Ritchie gets it wrong again!

The impact of the Washington Consensus on UK taxation is easy to identify. Over a period of thirty years top rates of income tax have fallen from 60% to
45%, corporation tax rates will have more than halved, the use of tax havens by UK based multinational corporations is now largely ignored by UK tax law, whilst VAT is at its highest ever rate.

The impact on UK society is also easy to identify. Inequality in the UK has risen. The share of national income paid to labour has fallen; the share to profits has risen.

No, the share to profits has not risen over the past 30 years.

This is simply wrong.

In my opinion, given that he\’s had this pointed out to him often enough, Ritchie is now lying, not being mistaken.

17 thoughts on “Ritchie gets it wrong again!”

  1. The share to profits has risen over the last 30 years. In 1980 and 1981 it was 18.5% and 18.6%. In 2010 and 2011 it was 21.8% and 21.3%.

    You can see this in Britmouse’s chart or mine (more clearly if you click on it).

  2. So, in effect, he confirms my suspicion as oft-quoted that he will immediately recommend to move the top tax rate back to what it was under Healey (83%) when he is ensconced as Chief economic advisor under the Miliband government in 2015.

    I note he never (unlike Toynbee) seems to quote any statistics from the 1950s, 1960s or 1970s. Other than Eoin Clarke I doubt I’ve ever seen such an egregious use of statistics to illustrate a ‘bogus’ point. As @fcablog points out, the man is a bully, liar and stalinist thug. His presence as one of their primary intellectual influences really sums up the true face of the Hard Left in the UK – vicious, brutish and profoundly ignorant.

  3. And besides, from what I can gather, neither higher business taxation nor higher individual taxation (for the richer than Richie) would have any impact on the labour share of income as per that chart. So what do those tax rates have to do with anything anyway?

  4. Even if what Richie says is true: that taxes have gone down and labour share of income has fallen / inequality has risen… how does he know that these things are in any way correlated?

  5. Paul, the first years of the 1980s saw severe nominal shocks as they tried to get inflation under control.

    We expect to see a cyclical shift in the wage and profit shares in such cases because wages are sticky, but profits will adjust fast. Late 2008/9 saw a similar spike in the wage share due to a negative nominal demand shock.

    Looking at the averages over each decade gives a clearer picture, I think. And again, the 1970s are exceptional with the low profit share because of persistent nominal shocks, the inflation roller-coaster.


  6. It’s a change from his usual complaint that the labour share of GDP has declined since 1975 when aggregate corporate profits after tax were negative on any sound accounting basis (i.e. one that did not treat the increased cost of an unchanged volume of stocks and work-in-progress as a profit).
    It is quite possible that PaulB is correct without that being anything to do with the Washington consensus. When Geoffrey Howe reduced the top rate of tax from 98% to 60% the amount of tax received from higher-rate taxpayers increased significantly. That had *nothing* to do with Washington.

  7. PaulB,

    So in 2013, when 30 years will take us back to 1983 will you say that *now* the share to profits has not risen?

    It seems a bit silly to make these claims based on the value of a single point that jumps around so much year-to-year. The point is surely that the trend is flat?

  8. My comment above was simply to say that Murphy is neither lying nor mistaken, but correct on the facts.

    To express an opinion on what the data mean:

    – MrPotarto is right to point out that there’s been no increase since 1983. My reading of the data is that there was a genuine change during the first Thatcher government, as a result of her achieving her objectives in eliminating unprofitable jobs and reducing the bargaining power of Trades Unions. So it would be more accurate to say that corporate profits rose 30 years ago than that they rose over the last 30 years.

    – Britmouse is of course right to say that comparisons between cherry-picked years may well be misleading. However, I think it a bit much to insist on averaging over decades, and then omit a whole decade as anomalous. I’d be happy to agree that the years 1974-76 would not be a good baseline for comparison.

    – I don’t see that it’s very important what these numbers were 30 years ago anyway. I’d be interested to read an intelligent argument showing why it would be better today for corporate profits to take a smaller share of the cake – this post by Chris Dillow gets some of the way there.

  9. @ PaulB
    It is possible for Murphy to be correct, just as I have kept a photograph taken by the local paper that shows me winning a race (sad to say that was less than 1000 metres into a 5000 metres race and most of the guys who were less than half my age overtook me before we finished).
    However if he is excluding income from self-employment over a period when self-employment has more than doubled he is just as misleading as my photograph.
    I think most complaints are not about the amount of corporate profits (dividends from quoted companies mostly go to British and foreign pension funds) but the excessive payments to top executives and bank traders, all of which fall within the “labour share” of GDP. Cutting these excesses (even I complain about them) would *reduce* the labour share in the teeth of Murphy’s propaganda.

  10. @PaulB: Chris Dillow’s graph shows GDP per capita being essentially constant vs union density (21 points around linear, 2 outliers), and this proves what about unions?

  11. PaulB: To quote Chris Dillow, which you like to do, this is a case of small truths and big lies. The small truth is that on a very narrow reading, the corporate share of profits has gone up in the past 30 years. The big lie is that this illustrates the general state of affairs — because, as you acknowledge, one has to pick one’s years very carefully to be able to get away with the claim. If the share remains static for the next couple of years, then in 2015 corporate share of profits will have fallen.

    The real truth is more like that corporate share of profits has basically gone sideways for the past sixty years, near enough, and certainly for the past thirty. (Though I’m not an expert in analysing time series data, so I’m not going to stick my neck out too far.)

  12. Since I’ve been dragged into this, 4 points:
    1. My point about unions is a red herring in this context; I was just showing that unions are not obviously bad for GDP growth.
    2. Philip’s right – the profit share has moved sideways since present data began on the 50s. The wage share has fallen. Statistically, this reflects a rise in self-employment. But it might also reflect a decline in workers’ bargaining power, due to global forces – the rise of Chindia.
    3. Whether this matters macroeconomically depends on the propensity to spend out of wages and profits. If the former is lower than the latter, a falling wage share/rising profit share would tend to depress aggregate demand.
    Personally, I doubt the difference now is significant enough to matter – though it’s debateable.
    4. If workers owned firms, changes in wages/profits would have no implications for equality. Leftists shouldn’t worry so much about wage shares, as about unequal asset ownership.

  13. I’m less concerned with whether he’s technically right or not, or even lying, but with the implications he seems to rely on in the statements

    “The impact on UK society is also easy to identify. Inequality in the UK has risen.”

    Frankly, I don’t think many people – even the poorest – would regard life now as less congenial or luxurious than it was in the early 1980s, let alone the 1970s, if they were thrown back to a similar social and economic position then as they hold today. I’d say that “UK society” is better off, perhaps even much better off, even for the “poorest” however you define that, so perhaps these “inequalities” don’t really matter, even if they exist.

  14. I was meaning to suggest that if you accept that trade union power is good for growth, and that trade union weakness is behind a downward shift in employee share of corporate income, you might deduce that an increasing employee share of corporate income is good for growth, albeit indirectly. It’s at best only a small part of an argument, so I shan’t persist with it.

  15. If the former is lower than the latter, a falling wage share/rising profit share would tend to depress aggregate demand.

    Chris, good point, well made but just the wrong way around? If the propensity to spend from wages is lower then a falling wage versus profit share ratio would increase the mean propensity to spend therefore increase aggregate demand.

    you might deduce that an increasing employee share of corporate income is good for growth, albeit indirectly.

    You might, but then you would be risking confusing correlation with causation. Chris’s less strident view – “not obviously bad” is more justified.

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