The UK is about to implement a tax code change that amounts to a massive subsidy for large corporations, most of all big banks. The remarkable bit is that this is taking place when the UK is projected to fall short of its budget targets, at a time when the government professes to take that sort of thing seriously. Although we don’t hew to the logic of austerity in the wake of a financial crisis (the better course of action is to encourage debt renegotiations/writedowns, and offset the contractionary impact with fiscal stimulus), a big tax break is contrary to the official policy stance.
For those in the US who have steered clear of the budget drama on the other side of the pond, a story from from the Financial Times just over a week ago will give you a sense of the state of play:
George Osborne says he has little option but to push on with the harshest public spending cuts in living memory because a reversal would alarm the bond markets and plunge Britain into “financial turmoil”.
Responding to growing clamour for him to explore a “plan B” for recovery, the chancellor insisted that there would be no weakening of the government’s resolve in implementing austerity measures.
Now with all this brave talk that the UK is hopelessly hostage to the bond vigilantes and cannot, dare not relent on austerity (the actual Osborne quote was even more alarmist, if the UK abandoned its stance, “Within minutes Britain would be in financial turmoil”) looks like a huge con. Or maybe the tax cuts planned are simply another sacrifice to the financial markets gods.
From George Monbiot in the Guardian (hat tip reader May S):
‘I would love to see tax reductions,” David Cameron told the Sunday Telegraph at the weekend, “but when you’re borrowing 11% of your GDP, it’s not possible to make significant net tax cuts. It just isn’t.” Oh no? Then how come he’s planning the biggest and crudest corporate tax cut in living memory?
If you’ve heard nothing of it, you’re in good company. The obscure adjustments the government is planning to the tax acts of 1988 and 2009 have been missed by almost everyone – and are, anyway, almost impossible to understand without expert help. But as soon as you grasp the implications, you realise that a kind of corporate coup d’etat is taking place.
Like the dismantling of the NHS and the sale of public forests, no one voted for this measure, as it wasn’t in the manifestos. While Cameron insists that he occupies the centre ground of British politics, that he shares our burdens and feels our pain, he has quietly been plotting with banks and businesses to engineer the greatest transfer of wealth from the poor and middle to the ultra-rich that this country has seen in a century. The latest heist has been explained to me by the former tax inspector, now a Private Eye journalist, Richard Brooks and current senior tax staff who can’t be named. Here’s how it works.
At the moment tax law ensures that companies based here, with branches in other countries, don’t get taxed twice on the same money. They have to pay only the difference between our rate and that of the other country. If, for example, Dirty Oil plc pays 10% corporation tax on its profits in Oblivia, then shifts the money over here, it should pay a further 18% in the UK, to match our rate of 28%. But under the new proposals, companies will pay nothing at all in this country on money made by their foreign branches.
Foreign means anywhere. If these proposals go ahead, the UK will be only the second country in the world to allow money that has passed through tax havens to remain untaxed when it gets here. The other is Switzerland. The exemption applies solely to “large and medium companies”: it is not available for smaller firms. The government says it expects “large financial services companies to make the greatest use of the exemption regime”. The main beneficiaries, in other words, will be the banks.
But that’s not the end of it. While big business will be exempt from tax on its foreign branch earnings, it will, amazingly, still be able to claim the expense of funding its foreign branches against tax it pays in the UK. No other country does this. The new measures will, as we already know, accompany a rapid reduction in the official rate of corporation tax: from 28% to 24% by 2014. This, a Treasury minister has boasted, will be the lowest rate “of any major western economy”. By the time this government is done, we’ll be lucky if the banks and corporations pay anything at all. In the Sunday Telegraph, David Cameron said: “What I want is tax revenue from the banks into the exchequer, so we can help rebuild this economy.” He’s doing just the opposite.
These measures will drain not only wealth but also jobs from the UK. The new legislation will create a powerful incentive to shift business out of this country and into nations with lower corporate tax rates. Any UK business that doesn’t outsource its staff or funnel its earnings through a tax haven will find itself with an extra competitive disadvantage. The new rules also threaten to degrade the tax base everywhere, as companies with headquarters in other countries will demand similar measures from their own governments.
Monbiots’ indignation is fully warranted if this move is as beneath the radar as it seems to be in the UK. Perhaps this is a stealth move for Britain to step into the role formerly occupied by Ireland: English speaking low tax jurisdiction, with a hope of attracting corporations and therefore some gains in employment by offering an integrated suite of “offshore” and onshore banking facilities (as Nicholas Shaxson details in his must-read new book Treasure Islands, the US and UK are already leaders in the offshore banking business, with tax havens such as the Isle of Man and the Bahamas part of the British financial empire). In other words, this move might be an effort to solidify the UK’s standing in the tax evasion game.
Shaxson argues that the US is actually now the leader in the offshore game (the Caymans are one of our answers to the British tax havens). With the UK taking such an aggressive move, can a race to the bottom countermeasure from the US be far behind? Given the success the major banks have had so far in looting the public, I fear we already know the answer to this question.
Update (hat tip Ian Fraser via Richard Smith). Aha, it looks like the poor chump UK taxpayer is being subjected to a major case of three card monte. The normally astute Robert Peston, no doubt soon to be followed by the rest of the UK media, is falling all over itself to report on the decision by the George Osborne to change the implementation of a bank levy, which was slotted to be phased in starting this year and is now to be implemented at the full rate. In other word, look at the hand that is raising taxes, to assure diversion of attention from the one that is handing out even bigger breaks to the banks.
From the BBC:
Could it be “no more Mr Nice Chancellor,” at least as far as the banks are concerned?
George Osborne had originally announced that the government’s new bank levy would be phased in, with a lower rate applicable in 2011.
The Chancellor has concluded that the banks are in better shape than he thought less than two months ago, when he announced that a smaller levy would apply in the current year. He has therefore decided that the full levy will be imposed with immediate effect, to extract the £2.5bn per annum which he expected to be the long term yield.
The effect of this is to raise £800m more from the banks in 2011 than the Treasury had been planning to do. Royal Bank of Scotland, as just one example, will pay around £150m more levy than it had been expecting (or £473m in total, up from £315m)…
So does the official explanation of the imposition of the full levy stack up? Are the banks really significantly stronger than they were in December, and therefore better able to pay more tax?
Well perhaps not. But perhaps it is understandable that the Chancellor thinks they are in ruder health, given that ministers’ pleas for banks to show pay restraint is not preventing them from handing out around £6bn in bonuses to their investment bankers.
Increasing the 2011 take from the levy also helps Mr Osborne respond to the charge from Labour frontbenchers that he is being softer on bonuses than they would be, in that Labour says it would repeat for one more year the special bonus tax which applied last year.
You can’t ask for a better smokescreen than this: the officialdom gets to look tough, the bank pretend they are being made to take some medicine, they will probably play along and make a convincing show of protest, and the fleecing of the taxpayer continues.
Originally published at naked capitalism and reproduced here with permission.
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