Ritchie\’s new report goes to great lengths to try and insist that corporation tax rates don\’t have very much effect on growth. Something which is true, no one has ever said otherwise, but then he takes the great leap into nonsense:
Mike’s trouble is I did not say it did not affect growth: read the report and it clearly says there is a link between corporation tax and growth. I did not deny it: I do not deny it.
In English that means that at most 7% of growth differences can be explained by differences in tax rates.
We\’ll assume he\’s got his numbers right.
But my point is that Devereux’s choice to ‘control’ for those other factors when coming to this recommendation ignores the fact that my findings suggest that those other factors explain 93% of growth and changes in corporation tax in countries comparable to the UK explain just 7%.
So, when making policy, and deciding how to allocate scarce resources would any rational, objective person, use corporation tax to stimulate growth when it is apparent that this has weak links with growth and that its impact is at best highly marginal or would you instead go off and look at and invest in the other factors that encourage growth?
The right choice is very obviously to look to recreate growth using other mechanisms.
Ah, no, that\’s the leap into the dustbin of bad ideas.
Recall what it was that the OECD was saying in the first place.
Different taxes have different effects on the rate of growth. No, not that taxation is the only influence on growth, that would be an absurdity. Just that *for the same revenue raised* you\’ll get more growth with one tax mix than you will with another.
And we can construct a table, as the OECD did do, which tells us which taxes *for the same amount of revenue raised* give us more or less growth. From the most growth *for the same amount of revenue raised* to the least growth *for the same amount of revenue raised* it\’s property taxes, consumption taxes, income taxes and then with the very least growth *for the same amount of revenue raised* we get capital and corporation taxes.
And Ritchie has calculated that this effect might be able to explain 7% of growth at best (for he is indeed looking at only corporation tax rates and growth).
Which gives us that lovely rarity in economics, the free lunch. By changing our tax mix we can have more growth than if we don\’t change our tax mix. If we have lower corporation tax than we do and higher VAT, or higher property taxes than we do, then *for the same amount of revenue raised* we\’ll have more growth. Our children will be richer by our doing this.
So, is this what Ritchie does? Says that, well, of course corporation tax rates are not the whole story but the evidence is clearly that lower corporation tax will boost growth and therefore we should have lower corporation taxes?
No, don\’t be silly, of course he doesn\’t. He says that given that there is a free lunch we shouldn\’t eat it.
He makes the choice ‘do you cut taxes, or not?’. Well if that was the only option then you might cut taxes. What my work shows is that Devereux asks the wrong question, uses statistics badly and as a result comes to the wrong answer, which is inevitable when your political blinkers mean you ask the wrong question, which is what I think he’s doing.
Quite. When Ritchie\’s research shows that cutting corporation taxes and raising other taxes so that we can go and do all of those other things as well, changing the tax mix *for the same amount of revenue raised* makes us better off, Ritchies\’s conclusion should be that we should change the tax mix *for the same amount of revenue raised*and also go off and do all of those other things with that revenue raised.
Which he doesn\’t suggest for when a report:
uses statistics badly and as a result comes to the wrong answer, which is inevitable when your political blinkers mean you ask the wrong question,
you will, as Our Retired Accountant From Wandsworth says, come to the wrong answer.