Cuts and thrust…the big tax battle – Sunday Herald

Sunday Herald, 18 May 2008

Last month we published an article by Stephen Boyd, Assistant Secretary of the STUC, attacking the widely held view in Scottish business that lower taxes were key to a prosperous Scotland.  Geoff Mawdsley, Director of the new free-market think-tank Reform Scotland begged to differ.  In the exchange of emails that followed, they wrestled with the most basic questions about the kind of economy – and the kind of country – Scots should be seeking to create.

April 30

Dear Stephen,
In your Sunday Herald article you state boldly that ‘There is no future for Scotland as a low tax economy.’ This is the opposite of the truth.

Our aim in Scotland should be nothing less than to match the growth rates of the leading world economies. It is only through faster economic growth that we will create jobs, opportunities and a higher standard of living for everyone living in Scotland.

Economic growth involves a number of factors, which are often difficult to isolate. However, lowering the tax burden is an essential element in a modern economic strategy and research shows that it can have a positive impact on economic growth.

Lower tax helps in three main ways. It improves productivity by enabling firms to invest in capital, training and research and development; it encourages risk-taking and entrepreneurship by making such activities more rewarding.

And it increases participation in the workforce by making it more rewarding to move off benefits and into work – it is often the low paid who are hit with the highest marginal rates of tax at present.

At 37%, the UK tax rate is now above the OECD average and Scotland’s economic performance is suffering as a result. We need to reduce that rate as a matter of urgency as part of a concerted strategy to increase economic growth.

In recent weeks we have read all too frequently about companies choosing to move their tax bases away from the UK to other, lower tax countries. If Scotland does not address this issue then there is a very real danger we will end up pushing away the very investors Scotland needs to help create economic growth.
Best wishes,
Geoff

May 1

Dear Geoff,

Your response reflects the quasi-religious faith of a supply-sider in the power of tax cuts.  Whilst acknowledging that a number of factors contribute to growth you choose not to consider these or how they might interact with fiscal policy to produce benefits.

How can you be so confident that the gains accruing to business from tax cuts will be invested in capital, training and R&D?  Scotland has benefited from over a decade of economic stability and, despite what you say, the business tax regime remains competitive.

And yet investment levels remain worryingly low.  Scotland\’s productivity deficit is the result of deep-rooted structural problems, not the least of which is the paucity of our capital stock and the lack of patient and dedicated capital.  Surely it is reasonable to assume that tax cuts are more likely to exacerbate this short-termism than remedy it?

At least we can agree that it is both unfair and inefficient to level proportionately higher taxes on the low paid.  However, the impact of any readjustment on participation levels is likely to be minimal at a time of record employment.

Designing public policy to appease siren voices among employers is hardly a sustainable strategy.  Indeed, cutting taxes will restrict the ability of government to invest in other priorities, such as skills and infrastructure.

Given the intense global competition for tax revenue, surely it makes sense for governments to consider strategies other than simple tax cuts to attract and retain discerning customers.

Best Wishes,

Stephen

May 5

Dear Stephen,
Government’s aim should be to create the right environment for growth. Of course, this involves areas such as infrastructure, regulation and the quality of our education and planning systems. I did not dwell on them because the point at issue was your dogmatic refusal to acknowledge the role lower taxation plays in fostering economic growth. And when I talk about tax, I am talking about the overall burden of taxation and not any one tax in particular.

Many independent studies have demonstrated the relationship between the level of taxation and growth. For example, the OECD’s Understanding Economic Growth links a 1% increase in the tax to GDP ratio with a 0.6 to 0.7% reduction in per capita income. Equally, the worldwide trend is clear. The fastest growing countries, such as the USA, Ireland and Australia, have reduced their tax burdens in recent years and achieved sustained economic growth. Individuals found it more rewarding to save, which fuelled investment, while companies took the opportunity afforded by tax reductions to invest in capital, training and R&D because it was necessary for success in a competitive environment. Surely there is a lesson here for those of us willing to learn?

You claim that ‘Scotland has benefited from over a decade of economic stability.’ Scotland’s trend rate of growth continues to lag behind that of the UK as a whole, its leading parts and the leading world economies. Indeed, the gap between Scotland and countries such as Ireland and the USA has grown over the past decade. How could this be described as a benefit?

Over the last decade, the tax burden has risen making us a far less attractive environment in which to do business. Instead of denigrating those employers at the sharp end of wealth creation when they point this out, it might be worth listening to them.
Best wishes,
Geoff

May 9

Dear Geoff,

I described a decade of economic stability as “beneficial” because most reasonable economic commentators regard macroeconomic stability as the foundation of a healthy economy.  I also noted that stability had failed to produce a step-change in investment and that this is due to our short-termist economy.  Tax cuts will not remedy this structural problem.

Your analysis of the world\’s “fastest growing economies” is astonishingly blinkered.  Are you seriously arguing that the US model is built on saving and investment?  So financial deregulation and resulting asset-price bubbles are irrelevant? How can two recessions in a decade constitute “sustained economic growth”?  It is revealing that you continue to promote this unsustainable economic model even as it implodes all around us.  Bizarre.

You also encouraged me to return to my well-thumbed copy of OECD\’s sober little tome Understanding Economic Growth.  Yes, it does contain reference to a link, albeit heavily qualified, between an increase in the overall tax rate and lower growth.  But nowhere does it propose tax cuts as as the best route to sustainable growth.  On the contrary, the key factors identified are human capital and R&D.

In any case, I\’m not arguing for an increase in the overall tax rate.  I simply don\’t believe, as you clearly do, that tax cuts possess alchemical properties.  However, I do believe that taxation must become much more progressive and that simplification is necessary to end the prodigious success of super-rich individuals and corporations in avoiding paying their fair share.

The “worldwide trend” is anything but “clear”.  The Nordic nations, arguably the most enduring successful economies on the planet continue to level comparatively high overall tax rates.  It is to the north that Scotland should look.

May 12

Dear Stephen,
Sadly, the economic stability of the last decade did not extend to fiscal policy, since the tax burden has increased substantially over the last ten years. Could this not be crowding out exactly the investment we need to boost our growth rate?

Of course, investment in human capital and R&D is needed. But if you don’t trust companies to invest in these areas where should the investment come from – the government? The evidence suggests that where government tries to replace the private sector it misdirects funds and doesn’t add to productive capacity. In a competitive environment, if companies don’t invest wisely they go bust.

You claim you are ‘not arguing for an increase in the overall tax rate.’ Yet you praise the high-tax Scandinavian economic model as the way forward. This all betrays an old- fashioned and misguided faith in government and its agencies to promote growth.

You suggest that the current credit crunch in the USA, which was caused by a specific problem with overly aggressive lending, shows that the whole model is unsustainable. This is a ridiculous overstatement of the case or is it just ideologically-inspired wishful thinking?

According to the OECD, Swedish GDP per capita was $35,023 in 2006, whereas in the USA it was 26% higher at $44,055. This gap is double what it was 30 years ago. People can draw their own conclusions as to which is the more sustainable model for economic growth.

The lesson is clear. If Scotland is to match the world economic leaders, it is the low tax, high growth economies such as the USA, Ireland and Australia that we should seek to emulate.

Best wishes,
Geoff

May 13

Dear Geoff,

The “high-growth” US economy? is that the one currently entering recession?

For the past quarter of a century the US model has been predicated on deregulation, debt-funded consumer spending and China\’s willingness to prop up gargantuan federal deficits.  Shamefully, tax cuts have been targeted at the already super-rich.

Of course this model is un sustainable.  Your problem is that my view of the US economy is no utterly mainstream.  Accuse me of being dogmatic and ideological if you wish but I\’m afraid it is Reform Scotland\’s anti-government crusaders who inhabit the lunatic fringe of economics.

Your take on sustainable economic development is a case in point.  Hardly cutting edge, is it?  The US might beat Sweden on GDP per head but it lags very far behind on inequality, child mortality, obesity, literacy and numeracy and social trust.

The disparity in the prison population is truly frightening.  Don\’t even mention environmental impact.  All these factors will combine to exert significant long-term drag on sustainable growth.

Yes, I firmly believe that the Nordic countries point the way forward for Scotland.  However, I\’m realistic enough to recognise that we cannot replicate their model overnight.

They have benefitted from decades of social democratic consensus, allowing high levels of investment to be maintained.

Nordic nations consistently top the World Economic Forum\’s competitiveness survey because comparatively high taxation helps maintain the foundations of sustainable economic progress.

The STUC simply seeks a mature debate about the levels of taxation required to fund the needs of citizens in a mature Western democracy.  Importing supply-side myths from across the pond will only serve to squander, not raise, our prosperity.

Best Wishes,

Stephen