Does cutting tax produce employment?

This post quotes my latest blog post, which can be found at: http://skwalker1964.wordpress.com/2012/05/27/rising-employment-or-tall-tales-does-lowering-tax-produce-jobs-51/

RISING EMPLOYMENT OR TALL TALES – DOES LOWERING TAX PRODUCE JOBS?

27/05/2012 · by skwalker1964

It’s been another glorious, sunny day today. So, naturally(!), I decided to spend an afternoon researching figures and playing with tables to find out whether yet another ideology/policy combination of the current government held water any better than your average sieve. (I did at least decide to do it in the garden with good coffee and an unplanned but steady stream of great barbecue food from my very kind Iranian and and Pakistani neighbours, proving that I’m not a complete idiot but that xenophobes and bigots are!)

The area that’s been tugging at my curiosity the last couple of days (ok, given the wonderful weather maybe I am a bit weird! ) has been the interrelation of tax levels and employment. The Tory component of the coalition government has a strong commitment to reducing tax levels for both wealthy individuals and for corporations.

Faced with the obvious accusation that reducing tax is either insane or hypocritical – or quite possibly both – when they claim they have to ‘sort out the mess Labour left’ (see http://skwalker1964.wordpress.com/2012/05/23/the-myth-of-the-inherited-mess-52/ for just how sieve-like THAT claim is!), Tories claim that reducing tax makes Britain an attractive place for companies to do business – in other words, that cutting taxes creates employment. The idea is that if UK taxes are low, companies will want to operate here, while rich owners and executives will want to live here – and in doing so will create jobs that benefit the country as a whole by creating employment, increasing tax take, reducing welfare costs and so on.

In justifying his recent budget decision to reduce the top rate of personal income tax from 50% to 45% when ordinary people are increasingly facing economic hardship, Chancellor George Osborne claimed:

“No chancellor can justify a tax rate that damages our economy and raises next to nothing.”

By the Tories’ own admission in other statements, ‘next to nothing’ is at least £500 million (!) but we’ll leave that aside for the moment. Osborne claims that high tax-rates for the wealthy are counter-productive, discouraging investment, entrepreneurship and growth, and driving wealth-creators out of the country to less tax-heavy locations. In the same budget in which he cut the top rate of personal taxation, Osborne also announced a cut in corporation tax and flagged plans for a further cut, on the basis that this will encourage companies to invest in the UK.

About 18 months ago, I sat in a studio with the excellent Chukka Umunna and Tory rising star Claire Perry, as guest ‘pundit’ on John Pienaar’s Sunday evening politics show. I argued on air that the Tory government had a one-sided view of deficit reduction, because there are two ways to reduce debt: reduce spending – and/or increase income. In terms of a national economy, one of the main and most obvious ways to increase income is to increase taxation on the wealthiest. Naturally, Claire Perry was in vehement disagreement with this point of view. Off-air, as the discussion continued, Claire pulled out a list of spending cuts the government had made or was planning to implement, and admonished Chukka that the Tories were the only party to be aggressive on spending cuts – plainly she felt this was something to be proud of, while I would have been far more impressed to see something like a balanced plan that would have evidenced some serious, non-ideological thought. Claire was a very pleasant lady, even going so far as to tweet that she was leaving the studio with me (my first real encounter with Twitter), but I felt and feel that her political imagination is lacking.

That aside, the point of this little illustration is this: if you believe (or want people to believe) that increased taxation is going to damage the economy, then you only leave yourself with the option of cutting spending. The problem is – as we’ve seen from recent economic reports and forecasts and the double-dip recession, cutting spending only sucks money out of the economy and worsens the debt spiral.

So, let’s take a look at some figures and see whether the evidence backs up the Tory dogma that you have to cut taxes to attract employers, and that increasing taxes will be worse for the country by driving away business.

Graph 1



The graph above shows the top rates of tax charged by countries on their highest earners, alongside their rates of unemployment. To keep the information readable and to maintain a degree of ‘comparing like with like’, I’ve only included countries from the European union, but the sample is certainly large enough to be illustrative, The UK is shown at the current top rate of 50%, as the new lower rate hasn’t yet come into force.

Far from showing that high personal taxation drives away so-called ‘wealth creators’, we see that in fact the situation is the opposite. The four countries with the highest top tax rate have among the lowest unemployment, while the countries with higher employment are predominantly at the worse end of the unemployment scale. Take out the ‘crisis’ countries of Greece, Spain and Portugal, whose unemployment situations have nothing to with taxation rates, and the picture is even clearer:

Graph 2:



All of the countries with over 10% unemployment are in the cheapest half of the distribution in terms of tax on the wealthy, while countries with the highest top tax rates have the healthiest employment situations. One might argue that some of these countries are relatively small – but in fact that makes the situation even more striking. Small countries don’t have large populations that may attract companies to take the tax ‘pain’ to operate there.

Having established that the numbers show that Tories are wrong to claim that maintaining/increasing tax rates on the wealthy will be bad for the UK economy, let’s look at the same kind of data with regard to corporate rates:

Graph 3:



Here we see the same unemployment data, but this time set against the rates of corporate tax for the same set of countries. Once again, in order to clarify the picture, I’ve excluded the 3 EU crisis countries whose problems go far beyond taxation rates.

And guess what? We see the same picture – if anything, even more clearly. Not only do the countries with the highest corporation tax rates not have worse unemployment, but there’s a definite progression the other way – the lower a country’s corporation tax, the more likely it is to have higher unemployment.

Of course, for any individual country, one can find arguments that explain why it has a particular combination. But the very least these figures prove is that there’s no justification for the Tory claim that lowering taxes boosts the economy while increasing it will damage it. Unless of course, you discount employment as a measure of economic health while considering an increase in the wealth of a tiny minority as economic growth. £155 billion increase in the wealth of the richest top 1000 people, anyone? (http://michaelrosenblog.blogspot.co.uk/2012/05/billions-were-not-allowed-to-talk-about.html)

Now, I’m no economist, just an interested amateur. But the government has any number of economists at its disposal, and it can’t possibly be unaware of these facts. Yet it continues not only to claim the opposite, but to use the patently false claim to justify the policy of tax-cuts that line the pockets of its friends, backers and paymasters. Call me cynical, but I can’t help but interpret that as meaning that they’re much more interested in enriching themselves and their ideological/financial allies than it is in the health of the country and the welfare of the British people as a whole.

Our dog knows more about economics than this coalition government.

I agree with you Skywalker. They cannot be stupid enough to not know all this. But like you said, it's idealogically driven. They're looking after one another, and us, joe public we're too dumbed down on x factor and BGT to quallenge them and actually give a shit! So sad that they get away with conning us all on a grand scale, purely because we let them. Apathy eh?

Post was mentioned in the Guardian's 'societydaily' section:

http://www.guardian.co.uk/society/2012/may/28/1?CMP=twt_gu

Good post Skywalker. Not sure how you got a story that long through our intrepid administrator though.
Surely though your only showing 1/2 of the argument.
1. Cut taxes
2. invest in R&D
3. Invest in infrastructure
4. Minimise government interference and redtape.

Economies with small governments tend to grow faster than those with big governments. This is the conclusion of Small is Best: lessons from advanced economies, by Ryan Bourne and Thomas Oechsle, published on Friday 25 May by the Centre for Policy Studies
New analysis uses regression techniques across a long time period, and cross sectional analysis for the past ten years, to examine 34 countries defined as advanced by the IMF:
• Econometric analysis of advanced OECD countries for the period 1965-2010 finds that a higher tax to GDP ratio has a statistically significant, negative effect on growth. For example, an increase in the tax to GDP ratio of 10 percentage points is found to lower annual per capita GDP growth by 1.2 percentage points. A similarly statistically significant negative effect on growth is found with a higher spending to GDP ratio. Detailed regression analysis stripped out the impact of variables such as investment as a proportion of GDP, the growth rate of the labour force, and the growth rate of human capital.
• For the last 10 years, advanced small government countries have, on average, seen significantly higher growth rates than advanced big government countries. Between 2003 and 2012, real GDP growth was 3.1% a year for small government countries (i.e. where both government outlays and receipts were on average below 40% of GDP for the years 1999 to 2009), compared to 2.0% for big government countries.

Your being a bit brave there aren't you blue?

What's good for the Goose and all that.....

Not sure how you got a story that long through our intrepid administrator though. Surely though your only showing 1/2 of the argument.

tlttf. Our friend skwalker1964 has, for the second time, reproduced his own blog from another site. I think it's reasonable to assume that he's given himself permission to do so.

As to your allegation that he's showing only half of the argument, if it's true it will still be 50% more than we ever get from your snidey, dishonest postings.

What's good for the Goose and all that.....

blue. That would be fair enough if it were true, but you're not comparing like for like. There's a world of a difference between reproducing your own words and reposting about double of what is permitted by copyright laws of someone else's work. If you have permission from the authors to reproduce that article, please produce it here.

If any breach of copyright litigation is commenced against this forum, it will be Shirina and myself in the dock for allowing it, not you. With that in mind, kindly reduce that interesting Bourne and Oechsle article to no more than about 14-15 lines by 3pm tomorrow (Tuesday). If you fail to comply, the entire article will be deleted.

If I switch to Labour can I post more than that?

All done Ivan......Just for once, both sides of a discussion would be nice on Cutting Edge

Blue.

'Small government' means lack of regulation, which means the 'growth' tends to get concentrated in the hands of a small number of people while the rest don't benefit. The US has always been a relatively small-govt country, yet wages for the vast majority have shrunk in real terms, while disparity between the ordinary citizens and the so-called elite has magnified manifold.

Lack of regulation also tends to lead to uncontrolled (by definition) and unsustainable growth: boom and bust, with the rich getting richer through both parts of the cycle, for the most part, while the less well-off end up paying for the mistakes of those getting rich. Which is just what's happening now.

I'd happily settle for prolonged, sustainable growth of 2% that puts wealth into everyone's pockets versus erratic growth that might enrich a few and does little for the many.

Nice, articulate post, though.

Ivan wrote:

Not sure how you got a story that long through our intrepid administrator though. Surely though your only showing 1/2 of the argument.

tlttf. Our friend skwalker1964 has, for the second time, reproduced his own blog from another site. I think it's reasonable to assume that he's given himself permission to do so.

As to your allegation that he's showing only half of the argument, if it's true it will still be 50% more than we ever get from your snidey, dishonest postings.

You'd be entirely correct in that assumption

As to half the story, sometimes things don't need to be overcomplicated - unless you want to arrive at a conclusion other than the obvious one. This govt is doing all the cutting without investing in anything good. And cutting taxes leaves them with less money to maintain essential and treasured services, let alone to invest in anything new. They're cutting for ideological reasons and to enrich themselves and their mates.

Thanks, blue, that's much appreciated. If you have a blog on another site, such as Word Press, and you transfer it here, then you're responsible for its content and Shirina and I won't end up in court!

Both sides of an argument are welcomed here. It's not my fault if Tories choose not to join Cutting Edge; membership is instant and only BNP racists are likely to be barred. As I'm sure you would expect, I tend to associate only with bearded swivel-eyed Marxists who drink vodka, read Castro tracts and have Che Guevara tattoos on their chest, so I suggest you invite some of your right-inclined friends to join us!

Ivan wrote:

Not sure how you got a story that long through our intrepid administrator though. Surely though your only showing 1/2 of the argument.

tlttf. Our friend skwalker1964 has, for the second time, reproduced his own blog from another site. I think it's reasonable to assume that he's given himself permission to do so.

As to your allegation that he's showing only half of the argument, if it's true it will still be 50% more than we ever get from your snidey, dishonest postings.

There we have it folks, suddenly having asked skywalker a reasonable question I've once again become dishonest and snidey. Do you ever actually read articles before condemning them Ivan or must we all walk on the left?

You haven't the foggiest of what a balanced discussion is have you pet?

Thanks for your answer skywalker, much appreciated.

skwalker1964 wrote:Blue.

'Small government' means lack of regulation, ....

If only it did! Successive Tory administrations since Ted Heath complained, "The trouble with this Country is too much government", have TALKED vociferously about removing "red tape" but the only visible result has been more and more Quangos, not answerable to the Public.

oftenwrong wrote:

skwalker1964 wrote:Blue.

'Small government' means lack of regulation, ....

If only it did! Successive Tory administrations since Ted Heath complained, "The trouble with this Country is too much government", have TALKED vociferously about removing "red tape" but the only visible result has been more and more Quangos, not answerable to the Public.

Yes - that's how it works in practice, generally. The ideology still means deregulation - and the seeds of what we're reaping now in terms of economies reliant on the sheep sorry, market, rampant corporate exploitation of people, sorry consumers, were sown by Thatcher's great deregulation that was supposed to make us all prosperous and instead enriched a few out of all proportion.

Quite. There will be no improvement until the lumpenproletariat can recognise the difference between government "information" and simple propaganda.

Interesting argument for cutting the rate from Mr Redwood, does it improve employment, probably not, does it improve the tax recovered from the rich, yes. So is it a valid argument or should we simply raise the rate and drive more of the wealthy tax payers abroad?


The 50p tax rate
By johnredwood | Published: April 7, 2013

Yesterday morning interviews with the IFS, Mr Balls and Mr Alexander on the Today programme failed to do justice to the argument over the 50p tax rate. The IFS and the BBC sat on the fence, and ignored the substantial evidence that the UK has experienced a serious shortfall of Income Tax receipts from high earners since the introduction of the 50p rate.

The IFS and the BBC were strangely silent on the fact that in 2009-10 there were 16,000 people declaring incomes in excess of £1million in the UK for tax, and that this fell to just 6000 people with such incomes after the introduction of the 50p rate. Many left the country, or worked less hard, or found legal ways of declaring less income.

http://johnredwoodsdiary.com/2013/04/07/the-50p-tax-rate-2/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+JohnRedwoodsDiary+%28John+Redwood%27s+Diary%29

Most will have just found additional ways to avoid paying taxes. So tighten the rules.

If they leave, I'll be happy to wave them off at the airport. Their absence will just leave a hole for others to fill - greater numbers of others and a better spread of wealth, along with more tax-paying.

The idea that we'd miss the grasping rich, who bank loads of cash and take it out of economic circulation, baffles me in its persistence when it's such patent nonsense. The rich who are happy to pay for the privilege of living in a decent, civilised country are a different matter.

Food for thought:

Here's another take on the tax situation:

Suppose that every day, ten men go out for beer and the bill for all ten comes to £100..

If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.

The fifth would pay £1.

The sixth would pay £3.

The seventh would pay £7..

The eighth would pay £12.

The ninth would pay £18.

The tenth man (the richest) would pay £59.


So, that's what they decided to do..

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.

"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by £20". Drinks for the ten men would now cost just £80.

The group still wanted to pay their bill the way we pay our taxes.

So the first four men were unaffected.

They would still drink for free. But what about the other six men? The paying customers?

How could they divide the £20 windfall so that everyone would get his fair share?

They realised that £20 divided by six is £3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving).

The sixth now paid £2 instead of £3 (33% saving).

The seventh now paid £5 instead of £7 (28% saving).

The eighth now paid £9 instead of £12 (25% saving).

The ninth now paid £14 instead of £18 (22% saving).

The tenth now paid £49 instead of £59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

"I only got a pound out of the £20 saving," declared the sixth man.

He pointed to the tenth man,"but he got £10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a pound too.
It's
unfair that he got ten times more benefit than me!"

"That's true!" shouted the seventh man. "Why should he get £10 back, when I got only £2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works.

The people who already pay the highest taxes will naturally get the most benefit from a tax reduction.

Tax them too much, attack them for being wealthy, and they just may not show up anymore.

In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.


David R. Kamerschen, Ph.D.

Professor of Economics.

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible.

Curious how the ordinary person understands wealth to be a fluid commodity.

The only fluid on Earth which flows uphill.

Perhaps I used the wrong analogy OW, if I'd used champagne as a guide would it have been better understood?

The problem with this analogy, which seems to be doing the rounds to show how tax cuts works, is that the bar man cut the overall bill which is then shared among all those who pay, whereas the reality in regards to tax cuts is that only the top two or three would get the cut in the bill and the rest of the payers will carry on paying the same amount.....

5% cut for those earning over £150,000, drop the threshold for the upper rate tax from £51,000 to £41,000 and the rest pay the same as before...so the bar story is a totally misinterpretation of reality....

Income Tax was originally introduced to require the entire working population to shoulder the expense of the Napoleonic Wars. More than two centuries later, taxation is government's preferred method of social engineering.

Harold Wilson's administration actually introduced a selective employment tax, for reasons which have passed into the mists of time, and to a large extent the topic question is rhetorical since National Insurance became effectively an extra tax on employment.

http://www.theyworkforyou.com/debates/?id=1969-05-20a.256.5

"ONS says unemployment up 70,000, employment down 2000, wages up just 1% ."

Why not? 1% is what Pensioners get on their Savings with a UK Bank. Fair shares.

Inflation is at nearly 3% so we're all paying 2% a year ON TAXED INCOME for the privilege of living under a Tory-led Coalition. What luck!