Mar 04 2011

Deconstructing the Oxford study on UK tax

Posted by: Nick Shaxson in: Thoughts

There’s been lots in the news recently about a new report entitled Corporate Tax in the United Kingdom, by the Oxford University Centre for Business Taxation.

Now “Oxford University” says ‘academic excellence’ to most people, and perhaps rightly so. But I don’t think we should leave this institution’s credentials entirely unquestioned. Before examining the relative merits of the report itself, I let’s look a little more closely at this centre.

Back in 2005 the publication Accountancy Age explored the origins of this centre in an article entitled Profile: Christopher Wales, Brown’s buddy at Goldman Sachs. This Goldman Sachs official had worked alongside Tony Blair and became Gordon Brown’s principal tax adviser and was, the article explained, “one of the most connected people in business and politics.” Now here’s the killer section, for today’s purposes:

“Wales’ mission to ensure a simple, but fair taxation system that allows UK businesses to compete effectively and profitably in a global marketplace. The culmination of this mission, he says, was the creation and launch of the Oxford University centre for business taxation (see box) on 4 November this year.

Based at the Saïd Business school and backed by £5m-worth of funding from the influential Hundred Group of Finance Directors, the centre has been set the goal of using academic weight, alongside HM Revenue & Customs and business expertise and assistance, to achieve a more competitive tax system for British businesses.

So the Oxford University Centre for Business Taxation was set up with the intention of achieving “a more competitive tax system for British businesses.” OK, that’s a paraphrase by Accountancy Age – but there’s a little bit more, further down:

“Conceived during a conversation with Jon Symonds, CFO of AstraZeneca and until recently Hundred Group chairman, Wales was confident that his vision for a centre to help British business become more competitive globally could become a firm reality.

Symonds invited him to talk to the Hundred Group where the plans were well received. Wales pitched the idea to Cambridge University and the London School of Economics before a decision was made to base the centre at Oxford. The Saïd Business school’s existing focus on finance, corporate governance and regulation made it a perfect fit.”

This, again, is pretty clear. A ‘competitive’ tax system to help British businesses become more ‘competitive’ globally. The goal of helping British businesses become more competitive globally is not a bad thing in itself – but it is not at all the same thing as the goal of helping the UK design an appropriate tax system. And in this respect, on this evidence, the Oxford Centre appears to have a bias built into its very DNA. That £5m-worth of funding from the influential Hundred Group of Finance Directors, a potent lobbying organisation, is particular grounds for querying this centre’s motivations.

And as I explain in Treasure Islands, ‘competitive’ is one of those weasel words which sound good but hide all manner of mischief. To understand what people in the Hundred Group and elsewhere in the big business community mean by a “competitive” tax system, a very good place to start is George Monbiot’s recent article entitled To us, it’s an obscure shift of tax law. To the City, it’s the heist of the century. Read it, if you haven’t already – and you’ll see why the emotive language in the headline is entirely justified.

This kind of ‘competition’ and ‘competitiveness’ bears absolutely no economic relation to the beneficial competition and ‘competitiveness’ that we take for granted when corporations compete with each other to produce better and cheaper goods and services. No, although this shares the same word ‘competition’ – this kind of competition the Hundred Group is talking about is of the harmful, race-to-the-bottom kind.

And we’ve seen, again and again, the output of the Oxford Centre for Business Taxation providing ammunition for those who would cut the taxes on multinational corporations and accelerate the race to the bottom. The latest report, while certainly nuanced in this respect, is a case in point.

Richard Murphy has written a fascinating blog entitled Taking Peston to pieces on tax, deconstructing analysis of the latest report by the BBC’s Robert Peston.

One of the main arguments is that multinationals contributed 85% of all UK corporation tax receipts, so it seems to make sense to encourage them to stay here. Another key finding is that although the UK corporation tax rate is quite low, when compared to other countries, its tax revenues are quite high. This has been taken by many commentators as evidence that this shows that it’s a good idea to lower taxes on multinational corporations.

The arguments look strong, on the surface, but once you dig down they fall apart.

Of course multinationals pay most tax, Murphy argues, but there are numerous reasons for this. The UK has the largest financial market in Europe clustering financial, oil, mining and other companies in a way that no other centre in Europe does. I would add that the legacy of Empire – not just with respect to old colonial companies, but also the network of British tax havens around the world, feeding business up to the City of London, has all done a lot to attract big corporations to the UK. It’s not tax rates, but these other factors, that big up the corporate profits – from which big tax revenues come. And once the financial corporations are there – as Adair Turner describes in great detail – they can extract super-normal profits by gouging customers and others. And then there is that 100 billion pound implicit subsidy that banks have been receiving from the government, as Andrew Haldane recently noted. The fact that something is implicit doesn’t mean it isn’t real – City banks derive huge (taxable) profits out of this.

There are various other reasons why multinationals can earn unusually large profits relative to small businesses: they are better at transfer pricing strategies (which may in some cases deplete the revenues of developing countries, leading to higher taxable UK profits,) for example.

But there are also other reasons why multinationals in the UK can earn unusually large profits relative to other countries, and that’s with respect to the tax base. That is, the bit that actually gets subject to tax. The UK, for now, considers corporates to be taxable on their worldwide income (though the Monbiot article highlights how the corporations are in the process of persuading the politicians to move this to a far narrower, territorial basis for tax.) Because the UK rightly taxes corporations on their worldwide income, it gets more tax revenues than countries that don’t. This has nothing whatsoever to do with the tax rate.

Murphy’s damning conclusion about Peston’s blog is this:

“Peston is wrong, and maybe very wrong. He clearly needs a crash course in tax.”

And as a reminder, let’s not forget that we should always be cautious about the findings of the Oxford Centre against for Business Taxation. What they have to say is always worth considering. But at the same time, always remember who helped set them up, and why.

There is one last conclusion from the Oxford report – that big businesses pay a lower rate of tax than small businesses. Here is something else that readers of Treasure Islands would not be surprised to learn.

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[…] (And in case anyone is in any doubt about the Oxford University Against For Business Taxation, read this.) Read more about those earlier moves here. As the expert Progressive Tax Blog noted at the time: […]

[…] (If you want more specifics on the capture, see this, or this.) […]

[…] causes.” The OUCBT is a common target for this vein of criticism from TJN (see for example this blog by Nick Shaxson on its origins), and its Business Tax report is certainly laced with the term ‘competitiveness’. But the new […]

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