I am thoroughly enjoying the ongoing debate over what powers a devolved Scotland should and should not have, particularly the discussion surrounding Corporation Tax given how crucial and fragile the economy is at the moment, north and south of the border. Former BOS Chief Executive Sir Peter Burt is the latest to lend his opinion on the matter and it is pleasing to see that he is backing Scotland to set its own rates.
Opponents to the suggestion that Scotland should set its own corporation taxes tend to immediately point to Ireland and the supposed result of the low 12.5% that was, and still is, applied to companies over in the Republic. It is classic ‘post hoc ergo propter hoc’ philosophy to suggest that just because Ireland had a low Corporation Tax before it sunk into a deep recession, then that said tax was a significant driver for the current malaise. It was, of course, the banks’ misreading of risk and heavily-impaired real estate assets that were the main problems.
There is of course a risk that a race to the bottom takes place of Scotland is allowed to set lower rates. Ireland had a 12.5% tax rate to kick-start the Celtic Tiger, Scotland then brings in 12.5% to drive its economy ahead of the rest of the UK and then England, Wales and Northern Ireland feel they have to follow suit and suddenly it’s a Sterling vs Euro issue that tears the continent in two. A scorched earth tax policy with all players too cautious and too poor to move back to a correct level.
Nonetheless, I say Scotland’s needs and opportunities make it worth going for and the beautiful diversity of these shared isles can once again be harnessed to maximise the Laffer Curve for the UK’s benefit. If George Osborne’s preferred 24% is closer to the correct figure for tax rates then it will quickly become clear when Scotland has an anaemic 12.5% and few new jobs to show for it. We already have a drive towards nuclear power down South and a drive towards renewables up North, we have a drive towards high fees down South and a continued drive towards state-funded education up North so we can continue this devolution adventure and experimental settlement by maintaining tax rates as they stand in England and Wales but reduce rates in Scotland to ascertain what that flexibility will do for the UK and then, if necessary, act accordingly, either through rUK following suit or Scotland lifting rates higher again with the strategy deemed unsuccessful.
As things stand, why would a large company base itself in Scotland when it can be snugly located outside London with the vast travel options that Heathrow, Gatwick and Stansted provide? RBS has long been expected to pack up and head South, it is even sneered at in the City for having its base up in ‘Jockland’. Such attitudes don’t shift easily and will regrettably deter emerging entities from basing themselves in Scotland. Furthermore, the destinations that Glasgow and Edinburgh from its airports offer pale in comparison to the capital cities of small-medium sized capital cities across Europe. Scotland is uniquely disadvantaged by its position within Europe and its situation as a state within a country and some sort of flexible solution is required within the devolution settlement. The Scottish Government cannot be expected to grow the economy, and blamed for not doing so, when it doesn’t have the necessary tools and does not have oil revenues to use to its competitive advantage.
Of course, were the eminently sensible policy of fiscal autonomy to be granted through this coming Scotland Bill then devolving Corporation Taxes would come with it but it looks increasingly unlikely that the federal Liberal Democrats will leverage its position within the coalition. A solution to the current constitutional imbalance and problems with the Barnett Formula will continue it seems.
It is difficult to have a low tax nation with a large public sector and a relatively high minimum wage but that is a balancing act that Scotland can learn, and achieve, in time. There is more to gain from a distinctly Scottish business market setting distinctly Scottish rates of corporation tax than there is to lose.
Scotland can reap similar benefits as Ireland while being wise to any potential pitfalls. Lower taxes, higher growth, more jobs and a prising away of the Scottish nation from the distant cash cow of the City of London. Even former RBS chiefs agree it is a good idea. We just need a way to Make It Happen.
#1 by John Ruddy on December 20, 2010 - 10:52 pm
Jeff, I cant believe you’re using the Laffer curve to justify this? Its been debunked so often and so thoroughly that I thought it was only alive in the minds of a few right wing neo-conservtive nut jobs in America and the UK cabinet?
No, the way to attract and create more enterprise in Scotland is to do the things that any sensible business will look for:
a well-educated and skilled workforce
good transport links
available land/helpful planners
All of which are within the control of the Scottish Government now, using existing powers. (Ok, theres maybe an argument about transport links, but you cant deny that the SG has SOME power in that area, at least as far as the border).
Following the corporation tax to its lowest denominator is a mugs game. If you do that, you will only attract those companies who will drop you as soon as you even intimate an increase in tax rate (which you may have to do – we cant foresee every eventuality) – and they’ll either blackmail you or be ont he next plane to Switzerland or whereever is the tax haven of the moment. Do you really want to be held hostage by big business for the sake of a little short term gain?
#2 by Jeff on December 20, 2010 - 11:08 pm
I’m not saying that those points you mention don’t also apply and, I’m a far cry from an Economics expert, but at a basic level I don’t see how the Laffer curve can’t apply :-
tax rates at 0% raises zero revenue
tax rates at 100% raises zero revenue
Consequently there is an optimum tax rates somewhere between the two that a country should strive towards. Is it 24%? Is it 12.5%? Let’s roll a UK dice and find out.
I don’t really follow your logic that the only companies that would stay in a low-tax economy are those that are here for the low taxes. Presumably the companies that already pay the higher tax would also stay. What is the disincentive that would see them leaving? Paying more tax?
I agree that a Government should never let itself be held hostage by business, hence the HSBC threats being so despicable, but there is still scope for a lower tax rate as being a viable option to jump start an economy and kick-start a stimulus.
#3 by John Ruddy on December 20, 2010 - 11:23 pm
When there were rumours of the Irish raising their corporation tax rate to 15% (still amongst, if not still the lowest in the EU), then Microsoft, Intel, Dell and a number of other companies that have set up their european operations in Ireland threatened to move to Switzerland.
If you want to use the tax system to stimulate economic recovery, the better solution, which avoids those issues would be to introduce allowances for capital investment, or for new companies (the more important SMEs).
For me, the biggest reason why the Laffer curve is a load of rubbish (at least as presently expressed by the likes of John Redwood), is that the rich want us to do it. yet its supposed to mean increased revenue, so why would they want to pay more tax?
Its all about whether we are on the downward slope on the right of that graph, or the upward slope on the left. which is why cutting the 83% tax rate to 60% in the early 80s probably did generate more revenue (in a limited way). However, cutting a 24% rate to 12.5% (or whatever level) probably wont.
#4 by j wales on December 22, 2010 - 7:20 pm
“the rich want us to do it. yet its supposed to mean increased revenue, so why would they want to pay more tax?”
‘The rich’ (do you mean companies?) don’t mind, because they’ll be making more money too. I suspect this is the main reason you’re against it, even if it does raise more tax. Tax isn’t just for raising money, but also for punishing the rich, and nasty old American corporations.
#5 by Gaz on December 21, 2010 - 12:28 am
The discussion about CT demonstrates just how inadequate any settlement short of fiscal autonomy actually is.
If CT is cut – and some argue that it should be cut to 0% – the theory is that the base for income tax will grow. Therefore, if CT was to be devolved, the current proposal for Income Tax would mean that Scotland would not get anything like the full benefit that the CT reduction would theoretically result in because it would not be able to collect additional monies at the higher tax rate(s).
The problem is that no national tax can be manipulated without impacting on another and so unless all these taxes are devolved then the tools will be very blunt instruments indeed.
Just to up the ante a bit, I would also add welfare and benefits to this mix because these are, in effect, negative taxes. Unless a government can act on all these levers it will never be truly accountable or competent from a fiscal perspective.
Fiscal autonomy is a necessity in my view but I would go further and say that only Independence will make this truly effective. John is right to say that the Scottish Government has a good deal of policy responsibility in areas which create conditions for a competitive economy but, fundamentally, it lacks the ability to make choices about basic spending priorities.
It is difficult to believe any Scottish Government would really spend billions on Trident before seriously investing in the infrastructure John describes, for example.
#6 by CassiusClaymore on December 21, 2010 - 7:05 am
The fact that the Irish government refused to accede to EU demands to raise their CT rate tells you all you need to know. It’s their cornerstone economic policy and has been superbly successful. Had they not screwed up the regulation of their banks, the Celtic Tiger would still be roaring.
Cutting CT to the level suggested by Burt would revolutionise the Scottish economy. We’d see huge capital inflows and a massive expansion in the Scottish income tax base, particularly if a cut in CT were coupled with an abolition of the 50p tax rate (which hardly anyone in Scotland pays anyway, so nothing much to lose).
Presumably that’s why the UK Treasury have no intention of allowing us any meaningful tax powers:-
“Scottish economic success? No thanks. Let’s keep them poor and tell them they’re dependent on us, until the oil runs out at least. Their media quislings will play ball.”
CC
#7 by John Ruddy on December 21, 2010 - 11:20 am
And why did the Irish Government refuse to raise CT? Was it because they were being blackmailed by big american corporations? Who is the low CT rate benefitting? American shareholders, or the Irish pensioners who have had their funds stripped to pay for it? Multi-billionaires, or the poor and low paid Irish workers who have had their wages cut by 25%? Does the SNp really want to swap “being told what to do by Westminster” with “being told what to do by big multi-national coporations”? The Irish Government refued to raise CT because they had a gun held to their heads – is that what you really what an independant Scotland to be? Someone elses plaything, just so long as its not Londons? Although looking at how the SNP Government has treated local councils, blackmailing them into accepting their deal or having massive funding cuts.
The UK already has a competitive corporation tax rate (not the lowest – that goes to Montenegro on 9%), but it is lower than Spain, France, Germany, Italy, Austria, Denmark, Netherlands, Norway, Belgium and many others). If the UK is not attracting business, then there are other reaons for it. If Scotland is not attracting (and creating) business compared to the rest of the UK, then it should look at ways to improve that.
Look at those juristictions which have low (zero) corporation tax rates – places like BVI and the Caymans. Does having large companies based there really expand the income tax base? No.
As for huge capital inflows, yes, you would get that – but you’d also get huge capital outflows as the money has paid its low corporation tax and then goes back out to the shareholders and oweners of the big multinationals.
#8 by j wales on December 22, 2010 - 7:24 pm
“As for huge capital inflows, yes, you would get that – but you’d also get huge capital outflows as the money has paid its low corporation tax and then goes back out to the shareholders and oweners of the big multinationals.”
How awful. Much better if the horrible corporate money never touches Scotland, and thus never raises any taxes here at all. Virtuous poverty, that’s what we want.
#9 by John Ruddy on December 31, 2010 - 3:33 pm
Yes, the horrible corporate money would never touch Scotland, and never do anything for Scotland.
Why for instance is the British tax payer having to bail out the cayman Islands with a £150million dollar loan, if a low level of corporation tax was all that we needed?
#10 by Indy on December 21, 2010 - 10:00 am
I think John is maybe missing the point. Having powers over business taxes is not simply about attracting businesses to Scotland – it is about keeping businesses in Scotland by having some way to counteract the pull of the south east. I’ve heard Jim Mather speaking about this very persuasively because that is what happened to the business that he started – once it grew to a substantial size it was taken over and the headquarters function moved to London.
#11 by John Ruddy on December 21, 2010 - 11:44 am
Keeping business in Scotland will always be difficult. Most businesses will want to be close to their markets, and Scotlands population will never be a big enough draw on those terms alone. We need to create the right conditions to create new business here in Scotland – the SME area is what will create jobs-its often not the big multi-nationals relocating, although they manage to get all the publicity.
Some of the things the SNP government has done around business rates will help, but there are many other barriers to new enterprise being set up in Scotland, one of which is lack of venture capital (and even more so since the credit crunch). Lost Highlander mentioned the ferry link to europe being underused – but I dont think that was supported enough by the Government. Fares were very high, and I know a number of people who found it to be cheaper to drive to england, stay in a hotel there overnight and then catch a ferry to europe. I’m not saying I know exactly how that could be changed, what with EU rules on state support, but more should have been done.
Was not the real cause with Jim Mather’s business moving to Scotland after he sold it not because it got to a substantial size, but because he sold it to people who wernt committed to Scotland (or at least as committed as he is)? Look at RBS – whatever you say about them, they grew very large and yet chose to stay in Scotland. There are other examples.
#12 by Lost Highlander on December 21, 2010 - 10:03 am
“a well-educated and skilled workforce
good transport links
available land/helpful planners”
We have a well educated and skilled workforce but one which as there are no jobs here move south or abroad as they have to to get a career.
We have reasonable transport links but as the point in case the ferry service to europe it is underused and at risk simply down to lack of buisness use.
And available land we have a plenty.
As noted unless we can actively encourage buisness to move or start in Scotland we are never really going to be able to improve our economy and actively start to sort out the social issues we have. We have good universities but unlike ones further south and in Europe/USA there spinoff buisnesses are less and often they relocate south. Using Ireland as an example it was not the corporation tax that caused its problems it was being locked into the low rates of the Euro countries loans. And everyone started to build houses.
#13 by John Ruddy on December 21, 2010 - 11:58 am
Type your comment here
Do we have a well educated and skilled workforce? Are you saying that our education system is working really well? Because if it is, whats the point of the curriculum for excellence? What about the skills that employers need, rather than qualifications they dont need? Are we teaching our children the basics of finance and running a business? I dont think so. Are we training our young people in the engineering and technical skills we need them to develop to create suitable businesses in Scotland? No, we’re not – at least not in the numbers we need.
As for available land, yes, we have plenty, but not in the right places, where there are people to work in the business or markets for them to sell to. We need to have a more enlightened plannign policy to allow areas of land (brownfield AND greenfield) to be developed in or close to our existing cities to promote the creation of businesses. Enterprise parks need to spring up in every town and city across Scotland, with Government and Councils helping to promote them with incentives and practical support.
#14 by neil craig on December 21, 2010 - 4:32 pm
Jack McConnell recently used Ireland’s alleged meltdown as justification for his refusal to cut business taxes. In fact it provides no justification.
Ureland’s 12.5% CT is certainly the primary cause of their 7% annual growth. The current borrowing requirement is purely because they bailed out their banks. The economic decline is because they refused to borrow 12.5% of GNP to fund fovernment spending (as we have done thereby not solving the problem but worsening & just putting off the say) & because, being part of the euro they cannotr devalue.
They are, correctly, determined to keep the tax rate no matter how it annots the Germans, which shows they have sense.
PS Even if you chose to censor genocide in the previous post I think it was improper, having decided to attack the Mail, to censor a supportive statement about it.
#15 by John Ruddy on December 21, 2010 - 6:14 pm
But its been proven that Irelands 12.5% CT isnt the source of their growth, especially as it used to be 10% between 1954 and 1993.
What was really the cause of all that growth was the massive EU led investment in Irelands infrastructure in the 80s and 90s. I remember visiting Eire in the early 80s, and compared to the UK it was backward in terms of roads/railways etc. The vast sums ploughed into the infrastructure has kicked started the growth.
Apprently in 2009/10, Ireland received 31.6bn of inward investment – however 31.1bn of capital flowed out.
#16 by CassiusClaymore on December 21, 2010 - 8:29 pm
John Ruddy – proven by whom? If it’s so ineffectual, why did they go to the wire to keep it?
CC
#17 by John Ruddy on December 21, 2010 - 11:39 pm
I think the fact that it was lower for the 39 years between 1954 and 1993 proves its not the driver for growth?
There was an EU court case about it, which meant they were forced to raise it, to 12.5%. They kept it because they were blackmailed by large multi-national corporations, who basically said increase it and we leave. You still havnt answered the questions – is it better to be told what to do by foreign companies or London (where we at least have some MPs)?
Several studies have shown that in actual fact the biggest driver for growth has been the International Financial Services Centre set up in Dublin. Richard Murphy has written about the irish corproation tax experience here: http://www.taxresearch.org.uk/Documents/CorpoTaxlores.pdf in relation to calls for NI to have its coporation tax reduced.
#18 by Observer on December 21, 2010 - 8:30 pm
I think there is clearly an argument to reduce costs for business to compensate for the advantages gifted to London & the SE. However that doesn’t mean it needs to be lowered to 12.5%.
The SNP need to look at how this will work politically as well as economically &, well, it just wouldn’t work going into an election saying that.
#19 by neil craig on December 22, 2010 - 10:50 am
John you are entitled say that somebody or other has disagreed with CT being the cause of Ireland’s growth but it is disingenous to claim the word “proven” (particularly without any attempt to produce evidence) & suggests anything else you say should not be believed either. In fact the EU money went largely to the agricultural sector, the part of the Irish economy that has grown least.
See this academic study which indeed gives at least overwhelming evidence that it was CT.
http://www.ideasinactiontv.com/tcs_daily/2005/03/the-celtic-tiger-secret-of-success-unveiled.html
Observer you are right that if our maximum ambition is simply to match English growth of, in good years, 2.5% then only a reduction of about 5% below English rates would be needed. With world average growth in this year of “world recession” being 4.8% (something our media don’t report) & China managing 11% I would like Scots to be a little more ambitious though I admit that is expecting far better of the numptocracy than they have shown.
#20 by Indy on December 22, 2010 - 11:18 am
Well I am not an economist but I have heard Jim Mather saying that the Scottish economy is a bit like a doughnut – there are a large number of small and medium sized businesses in Scotland (I think about 80 per cent of businesses are in that category?) and then a very small number of big businesses headquartered in Scotland and in the middle is a huge hole – hence the doughnut analogy – because as soon as a business starts to move from being small or medium sized it gets taken over. He says this is the root cause of Scotland being a branch line economy and that we need to have economic powers in order to counteract that.
Of course it is a fair point that businesses want to be located close to their markets but that is another point he made – being on the periphery of the EU, as well as the UK, means you need to use every tool at your disposal to counteract that. The Nordic countries seem to manage OK at that.
All the political attention seems to focus on corporation tax but I think it’s about a lot more than corporation tax – that’s just one element.
#21 by neil craig on December 22, 2010 - 3:07 pm
John reading the intro to your link it is clear their eviodence” that CT doesn’t work is merely assertion plus sayinvg it woyuldn’t be allowed (irrelevent to whither it is desurable) plus claiming that a previous Varney report had “proved” it. This is a common practice in certain political circles where “evidence” turns out to be just people quoting their friend’s unsubstantiated claims as “proof”.
Nobody sensible would deny that there are other things that could also be done. I have proposed dozens of them. But anybody who says we shouldn’t do the single most effective thing musr be assumed unlikely to actually be willing to do the other things either, unless they accidentally fit their own, entirely different, agenda.
And even worse – things they propose, claiming they will be to improve the economy, may very well not be & neing proposed for diferent real reasons – Scottish politics is full of lying like that – see McConnell’s tepeated lie that the economy was his “number one priority” & the SNP’s similar promises.
#22 by cynicalHighlander on December 22, 2010 - 7:01 pm
This tinkering in having one power is like saying here’s a swimming pool but you can’t fill it moore(typo) than 6 ins, full fiscal powers are needed not bits.
#23 by James Aitken on December 24, 2010 - 9:26 am
A competitive rate of corporation tax is just one aspect to this. Scotland also needs control of the underlying law, in this case company law and Companies House Edinburgh to make this a viable proposition.
James Aitken
Trustee Reform Scotland
#24 by Hamish on December 25, 2010 - 11:21 am
“Former RBS chief executive”?
That’s like saying John Reid is chairman of Rangers.
#25 by neil craig on December 30, 2010 - 11:10 am
John those who say “we need more oiwers” vefore we start doing anything. We already have extensive powers, some of which like preventing nuclear power, are not inherent in the act but have been derived through other powers.
The arguments against this is that nobody making such an argument ever says what particular powers we don’t have that would allow them to produce Irish level growth & even moreso that rhe SNP have decided, whether deliberately or through incompetence, to get rid of the major power we do have.
#26 by Hamish on January 2, 2011 - 12:38 pm
Jeff, sorry to be a bore, but is it Betternation’s strategy not to correct, or at least admit, such egregious errors?
If it is, I won’t have any respect for your pontifications about the Scottish eceonomy.
#27 by Jeff on January 3, 2011 - 6:17 pm
Only really just back online now Hamish after a long and enjoyable Winter break so I can assure you that timing, rather than some sort of revisionist editorial policy, is the reason for the delay.
Thanks for pointing out and hope it didn’t spoil your Christmas period too much…