] And we need to make sure that it is fair and applied across the whole of the economy. It shouldn’t just be the sectors populated by people with sharp elbows — like the film industry — that get preferential treatment. The incentives need to available to all businesses, big or small, no matter what they do or where they are.
There’s also no reason why we shouldn’t put the base level of corporation tax up to the 26% proposed by Labour or even higher, as long as there are sufficient incentives available to allow corporations to bring the effective rate down to zero.
We should make it quite clear that these tax incentives are not a subsidy to business. Think of corporation tax as a fine, imposed by default, and the onus is on the corporation to prove they don’t deserve to be fined. The fine for, say, not providing training for its workers will reduce net profits and, ultimately, reduce the dividends payable to shareholders. The shareholders won’t like that and will insist that the board takes steps to minimise the tax bill.
It’s here that we get to the crux of this piece. Profits don’t make corporations happy, but dividends do make shareholders happy. And if they are rich shareholders, that’s where the tax needs to happen.
Tax the people, not the corporations.
Notes:
[1] See John McDonnell’s full speech to Labour Conference 2018, 24 September 2018, Labour Party. Did anyone else spot the flaw in the proposals for workers’ shares? What about people who work in the public sector? Are they not also entitled to have a ‘stake’ and dividend payments? It seems to me that it’s the same old problem of thinking that ‘real’ work only happens in the private sector.
[2] Leaving aside for one moment the arguments against nuclear power, the reason why the UK is having to procure its next nuclear power station from the Chinese is that we no longer have the capability to build one. If you don’t use the skills, you lose them — and we stopped using the skills twenty years ago. Anyone who suggests that we should be building Hinckley Point C ourselves really hasn’t thought it through.
[3] See Film Production Company Manual, 3 August 2016, HMRC. For the digested read, see About UK creative industry tax reliefs, BFI.
[4] See Paddington, Star Wars and the rise of the UK film industry, 14 December 2017, Office for National Statistics. Three Billboards was a 50/50 joint production between Film4, the film-making arm of Channel 4 (a public body with the same status as the BBC), and Fox Searchlight Pictures. See Outstanding British Film – Three Billboards Outside Ebbing, Missouri, BAFTA.
[5] See Labour to address lack of diversity in British film with new tax relief rule, 22 April 2018, The Guardian.
[6] See Tory austerity to hand £110 billion in corporate giveaways, new figures reveal, 22 June 2018, Labour Party.
[7] Yes, I know I am doing the same thing when I talk about ‘forcing the corporations to do good’.
[8] Case in point (and a libellous one too): ‘Nothing gets up the noses of honest taxpayers more than a government squeezing every penny it can out of small firms, while rolling out the red carpet for world-class tax-dodgers like Amazon, Facbook [sic] and Google’, 2018 Conference Speech, Vince Cable, 18 September 2018, Liberal Democrats.
[9] Top accountancy firms accused of exploiting tax laws they helped to draft, 31 January 2013, The Independent.