Blogroll: Adam Smith Institute
I read blogs, as well as write one. The 'blogroll' on this site reproduces some posts from some of the people I enjoy reading. There are currently 105 posts from the blog 'Adam Smith Institute.'
Disclaimer: Reproducing an article here need not necessarily imply agreement or endorsement!
Given the delicacy and refinement that we so pride ourselves upon here we might prefer to use horse puckey but there's no doubt that there's a certain directness and vibrancy to The Guardian's phrasing:
From inboxing to thought showers: how business bullshit took over
No one with any experience of modern capitalism would disagree with the underlying idea. We all know that by the time any organisation has a Human Resources department (rather than one bod in a corner just checking the legality of employment contracts) there's going to be floods, great tsunamis, of the latest cod nonsense flowing through the system. What we desire, of course, is some method of divining which is useful such and which isn't - something subject to Sturgeon's Law, 90% of everything is, well, that horse puckey.
Fortunately, we do, those markets in which modern capitalism is embedded. The proof being:
Although Kroning may have been killed off, Kronese has lived on. The indecipherable management-speak of which Charles Krone was an early proponent seems to have infected the entire world. These days, Krone’s gobbledygook seems relatively benign compared to much of the vacuous language circulating in the emails and meeting rooms of corporations, government agencies and NGOs.
Those agencies and NGOs are not subject to market pressures. The corporations are. Get too much up the bovine cloaca here and the business will go bankrupt. As C. Northcote Parkinson pointed out well over half a century ago the others will find that greater attention paid to such things brings an increase in budgets.
It might be true - sadly so - that there is no method of preventing the puckey takeover. That just means that we need to wipe out those organisations so affected - now all we've got to do is apply this rigorously, to those organisations which don't already face those market pressures which do that very job for us.
Some people claim the rich are not paying their “fair share” of the tax total, and propose that the top rate of income tax should be raised to 50 percent, and some even say 60 percent. They often then proceed to say how the extra billions raised should be spent.
The problem is that there would be no extra billions. Less revenue would be raised at 50 or 60 percent than is currently raised by the top rate of 45 percent. In 1979 when a Conservative government took office, the top rate of income tax was 83 percent on wage income, with an additional 15 percent surcharge on money earned from investments, giving a top rate of 98 percent. Very few people paid 98 percent since it was hardly worth people earning money if they were only allowed to keep 2 pence for every pound earned.
The Conservative government made a series of income tax reductions. It cut the top rate on high earners to 60 percent and abolished the 15 percent investment income surcharge. More money was raised from the lower rates. It later cut the top rate to 40 percent with a standard rate of 25 percent. Again, more money was taken by the Treasury at the lower rates.
The reason is that economic activity became more worthwhile when people were allowed to keep more of what they made. Secondly, it became less worthwhile to make complex use of tax havens and to employ accountants to devise tax-sheltering schemes. At the lower rates it was simpler just to pay the tax. Thus more revenue was raised because the tax base increased and avoidance declined.
There was another significant effect. The proportion of the total paid by top earners increased. Where the top 10 percent had been paying 35 percent of the total, it went up after the tax cuts to 48 percent. The richest went from paying just over a third to just under a half of all income tax. In 1976 the top 1 percent paid 11 percent of the total; now they pay 29 percent of it. The top 10 percent of earners now pay 60 percent of all income tax, whereas the bottom 50 percent pay only 10 percent of the total.
More money would be raised by lowering the top rate to 40 percent, and more still at 35 percent; and the top earners would be paying a larger share of the total. It is politically difficult to be seen to be cutting tax rates for the rich, but the government could declare the target percentage of the total it wants the top 10 percent of earners to pay, and adjust rates accordingly to achieve it.
For many years, big welfare states tended to guard their borders, right to residency and especially access to welfare benefits very carefully out of fear of immigration creating a strain on the finances and many nations do in fact still guard these prerogatives today. There generally is a consensus today that if a nation has a liberal policy towards immigration then it also has to have more restrictive access to welfare benefits. However, EU changed this radically when they introduced free movement within its borders. This now meant that what had earlier been controlled by sovereign states now was controlled supranationally by the EU. Following this, workers moving within the Union had the exceptional right to access welfare benefits of other member states.
Nonetheless, this policy has for a long time been questioned due to political uncertainty regarding the sustainability of the welfare state in an open border community. Additionally, ever since the A8 countries (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia) from the former East Bloc joined the EU, concerns with immigrants taking more out of the welfare state than they put in have been exacerbated ultimately peaking with the referendum on Brexit.
This concern ended up being one of the most pressing issues during the referendum campaign, even though EU immigrants have helped subsidize the welfare state as Sam has pointed out before. While it’s uncertain that this was the main driving force behind the outcome of the referendum, there’s no doubt that EU citizens right to participate (and receive welfare benefits) in the labour market created a polarised debate leading to an assumption that EU immigrants are “welfare tourists” who are here to free ride on the system, in spite of the fact that claiming benefits in the UK doesn’t come easy. In fact, in 2013 the EU Court of Justice supported a German jobcentre who declined two Romanian from getting basic social security on the ground that they travelled to Germany with the one goal of getting welfare benefits.
However, the debate is not exclusively prominent in the UK. In other countries, such as Denmark, similar assumptions are made. Due to the generous and universal benefits, many think of Denmark as a "welfare magnet" and to be incompatible with the free movement and open-border policy. Arguably, Denmark is even more of a welfare magnet than the UK with its high share of non-contributory benefits. In addition, more than 90 percent of immigrants from western countries that migrates to Denmark are members of an EEA country. With the addition of the Eastern European countries, the immigration from these countries have even been increasing since 2004 and since 2007 they’ve accounted for the biggest share of immigrants from the EEA, whereas in the UK they’ve been on par or beneath the level of immigration from the original member states.
Because of these characteristics, Denmark makes a good case for examining the effects of EU immigrants on the welfare state enabling us to generalize beyond Denmark and confirm/deny that countries with a residual/insurance based welfare state are attracting EU workers because of the appealing benefits, otherwise known as “welfare tourists”.
A paper published earlier this year examines some of the claims that is stated in the public debate. They manage to identify three core claims in all that they think should be examined empirically:
The EU free movement and cross-border welfare rules are more likely to pose a burden on more inclusive and generous welfare states.
EU immigrants from the new member states are more likely to be net burdens to the host welfare state than EU immigrants from the old member states, as their wage levels will be low, and they will contribute less to the public purse.
EU immigrants with short-term residence are more likely to be net burdens to the host welfare state than EU immigrants with longer term residence, as they may benefit from the system before they have earned their way into it.
The authors found that in the period examined the EU free movement and cross-border welfare rules did not cause a fiscal burden - quite the contrary actually. They conclude that EU citizens had a positive effect on the Danish welfare budget contributing with 15.54bn euros while expending 8.91bn euros resulting in a positive fiscal contribution of 6.63bn euros. Furthermore, EU immigrants coming from some of the newer member states also net contributed to the Danish welfare state, although they didn’t contribute as much as immigrants coming from the original member states. However, they weren’t as much of a strain on the expenditures as EU15 immigrants.
In the blog post I mentioned earlier that Sam wrote, he also examines, based on a paper written by LSE’s John Van Reenen, what effect immigrants have on natives wages. He finds that they have little to no effect overall on low skilled workers. As he argues:
This isn’t terribly surprising, even if we take a fairly simplistic supply and demand view of things. Immigrants supply labour, yes, but they also demand labour – they spend their incomes on groceries and other things, creating about as many jobs as they’ve taken. That’s a very crude way of putting it, but it might help us to understand why the empirics look so benign.
Finally, EU immigrants with short-term residence proved to be putting more into the system than they would take out albeit the numbers are significantly lower than immigrants staying long-term. A report from the Danish Ministry of Finance has confirmed this as well.
In addition to all this, employers understandably fear that a shortage of short-term workers will occur. The average satisfaction with current short-term workers has dropped as well, suggesting that the qualifications of these workers have diminished. However, the fears go beyond that. With the net immigration of EU citizens falling with 81,000 compared to 2016, something might suggest that if a proper deal with the EU securing the free movement of labour and current EU citizens rights to stay in the UK, similar to the deal that Norway or Switzerland have, doesn’t happen, the lack of workers from EU member states will result in an acute labour shortage, especially within the NHS where non-UK doctors have been an important remedy to meet that shortage. If, as the numbers suggest, UK becomes less attractive for EU workers, UK will suffer from even lower productivity as 5.5 percent or 35,740 smaller and medium-sized business directors are from the EU.
Therefore, a change in discourse among pundits is much needed in order to address some of the concerns that dominated the referendum campaign and still dominates the media today. Instead of using fear mongering rhetoric, we should aim to address these fears with sensible arguments and hopefully the UK will get out of the EU with similar possibilities for EU citizens as they have now. They after all help contribute on key areas which is indispensable, especially with the prospects of low productivity for the years to come.
As this is something that we've been banging on about for a decade now we do indeed welcome the manner in which others are now getting with the program:
Back in the 90s, it was all going to be so different. Not for our generation the lopsided approach of our parents, with their quaint postwar notions of father-breadwinners and mother-homemakers. We would be equal; interchangeable. Our young women would run companies, embassies, hospitals and schools, while our young men, no slouches themselves, would punctuate their careers with long, halcyon spells dandling babies and teaching toddlers how to make tiny volcanoes out of vinegar and baking soda.
That equality would have formidable knock-on effects. The gender pay gap would narrow. Sexual harassment wouldn’t disappear, but decoupling professional power from gender would do a lot to erase it from the workplace.
If men and women had equal working patterns then it is entirely true that the "gender" pay gap would not exist. If an equal portion of fathers were the primary child carer as mothers are then it would be very much smaller (not disappear though, it is still true that the portion of mothers among women is higher than fathers among men).
So, what's happening?What happened? Latest statistics for England show more than 80% of fathers still work full time, rising to almost 85% for dads of very young children. This rate has barely changed for 20 years. The ratio of part-timers has flatlined just above 6% throughout this decade (having soared through the 90s and early 00s). Just 1.6% of men have given up work altogether to take care of the family home. New rights for fathers to share parental leave with mothers have poor take-up rates.
At which point we face our standard liberal differential. There are those who call themselves liberals who argue for a specific outcome. Say, that equality of market incomes between mothers and fathers, or more generally between men and women. Then there are those who are actually liberals who are entirely willing to agree that opportunities should be equal but that that doesn't equate to equality of outcome. A society in which choices are available but which lead to different outcomes as a result of consenting adults maximising their utility through such choices is an entirely just one, a righteous outcome. Indeed, that's rather the point, that all should be able to access the choices which maximise that utility.
Not just rather the point actually, it's the whole and entire point. The society emergent from maximal liberty might not be equal along certain axes but it is along the only one which really matters - equality and thus maximisation of liberty.
We cheer because the basic point is being made, that gender pay gap is today largely if not entirely reliant upon the different choices that men and women tend to make about the care arrangements for their mutually begotten children. Where we differ is that, well, if the choices are available and adults make them then, well, what is it to anyone else what the outcome is?
Aren't we all supposed to be liberals on such matters?
Place a cap on maximum earnings
The earnings of Chief Executive Officers have risen spectacularly over the course of the century. This has been especially true of those involved in the finance industries, but has also been true of most of the FTSE 100 companies. Salaries and bonuses running into millions of pounds are common, and even those running into tens of millions are not unknown. The gap between what is earned by the average employees of a company and what is earned by its executives has widened dramatically over the same period.
There are calls for government to take action by setting an upper limit on what executives can earn, and by legislating to impose a maximum ratio between the earnings of average employees and those of directors and board members. The claim by some is that directors have been abusing their power by voting themselves unjustified salary and bonus increases simply because they can, and that only legislation can curb this misuse of power.
One reason behind these dramatic increases has been globalization, and another has been advances in technology. Globalization has opened up vast new markets for firms and placed a premium on successful expansion. The rewards of this activity have been huge, spawning multinationals with an outreach into many countries.
Technology has seen the rise of hugely profitable companies such as Google, Amazon, Apple and Facebook, all of which make huge sums on a global scale and have seen their shares rocket as they have expanded.
This backdrop has meant that successful chief executives can make a dramatic contribution to corporate earnings. There is a limited pool of outstanding talent, as there is in many sports. It means that those at the peak of their profession or their performance are in great demand. Because they are in relatively short supply, organizations bid against each other to secure them. This happens in business as in football. The presence of Ronaldo on a team can make the difference between success and failure, and the same is true of top executives. Often when a talented director leaves a company, its shares plunge in consequence. The recruitment of a known outstanding talent can similarly see an immediate increase in a company's shares.
Top executives are paid huge sums because, for the most part, they earn it for their companies. In a highly competitive world with great revenues at stake, companies want to hire the best, and to hire the best they must pay the most.
There are undoubtedly some cases of abuse, in which executives are given rewards beyond any value they have added to their company, but the solution here is not to limit maximum earnings and punish the ones who are worth it, but to encourage shareholders to resist unjustified awards. A maximum earnings limit would severely damage the UK economy by depriving its companies of the top talent that can augment their revenues. The UK would be reduced to employing second rate people and would become a second-rate economy.
The Chancellor decided not to exercise his traditional right to present the budget alongside a stiff drink. That’s a surprise, because today’s OBR GDP Growth projections would have any reasonable person reaching for the bottle. The stubborn refusal of productivity growth to return to its pre-crisis levels has led the OBR to predict that growth will be a sluggish 1.5% for the next five years. By contrast, the US is currently growing at twice that rate.
Forget the gimmicks, the jokes and the tweaks to the tax system, this should be the big the story out of the budget. And if the OBR’s forecasts are correct, we should expect voters to be even more likely to risk it all on a radical socialist agenda.
Hammond understands the problem. It’s welcome to see him commit to boosting R&D spending and recognise the importance of sorting out the housing crisis so people can move to the high-paying jobs of the future. But frankly, the measures announced in the budget won’t do enough to really move the needle.
If the government wants to get a grip on productivity, here’s what they need to do.
As my colleague Sam Bowman persuasively argues the housing crisis is a key driver of the productivity crisis. Nobel Prize Winner Ed Prescott found that wages in the US would be 12.4% higher if planning regulations were relaxed in the most productive cities. It’s likely that the problem is even worse in the UK.
Hammond is right that housing has become increasingly unaffordable because we’re not building enough. Indeed, if rumours are true he understood the need to build on the Green Belt but was blocked by the PM. Still if the government are truly committed to ending the housing crisis they need to be bolder and focus less on distractions like second homes and land banks, and more on fixing the broken planning system.
- They should revise green belt rules so that land within a short walk of an existing railway station is made available for development – 3.7% of London’s green belt made available in this way would give us land for one million new homes. If they auction off the planning permission for this land, they could raise billions to pay down the deficit, fund local services and replace intensively farmed land with lush parks and forests.
- They should make it easier to build up as well as out. They should grant permitted development rights within cities to allow anyone to add two extra floors (or match the tallest building on their street). That would allow our cities to densify gradually. Furthermore, they should scrap outdated protected views that allow people in Richmond to block development in Stratford.
- The public sector is sitting on bundles of land that could be developed for real estate. We charge public bodies for using the radio spectrum, maybe we should replicate that for land use. If government bodies were forced to pay rent on the land they used and could auction it off with permission attached, we could raise billions to fund tax cuts or better public services.
- Scrap stamp duty altogether to allow households to downsize. Stamp duty is the worst tax on the books destroying more wealth for every penny raised than any other tax. Taxing transactions gums up a market and causes people to stay put when they’d be happier in smaller properties. Scrapping it altogether and adding extra council tax bands to compensate would make it much easier for home owners to move to where the jobs are.
The UK has one of the lowest levels of business investment in the EU. Only Greece and Portugal invest less as a share of GDP. Part of that is down to a tax system that encourages consumption at the expense of long-term investment. Corporations are able to deduct day-to-day expenses (e.g. stationary) from their annual taxable income, but they can only deduct long-term productivity boosting investments in new machinery gradually as the investment depreciates. But a £100 tax benefit is worth much less if I don’t get it in full until ten years down the line. Worse still, even as corporation tax has fallen (a good thing) the cuts were funded in part by lengthening capital allowances and for industrial buildings scrapping them altogether.
- Boost investment by letting firms deduct capital costs from their taxable income in full, up front. Research from Oxford University by Giorgia Maffini, Jing Xing and Michael Devereux found that when firms qualified for additional investment allowances that they boosted capital expenditures substantially. Firms upped investment by 11% on average. Further research, this time from the US by Eric Ohrn, found that US states that brought in this measure saw investment increase by 17% leading to a 2.5% increase in wages.
Cheaper off-peak rail travel is a nice perk, but it’s no substitute for ensuring that Britain’s towns are well-connected to growing cities and ensuring everyone has a fast connection to the web.
- Devolve the money that is going to be spent HS2 and let Manchester and Birmingham decide on the best way to spend it on transport. The Eddington Review found that the biggest transport projects often delivered the smallest returns. Money could probably be better spent in adding services across the North through rail electrification. I suspect Manchester and Birmingham's mayors could put the money to better use.
- Use existing infrastructure more efficiently by bringing real road pricing. Congestion is a nightmare and imposes substantial costs on the UK’s economy. By bringing in dynamic road pricing we could reduce congestion and boost speeds on UK roads and motorways.
- Rural broadband speeds are a constant complaint, but deregulation after Brexit is the real solution. Rather than waste taxpayers money on outdated broadband projects, the government should repeal the EU’s Net Neutrality rules to incentivise firms to invest and grow their customer bases. When similar rules were brought in stateside, investment levels fell by 5.6%.
Since Thatcher, the fundamental debate between Labour and the Conservatives has been about whether it’s better to grow the pie (the Conservative way) or slice the pie more evenly (the Labour way). If the Conservatives can’t deliver the real growth, voters will desert them for a less dynamic but more egalitarian Labour government. Put simply, if the OBR’s forecasts come to pass then this government is toast. But we shouldn’t be fatalists, we know the policies that can kickstart growth across Britain, we just need a government with the guts to implement them.
When the Minimum Wage was first introduced, some analysts predicted that it would increase unemployment, particularly for young people and those from ethnic minorities, as it had repeatedly done in the US where it was set above the level that some people's labour was worth to employers.
However, the UK level it was set at was sufficiently low to avoid this effect. Indeed, it was widely criticized as far too low by many of those who had campaigned for it. It has been raised several times, and when Chancellor George Osborne decided to match the Opposition commitment to the 'Living Wage,' it headed to the level where it could prevent people from getting a first low-paid job that would set them on a course to work their way up the employment ladder by gaining on-the-job experience.
Analysts note that every time it is raised, the supermarkets increase the number of automatic checkout machines that enable them to employ fewer staff. A similar effect is seen in other businesses, where it becomes cheaper to automate than to pay higher wages to employees with relatively low productivity levels. A substantial further increase in the Minimum Wage would increase the number of people that it would be uneconomic to employ.
The problem for the low-paid is not so much that employers pay too little, but that the government takes too much. At a mere £8,164 per annum, the government starts charging National Insurance at 12 percent. At only £11,500 per year it starts charging income tax at 20 percent. Add the amount the government takes in VAT, insurance taxes, stamp duty, airport departure tax, fuel duty, alcohol duty and tobacco tax, and it adds up to a huge slice of a low-paid persons’ earnings.
Take-home pay, the figure that matters most for the low-paid, could be increased if the thresholds for National Insurance and Income Tax were harmonized and raised to a level that look low-paid people out of taxes on their income altogether. Take-home pay could be further raised for young people starting out in low-paid jobs by levying a lower youth rate, certainly for National Insurance, and possibly for income tax, too.
We regard this as an interesting little logical puzzle, this fuss being made about corporation tax at present. The basic starting point is that corporations don't pay the tax at all, they cannot. All and any taxes mean the wallet of some live human being is lighter. Whose pocket is being picked by which ta is the study of incidence.
About which we have an interesting paper:
Data on the foreign activities of American multinational firms provide wage rates and interest rates for a panel of more than 50 countries between 1989 and 2004. Evidence from applying this framework to these data indicates that between and 45 and 75 percent of the burden of corporate taxes is borne by labor with the balance borne by capital.
We do not, by any means, insist that this specific number is correct. However, we do insist on the basic underlying logic of the case. Which is that the more mobile factor of production will bear less of the tax burden, the more immobile more. Mobility here is a close proxy for elasticity of course. Which brings us to the common complaint about that corporate taxation:
Second, capital - financial and real - and goods and services are now more mobile across national boundaries than ever before. This is because many highly valued modern products - such as the iPhone - are relatively lightweight and can be shipped economically (and in volume and rapidly) by air. Other valuable modern products weigh nothing. Consider the digital nature and economic value of operating systems and the multitude of apps for smartphones and the growing value of "big data." Financial capital and services are also weightless. These products can be shipped globally with a few strokes on a computer and at the cost of a few electrons.
A major and unheralded problem for modern governments is that they are landlocked, while firms and their plants and equipment and job bases can move with growing ease among countries at decreasing cost.
Which brings us to what we think is the interesting little puzzle. When capital was less mobile the incidence of such taxation weighed more heavily upon the capitalists. Perhaps a good idea perhaps not but what was actually desired at the time at least. Now with the greater mobility such corporate taxation necessarily falls more upon the wages of the workers, the least mobile factor of production. Yet this is exactly the point where people are calling for more corporate taxation. Just when we absolutely know that it's not the capitalists or the rich people being taxed.
The very thing which is causing the problem being complained of, that mobility of capital, is exactly the thing which says we shouldn't be trying to tax it in this intermediate manner, through the corporation. Yet the campaigning insistence is the other way around, that because of the mobility we must tax it more, as we actually cannot in this manner.
Isn't that an interesting little puzzle? It's almost as if the campaigners don't understand the subject, isn't it?
An old joke in the Armed Forces is that if the Secretary of State has to choose between sacking military personnel or Whitehall desk-drivers, the military personnel have to go because he needs the latter to do the calculations. There has been some shedding of top brass and civilians in recent years but the hierarchy remains excessive The Royal Navy has 30 admirals and 70 commodores to supervise the commanders of the 29 fighting ships we still have. We also have a miscellany of 48 support ships and boats including HMS Victory, still included in the RN’s list of 77 active ships 212 years on. That must frighten Johnny Foreigner. The 7,760 Royal Marines (about five brigades) have four generals and 10 brigadiers. Top heaviness also applies in the other services.
The aggregate defence bill for 2016/17 was £44bn., the main items being service personnel, hardware and IT procurement and equipment support at £9bn. each, and £7.5bn. on running the department. Between 1980 and 2014, the number of service personnel halved to 160,000, with talk of more cuts to come, whilst the proportion of officers increased from 13% to 17%. Estimates are hard to establish but between 5% and 10% of service personnel are probably employed in civilian roles, mostly procurement and equipment support.
The Royal Navy is far the most expensive service although the value of the nuclear deterrent is hard to quantify. After 50 years of maintenance experience, it is strange that we still need four ballistic submarines in order to have one at sea. The only two naval engagements in the last 70 years were in the Falklands, where two frigates pursued an Argentine coaster which escaped by running aground, and in 2011, a British destroyer, together with Canadian and French warships, scared off a few pro-Qadhafi boats attacking Misrata. No one was hurt nor damage done.
The MoD’s central problem is procurement. The armed forces first decide what they want. They know procurement policy requires competition but faced by a choice of tailor-made or off-the-peg, the former is chosen 50% of the time, by value or number, and not tendered competitively. It is awarded to a favoured supplier on a cost plus profit basis. In theory, more profit is permitted when there in higher risk but in practice all the risk falls on the taxpayer. Seven of the top ten suppliers obtained more than 80% of their business non-competitively. In these cases, no one says “why not have the tried and tested that will do much the same job at less cost?” When spending other people’s money, only the best is good enough. Unfortunately, the “best” too often turns out to be mis-specified, more than budgeted and years overdue. On all 14 occasions (out of 166, January 2015 – September 2017) where the MoD’s Investment Approvals Committee (IAC) challenged the bespoke decisions, they were told it was too late as commitments had already been made.
Procurement has been a mess since the MoD was born. The latest reform addressed non-competitive contracting in particular. The Defence Reform Act 2014 established the Single Source Regulations Office (SSRO) and the accompanying Single Source Contract Regulations. In essence the idea was that full transparency would enable buyers to look for better value and discourage contractors from taking the advantage they traditionally have. In 1961 I was auditing Fairey Engineering, then on government cost-plus contracts. We were encouraged not to stint on our expenses because the more we charged, the more profit Faireys made. Today’s regulations would have made little difference.
Now, three years after the new regulations became law, only 110 of the 1,891 MoD non-competitive equipment contracts are operating under the SSC Regulations. The government claims that these new regulations will save £1.7bn over 10 years but with equipment purchasing running at £9bn. p.a., that is only about 2%. And how is the counterfactual, what would have been the case, calculated?
Add the MoD’s procurement section’s internal problems. After a very mixed career, and none in procurement, the head of Heathrow, Tony Douglas, was selected to run Defence Equipment and Support but quit just two years later: “after claims that his department is in chaos and struggling with rising costs”. Half a dozen other top procurement officials have quit too. Procurement management was compromised by 386 (24%) of the commercial posts being unfilled at the end of August 2017. Of the 33 major projects independently monitored in 2017, five were in serious trouble. One recent example of procurement failure was the near £1bn. computer upgrade “suspension”, i.e. fiasco. The MoD, naturally, blames its US supplier, DXC Technology, “the world's leading independent, end-to-end IT services and solutions company, helping clients harness the power of innovation to thrive on.” With annual revenue about $25bn. and a workforce numbering over 170,000, it seems unlikely that such a business would be unprofessional.
At best, the new procurement arrangements appear to be sticking plaster. The MoD is believed to be £20bn. overcommitted. It claims to be able to offset that with unspecified short-term savings. Perhaps more cuts of military personnel.
The MoD is the largest customer of British industry. A radical cutback in its procurement would severely damage our economy. The solution has to be buying competitively whilst ALSO buying British. We must get away from the cosy cottonwool relationships that exist at present and benefit the later careers of the upper reaches of the MoD.
As a major player in the global market, the UK has some ups and downs. In terms of heavy weapons, the UK is the 6th largest exporter, just ahead of Israel, with great dependency on Saudi Arabia and the middle east but that may be more due to political relationships than competitive, value for money considerations. And the terms offered overseas, or even domestically, may not always match those obtained from the MoD.
The solution is quite simple: the Investment Approvals Committee must be made independent of the MoD by transferring it to HMT and given teeth. In future, the MoD should not be allowed to make non-competitive procurement commitments without the IAC’s explicit prior approval. The IAC must insist that good enough is good enough, especially where that equipment improves compatibility with our allies. For the good of the country and our armed forces, the IAC must gently wean British contractors dependent on the MoD towards winning in the free market competition. Of course, there will always be some areas where, for security reasons, the UK needs its own solutions but they need independent verification.
 71, 000 in 2012 dropped to 58,000 in 2015 (Ministry of Defence Annual Report and Accounts, 2016-17) and then claimed it would drop by a further 30% by 2020. No explanation was given as to how this would be achieved and the NAO expressed some scepticism in A Short Guide to the Ministry of Defence, September 2017.
 “As of January 2017, there are 77 commissioned ships in the Royal Navy. 19 of the commissioned vessels are major surface combatants (six guided missile destroyers and 13 frigates) and 10 are nuclear-powered submarines (four ballistic missile submarines and six fleet submarines).” https://en.wikipedia.org/wiki/List_of_active_Royal_Navy_ships
 “HMS Victory continues to be a commissioned warship of the Royal Navy under her Commanding Officer and ship’s company and is the flagship of the First Sea Lord.” https://www.royalnavy.mod.uk/our-organisation/where-we-are/heritage/hms-victory
 A Short Guide to the Ministry of Defence, National Audit Office, September 2017, p.9
 A Short Guide to the Ministry of Defence, National Audit Office, September 2017, p.16
 Improving value for money in non-competitive procurement of defence equipment, National Audit Office, 25 October 2017, para. 2.8.
 Ibid., p.4.
 “Defence chief Tony Douglas jumps ship and ‘leaves MoD in chaos’”, The Times, Deborah Haynes, Defence Editor, 29 September 2017.
 Improving value for money in non-competitive procurement of defence equipment, National Audit Office, 25 October 2017, para. 4.
 Improving value for money in non-competitive procurement of defence equipment, National Audit Office, 25 October 2017, p.16.
 “Computer upgrade for MoD is £900m fiasco”, The Times, Deborah Haynes, Defence Editor, 21 October 2017.
Someone has to pay for university education. In the 1960s when 5 percent of the population cohort went to university, it was possible to meet this out of general taxation. The 5 percent had a very generous ride, with free tuition and local authorities paying maintenance grants. There was, though, a widespread feeling that Britain needed more educated people, and that a higher proportion of the age group could benefit from university education. People looked to the US, where roughly 40 percent underwent higher education.
Today the proportion in the UK has risen from 1 in 20 to 9 in 20, a figure comparable to that of the US. The costs of this increase imposed a huge strain on public finances, and the question was asked whether the general taxpayer or the direct beneficiary should be financing it. University graduates start with higher salaries on average than non-graduates, and estimates put the lifetime extra earnings at an average of roughly £80,000. Obviously the figure varies with the subjects chosen.
It seemed unfair that people less intellectually endowed should be paying higher taxes in order to provide a free entitlement to lifetime higher salaries for their more academic counterparts. Someone who left school to become an apprentice bricklayer was being asked to pay higher taxes to finance someone to become a far better-paid investment banker. It seemed like a subsidy to the children of middle class parents.
Tuition fees and loans were introduced to shift more of the cost onto those who benefitted the most from university education – the graduates themselves. But there is no doubt that as costs have spiralled, so has the burden of debt undertaken to finance fees and maintenance. A typical graduate can be £50,000 in debt by the time they graduate, including about £6,000 in interest charges.
Rather than shift the burden back onto the general taxpayer, the solution might be to move to a loans system like that used in Australia. In place of a Student Loans Company there is a Higher Education Funding Council that pays the fees at the time in return for a promise to repay when the graduate is earning enough. At a salary of AUD50,000 the repayment starts at 4 percent of salary, and at AUD95,000 it rises to 8 percent. The amount outstanding is indexed with inflation, but no interest is charged. The average repayment period is 8 years, and the proportion never repaid is 17 percent, compared with the UK's 45 percent. The system resembles the UK's, but the terminology is different and most students accept it as fair and do not feel the burden of debt incurred to the extent experienced by their UK counterparts, particularly since no interest is added.
Crucially, the Australian system allows for different courses to set different fees, so that students can choose less costly courses if they wish to trade higher future earnings for a lesser commitment undertaken while studying. The UK could overhaul its funding of higher education by incorporating similar features.
We are beginning to get to the point that we suspect a conspiracy here. For we've another of these reports telling us that Brexit is going to visit the Holy Terrors upon us all. Which, of course, it, might, for perhaps polite Europeans will no longer speak to us. But it isn't going to be true that the country's terms of trade are so ruined by tariffs that we'll all start to starve.
Today's entry is from the Food Foundation, which tells us that the imposition of WTO import duties upon ourselves will lead to food prices rising. Thus fewer will have their five a day and at some future date all die of scurvy (it's possible we might have exaggerated).
Five-a-day eating targets for fruit and vegetables could become unaffordable for millions of low-income families as a result of Brexit-related food price rises, a report says.
The Food Foundation says that already-feeble consumption rates of healthy food in the UK could nosedive under Brexit because the triple impact of exchange rates, labour costs and tariffs could add up to £158 a year to the amount a family of four spends on fruit and vegetables.
Their full report is here and their source for the effects of import duties is this from the Resolution Foundation (see where our mutterings about conspiracy come from?) something we've already commented upon:
Clearly reverting to MFN tariffs with the EU is by no means the only possible outcome from a “no-deal” Brexit. If we leave the EU without a free trade agreement some have argued that the UK should unilaterally reduce all tariffs to zero. Our analysis indicates that should the country do this the benefits to consumers would be low. Across those good affected by the tariff cuts prices would fall by just 1 per cent.
The Food people conveniently leave out that effect. We just can't think why either.
Just to make it as clear as we can. Upon Brexit we have a choice, we in Britain get to decide this. We can tax ourselves with import tariffs on the things we buy from foreigners or we can decide not to be bloody fools and thus fail to do something so damn stupid. If we do tax ourselves then prices will, naturally, be higher than if we don't. But there is absolutely nothing in any set of rules, regulations or international agreements that insists we've got to go doolally the moment we're outside the EU. So, please, could varied think tanks all stop stating that we must go mad?
Then there's this from the Foodie report.
These are crops which we only import from countries outside the EU. Their prices are unlikely to change (over and above the effects of the exchange rate) unless we unilaterally reduce tariffs. Several of these crops are grown in low and middle income countries where pressures on prices driven by UK supermarkets can have substantial impacts on the sustainability of production and treatment of workers. If free trade agreements resulted in reductions in price of these products and a growth in the UK market, the knock-on effects on producing countries would need careful consideration.
Seriously? If we remove tariffs then we'll buy more of these things, raising demand for them, and this could be a bad idea because poor people will be able to make more money supplying them to us?
Are these people smoking the banana skins rather than eating what's inside them?
Ahead of the Budget on Wednesday 22nd November we give our view on the changes the Chancellor should make to cement Britain's economic recovery, and end Britain's productivity and housing crises.
Sam Bowman, Executive Director, on how we should tackle the housing crisis:
"Housing is unaffordable because too few houses are being built in the places people want to live. Too few houses are being built because getting planning permission is extremely difficult and unpredictable – the fact that land given permission rises in price by over one hundred times, in some cases, is strong evidence that planning is the important bottleneck. This leads to phenomena like ‘land banking’, which occurs because developers need to ensure a supply of land they can build on in the future to make sure their workers and machinery will be in use throughout the next few years.
"Cracking down on ‘land banking’ will threaten the existence of smaller housebuilders that will not be able to absorb the costs of unpredictable land supply, and make the market less competitive. What the Chancellor should really do is announce a major revision of planning regulations. One, revise green belt rules so that land within a short walk of an existing railway station is made available for development – 3.7% of London’s green belt made available in this way would give us land for one million new homes. Two, liberalise height and infill restrictions within existing residential areas so that streets of detached and semi-detached houses can densify into mansion flats. The only way to get cheaper housing is to build more of it – remove the regulatory barriers to supply and a housing boom will follow."
Ben Southwood, Head of Research, calls on the Chancellor to scrap Stamp Duty:
"Popular giveaways are usually to be avoided, but this year Philip Hammond has the opportunity to please both the public and hard-nosed economists.
"Stamp Duty Land Tax is the most damaging major levy on the books, slicing 75p off the economy for every pound it raises—many multiples more than council tax, income tax, or VAT. It gums up the housing market by lumping people with huge bills for moving, stopping people from moving to get new jobs, and discouraging downsizing or upsizing.
"It’s also hated by those who pay it, coming in one giant bill and usually the largest single payment a household will ever make to the exchequer.
"Whether he funds it by raising other major levies, fixing the regressiveness in our current property taxes, or finding some more spending cuts, Hammond should avoid tinkering and scrap the whole thing. Voters and the UK economy will thank him."
Sam Dumitriu, Research Economist, says the Chancellor needs to reform corporation tax to boost capital investment in the economy:
"The UK has one of the lowest levels of capital investment in the EU. Only Portugal and Greece invest less as a share of GDP. At the moment, businesses can only deduct the cost of long-term investments in plants or machinery gradually over the life of the investment creating a bias in the tax system against the long-term productivity boosting investments we desperately need. Recent budgets have compounded the problem – capital lives have been lengthened and the Annual Investment Allowance has been cut from £500,000 to £200,000.
"In Wednesday’s Budget, the Chancellor should reform corporation tax to allow businesses to immediately expense investments in new plants and machinery to boost investment and raise productivity. Recent research suggests that this simple change could raise investment by around 17.5% leading to substantial job creation and a 2.5% wage increase."
There is a need for social housing for groups unable to afford ownership or private rentals, or those with special needs. But the biggest shortage in Britain is of private houses at affordable prices.
In the 1970s and early 1980s social housing, called council houses, represented 35 percent of all houses. They were nearly all owned by local authorities and let out at subsidized rents. Waiting lists were long, sometimes 20 years, and constituted a major bar to mobility of labour, because someone moving to where there was a job would have to give up their place on a waiting list and have to start again.
Furthermore, the right to live in a house subsidized by taxpayers and ratepayers was a heritable asset. Once acquired, it could be passed on to children or dependents. There was a thriving black market sustained by people who no longer lived in their council houses, but let others do so for money while they pretended to be still tenants themselves.
The houses were generally not well maintained. There were always more claims on local authority funds, and tenants were not motivated to repair houses they did not own, so repairs and maintenance tended to involve lengthy waits, while property deteriorated in consequence. Some council estates became by-words for squalor.
The policy of Right to Buy transformed that situation. Government gave council house tenants the option to buy their home at a discount. If they had lived there for more than 2 years, they could buy at 20 percent below its independently assessed market value. This rose to 50 percent if they had lived there for more than 10 years. Many tenants bought, thereby ending the need for annual subsidy. The properties were immediately better-maintained, smartened up with fresh paint. Windows and pipes were fixed immediately since people were now protecting their own property.
Purchasers felt they had acquired a stake in the country, since the home could be part of their estate, giving a substantial sum to their heirs. This was a population group that had previously owned no assets.
Rather than return to mass social housing, local authorities should be empowered to buy farmland in their area, give it planning permission, and sell it on to house-builders, setting a time limit for new homes to be built upon it. This could add a million new homes within 4 years, bringing down house prices to within the range of young couples. Huge numbers again would become home owners instead of the state dependents that social housing would make them.
Tax is complex, and it's natural that people would change their mind when they come into contact with new arguments and new evidence. In the past I've argued that we should only tax unimproved land values. After all, taxing improved land values reduces the incentive to improve land. But I've changed my mind: we have to tax value added, and we do it on everything else, so there is no reason to have a special land preference.
I have always wondered why land value tax enthusiasts were so obsessed with VAT. They have a very specific animus against it, as will surely be demonstrated in many twitter replies to this very piece. Nearly all taxes reduce value-added.
Taxes on capital income reduce the incentive to add value by saving and building up capital. Taxes on labour income reduce the incentive to add value by working, and indeed by gaining experience, qualifications, and skills. Transactions taxes reduce all of this and reduce the value added when something moves from someone who values it less to someone who values it more.
The only exceptions are firstly Pigovian Taxes that balance out externalities—they're more like prices than levies, and make people take into account the cost of their behaviour to others—and secondly lump sum taxes.
Lump sum taxes are those that are extremely difficult to avoid. There's a general rule that the more elastic the response to a given tax, the more inefficient it is; each pound changes more behaviour. Well the response to lump sum taxes is the least elastic—the most inelastic—of the lot. Examples are a tax on height, a poll tax, and a land value tax. Reclaiming land is possible but very difficult, and essentially impossible in the most valuable parts of cities. All of these are highly efficient because none of the incentives around adding value are changed.
Now the first two seem obviously unfair to most people. I think the third is unfair too, for reasons Sam explains here:
If buyers know that they’ll have to pay £10,000 in tax on a piece of land they valued at £100,000, they’ll only be willing to pay £90,000 for that land. The tax lowers the returns from land ownership which is reflected in the value of the land. The current owners of land are the ones who bear the full cost of future tax bills.
It's best seen as a one-off raid on current property owners, or alternatively a nationalisation of all land. Technically a one-off raid on current kebab shop owners is efficient too—if the tax only relates to past behaviour then there can be no response to it. But not hitting people for retrospective (legal) investment decisions seems like a basic threshold for a civilised, and indeed prosperous, society.
A more compelling candidate for the "single tax" base is consumption, which is what the value-added tax hits. But we currently tax consumption of property values at a far lower rate than most other goods, especially as it gets pricy. Expensive flats are massively tax-advantaged because of the intentionally-regressive council tax banding system.
Yes, taxing consumption reduces the total value added by business and commerce in society, but we have to fund government programmes somehow. If we don't want to discourage economic activity with our taxes then we need to slash government spending. Since wealth is just stored-up claims on future consumption, raising consumption taxes is also a one-off tax on wealth. However, a switch to a single consumption tax would not require higher total tax take, just the same roughly-two-fifths taken in a clearer way. And it is less arbitrary, by hitting everything, rather than a single asset class.
What taxing consumption doesn't do is expropriate particular people for arbitrary reasons, disincentivise saving and investment compared to consuming now, or arbitrarily encourage lifestyle, consumption, or employment choices—many of the taxes on the books do.
We don't need to be paying all that much attention to the newspapers to see that there's something of a fight going on over workers' rights. Uber seems to be on one side of the contractual line where drivers are classified as workers and thus has certain costs it must carry as a result of employing people, Deliveroo on the other side of that same line where all are self-employed.
And, of course, all those costs of employment are going to come out of the workers' wages in the end, as is true of any division of compensation into wages and costs of employment. It isn't though necessary for all of this to be done through the law an the state's definitions:
Founded by Harry Franks, Sten Saar and Stuart Kelly in 2016, Zego has set out to re-invent commercial insurance for self-employed people, with a particular focus on contractors powering various parts of the gig economy. Its first product is pay-as-you-go scooter and car insurance for food delivery workers utilising platforms such as the Deliveroos of the world.
Unlike traditional insurance, which can work out prohibitively expensive as a proportion of income for food delivery drivers who may only work part time and even sporadically, Zego charges by the hour, with drivers only buying cover for when they are logged in to the various on-demand food ordering services they contract for.
We have no brief for this company, indeed know nothing about them other than what is in this source article. But here we do have that private sector, that market lubricated by that thirst for profit, coming in to solve one of these problems. And it's not that difficult to imagine such a service offering other forms of insurance - sickness, say - or a method of saving for holiday pay, pensions and so on.
Do note again that all of the costs of those things offered by a more traditional employer will be incident upon the workers' wages. So their paying for them directly, if they should wish them, will not impact upon net wages at all over time.
Who would have thought it, eh? Markets unadorned manage what some insist can only be achieved through the heavy hand of the state?
Most of those who advocate renationalizing the utilities can have no idea what the utilities were actually like when they were publicly-owned. The term itself is an illusion, because the public could exercise no ownership rights; these were exercised by politicians, civil servants and labour unions. When telecoms, energy and water were state-owned, they were characterized by high costs, high prices, inefficiency, lack of modernity and under-investment.
In the absence of competition, customers were effectively captive, so their needs and wants did not have to be addressed. Economists spoke of "producer capture," since the utilities served the interests of the producers in the absence of any consumer power. They were invariably over-manned, since the monopoly gave the unions huge power to dictate terms of employment and to oppose any job losses that new technologies and efficiencies might bring.
They were mostly loss-making, supported by subsidy from taxpayers. Crucially they were under-invested because there were always more demanding claims on public funds. Politicians satisfied electorally powerful groups, but infrastructure renewal carried no votes. In the 1970s the state telephone service would allow you to rent with quarterly payments a handset designed in the 1930s. Phone calls were costly, and overseas calls were prohibitively so.
Water was conveyed along cast iron pipes laid down in Victorian times, and burst water mains in cities were reported daily in the news.
Gas appliances were bought from gas showrooms in high streets, but customers had to go in person because the showrooms all had unlisted numbers to avoid being bothered by telephone calls. Electricity was inefficient, losing vast amounts of power in transit. It was also expensive, and disconnections for non-payment were common.
They were all transformed by privatization. The formula RPI – X for maximum prices meant that prices came down for nearly all of them, X being the savings anticipated from technological innovation. In the case of water the formula was RPI – X + Y to give the water companies the funds to renovate the storage and conveyance that was so badly outdated.
The greatest change was that they were opened to competition, to give customers the choice between competing providers. What had been thought of as natural monopolies were opened up by allowing different providers to use a common transmission network or grid.
Privatization made them efficient and cost-effective and gave customers a choice. Renationalization would turn the clock back to the over-priced, inefficient and shoddy services that prevailed under state ownership.
As Adam Smith pointed out - and as we all know - there's a lot of ruin in a nation. There is not though an unlimited amount. As Zimbabwe shows us and as Venezuela is having a damn good go at proving:
There are two morals to draw from Mr Mugabe’s long, ignominious career. The first is that bad policies, corruptly implemented, can wreck a country with alarming speed and go on wrecking it long after you would have thought there was nothing left. Venezuela has little in common with Zimbabwe culturally, but has also achieved disastrous results by embracing a Latin version of Mugabenomics. By contrast, Botswana, Zimbabwe’s culturally similar but well-governed neighbour, was roughly as rich in 1980 but is now seven times richer.
We can also look at this over a longer timescale, using Angus Maddison's numbers. Roughly enough GDP per capita over history and geography was some $600 a year (these are 1992 dollars, adjusted for inflation and price differences across place). That's simply what a place without what we would call "an economy" in anything like the modern sense produces. There are indeed places out there, thankfully ever fewer of them, which have never had more than this. Those 700 million still living in these conditions tend to be - tend mind - to be some portion of a larger economy, rather than entire nations living at this level.
Except, of course, in our examples of people testing quite how much ruin there actually is in a nation. The real result of Mugabenomics, and the Bolivarian Revolution is testing that limit, is that it is possible to entirely destroy an economy, to reduce living standards to those of the Stone Age. For that's where Zimbabwe has got to, that $600 a year per head, roughly enough, in those 1992 dollars.
In 1979 my colleague, Eamonn Butler, co-authored a book entitled "Forty Centuries of Wage and Price Controls." The book showed that, throughout history, all attempt to fix prices by law had led to shortages, economic dislocation and black markets, and had ultimately collapsed. Throughout history, starting with the Babylonian emperor, Hammurabi, people have thought there was a fair and just price for things. Thomas Aquinas thought the same.
Politicians, including Richard Nixon and Edward Heath, have imposed price caps when people thought that businesses were profiteering unjustly when prices of scarce commodities rose. The problem is that price is a signal that responds to changes in supply and demand. When the price rises it tells consumers to use less of a product if they can, or to switch to cheaper alternatives. It similarly tells producers to step up production or to enter the market to take advantage of the increased price. In the absence of that signal those messages are not conveyed.
To impose prices by law is akin to blocking up a thermometer to stop it registering temperature. The heat pumping into a room will continue if nothing is done to stop it, despite the now-fixed reading on the thermometer. In a similar way, prices fixed by law will do nothing to redress the imbalance between supply and demand that price changes indicate.
Energy prices have many components. They take account of the costs of extraction of the energy source, the costs of processing it, the costs of transporting it, and the costs of distributing it. They also factor in changes in the total demand for energy, something subject to short-term weather and seasonal changes and to long-term trends. Changes in any of these components can affect energy prices, some gradually, some sharply.
If energy prices are capped, energy companies will have less incentive to locate and extract new sources, and some potential sources will be unprofitable to develop at the capped prices. They will have less incentive to invest in new facilities and to invest in upgrading existing ones. The result will be energy shortages in the future. The politicians who enact energy price caps will be bidding for the support of today's consumers at the expense of tomorrow's ones. Pegged prices now will lead to blackouts in the future.
The way to put checks on price rises is to make it easier for new companies to enter the energy market to compete with existing ones, and for consumers to switch easily between suppliers. Competition and the fear of losing customers will restrain companies from raising prices without threatening the future supplies of energy that price caps will.
The Centre for European Reform tells us that Brexit will be bad, very bad, for us here in Britain. The reason being that they're unable to see the logic of what they themselves are saying. Which isn't when you come to think about it, quite the right way for us to be running the affairs of a nation state.
A UK trade deal with the US will create more problems for British agriculture and food consumers than it would solve.
Their statements are as follows. A trade deal with the US would mean that the US agricultural lobby, something which has a great deal of political power over there, would be able to determine much of the terms under which agricultural trade would take place. Well, OK, let's take that as being true - whether it is or not. They also tell us that lower land prices, greater efficiency and so on make US food cheaper. That is indeed true. Finally, they insist that if the US ag lobby can determine the terms of trade then that will mean the UK would have to have low tariffs and barriers to that cheap US food. OK, again, just let us accept that statement.
They then tell us this would be bad for UK consumers.
What? Consumers are made worse off by having access to cheap food? In which universe does that happen?
There's something about this toxic mixture of trade and Brexit that is turning people mad. The entire point of the exercise of trade itself is to gain access to those imports, those things which foreigners do better or cheaper than we do. That's it, there is no other here.
Seriously, more cheaper food doesn't make consumers worse off.
In the popular mind there is a degree of attractiveness in taking money from profitable businesses and spending it on desirable things such as health and social care. The call for Corporation Tax to be raised resonates with those who think in terms of "corporate bosses," "fat-cat CEOs," and "multinational businesses." Politicians, ever quick to buy votes, note that the likely beneficiaries of spending on such things as health and social care are far more numerous that the board members of big companies, and have far more electoral clout.
There are problems in raising Corporation Tax, though. All tax is ultimately paid from someone's wallet or purse. Corporations are not people, but the taxes they pay are paid by people. Studies of Corporation Tax show that it is paid principally by three groups of people: these are the shareholders, the customers and the employees. If some of the profits are taken by government, there is less money to be distributed in dividends to shareholders. If their taxes are increased, businesses will try to recoup it by increasing the prices they charge to their customers, and there will be less money in the wage pool, the sum available to pay the wages of their employees.
Studies show that the greatest burden, over 60 percent of Corporation Tax, is ultimately borne by the workers. The second largest group to pay are the customers, and the third group paying toward the tax are the shareholders. Thus the promise of higher taxes on corporations will impose most of its burden on employees and customers rather than on the faceless corporations who it is claimed will pay them.
There is another problem. It is that increases in Corporation Tax often result in less tax being collected, not more. And reductions in its rate usually yield more tax revenue. The reason behind this apparent paradox is that the increased taxes make corporations less profitable, so their activity is less worthwhile. Increased investment, which brings expansion and jobs, is less attractive. Businesses do less and earn less, so the Treasury take is reduced. This effect is increased by the higher tax rates deterring foreign firms from locating in the UK.
When Corporation Tax is reduced, however, businesses take the opportunity to expand, and foreign firms to locate here, so the tax base is broadened, enabling more revenue to be yielded on a lower rate. Practical experience has confirmed this effect. Most recently in the UK, as Corporation Tax has been lowered in stages from 28 down to 19 percent, the revenue yield has been greatly increased. In the year 2016-2017 the tax yielded £56bn, a 21 percent increase on the previous year. In purely cash terms this was still a 12.6 percent increase.
Although politicians talk of raising the tax back up to 28 percent, and how they plan to spend the "extra money," the reality would be that less money would be raised, making spending cuts a more likely prospect than the promised largesse.