The man is irredeemably ignorant.
We all know that higher business taxes feed through to a combination of prices, dividends, pensions, profits…and for an open economy like the UK, wages in particular.
Higher taxes on profits reduce the return to investment, leading to lower levels of investment. And a lower level of investment undermines productivity which ultimately feeds through to lower wages.
Right, so that\’s David Gauke, Exchequer Secretary. A man well up there with the standard economics of corporate taxation.
For that is the standard economics of corporate taxation. Harberger\’s paper of 1962 (over 800 citations, pretty good for an economics paper) through to a nice little empirical paper showing the actual effects through state corporate income taxes in the US from 2009.
The more open the economy the more the incidence of the corporation tax is upon labour. This isn\’t one of those arguable contentions (\”The State should run the health service!\”. \”No, it shouldn\’t!\”). This is simply a plain observable fact about the universe that we inhabit.
There’s no other way to describe this but complete and utter nonsense.
Oh, right, half a century\’s worth of work by the collected economists of the world: complete and utter nonsense. The retired acountant from Wandsworth knows better. How is this we ask ourselves?
Gauke like me believes there is tax incidence – corporation tax is paid by someone else than a company at the end of the day.
OK, good, this is an advance from a few years ago when Ritchie absolutely denied such a thing could possibly happen. We advance then.
He however hides behind the convenient claims of the Oxford Centre for Business Taxation that the charge falls on labour (an argument contrived on the basis of exceptionally dubious and bluntly biased analysis that only looked at the consequence of corporation tax increases and not decreases – which is what Gauke is delivering).
But he\’s not hiding behind those specific claims. The paper by Mike Deveraux (who Ritchie hates and this might explain some of all this) is simply one empirical paper which tries to measure the exact effect, in the UK, of what everyone does agree happens: the more open the economy the more labour bears the burden. So, given how open the UK is, how much of the burden does labour bear?
I repeat again, this is all absolutely standard economics. It no more depends on the Oxford Centre for Business Taxation than does what I\’m going to have for dinner.
The reality is as I say – that tax cuts deliver wealth to shareholders and no one else.
No Richard, it isn\’t. And it doesn\’t matter how many times you say it it still won\’t be true. Not in an open economy it won\’t be. It is true in a closed economy. It is not true in an open one. And Murphisms do not change this objective reality. No, really, not even stamping your tiny little feet in anger changes this fact about our world.
Not once, not ever, has a manager turned round and said “we’ve had a corporate tax cut – have a pay rise”.
No one has ever said that managers do do that.
Nor, candidly, have they ever turned round and said “we’ve had a tax cut – let’s invest more” – indeed the evidence is that higher taxes encourage investment and lower ones don’t.
No you ignorant little cretin! Will you please, just for once, listen to someone explaining the situation to you? I\’ve been doing this trying to teach you tax incidence for some years now and you still, still, cannot seem to get it.
There is a global, risk adjusted, average return to capital.
Taxes on returns to capital in one jurisdiction will bring the risk adjusted return to capital below this global average in that jurisdiction.
Capitalists investing are of course looking for higher than that risk adjusted average, if they can get it, but they\’re certainly averse to investing to get lower than it. Thus, when taxation on returns to capital in one jurisdiction lowers the return below the global average, those inside the jurisdiction will invest outside it, those outside it will not invest inside it.
This reduces the amount of capital invested in the jurisdiction.
Average wages in an economy (which we\’ll equate with the tax jurisdiction here) are determined by average labour productivity in an economy (yes, this is true, from Paul Krugman).
Average labour productivity is, while not entirely determined by, certainly heavily influenced by the amount of capital that is added to that labour.
So, less capital being invested in our jurisdiction as a result of higher taxation on the returns to capital, leads to lower wages in that tax jurisdiction.
It is sod all to do with managers handing out pay rises as a result of lower corporate taxes. It is entirely to do with the mobility of capital.
And yes, this does mean that the more open the economy is the more of the incidence, the burden, of corporate profit taxation falls on the workers in the form of lower wages.
This is straight, plain, economic orthodoxy. It is not classical, neo-classical, Keynesian, New Classical, neo-liberal nor even social democratic. It\’s simply a fact about our world in the same way that apples generally fall downwards out of trees, not upwards.
The reality is as I say
No, it isn\’t. You are simply wrong.
the evidence is that higher taxes encourage investment and lower ones don’t.
Not when people have a choice of where to invest their money they don\’t.