Why corporation tax cuts are a waste of money

A new study shows that George Osborne’s tax cuts will do little to create growth and jobs.

Whenever George Osborne is asked to produce something resembling a growth strategy, he cites his plan to reduce the headline rate of corporation tax to 23 per cent by the end of this parliament (it fell from 28 per cent to 26 per cent in the Budget).

Osborne recently boasted to the Institute of Directors that his decision to "very aggressively" cut corporation tax had been "noticed around the world". The Chancellor's hope, presumably, is that his tax cuts will revive an economy that, under his stewardship, has not grown for six months.

But today's TUC report on the subject, written by Richard Murphy of the excellent Tax Research UK blog, suggests that there is only a weak relationship between tax rates and growth. The study, which looked at OECD member states between 1997 and 2010, found that at most 7 per cent of growth differences (see graph below) can be explained by differences in tax rates.

In other words, 93 per cent of the variation is explained by other factors.

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As Murphy writes, "Tax rate differentials of between 27 per cent and 40 per cent over a period of 14 years are clustered so weakly around growth rates that these growth rates only vary between 1.9 per cent and 2.3 per cent per annum as a result."

He excludes Ireland and Luxembourg on the grounds that "the first two are both small states and tax havens" and excludes Japan and Italy on the grounds that they "have suffered such low rates of growth that they cannot be compared to the UK". In the case of employment (see graph below), just 6 per cent of the variation is due to differences in corporation tax rates.

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Murphy's persuasive conclusion is that scarce resources should be devoted to policies that have a significant, rather than a marginal, effect on growth and jobs. Reducing corporation tax to 23 per cent is a poor use of £4.5bn. Osborne's tax-cutting agenda is founded on political dogma, not economic evidence.

PS: As I've noted before in a Data Hound column, there is no reason to believe that a corporation tax rate of 28 per cent was damaging the UK's international competitiveness. The US, for instance, has a headline rate of 39.25 per cent and Japan has a rate of 39.5 per cent.

George Eaton is political editor of the New Statesman.

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The rise of the green mayor – Sadiq Khan and the politics of clean energy

At an event at Tate Modern, Sadiq Khan pledged to clean up London's act.

On Thursday night, deep in the bowls of Tate Modern’s turbine hall, London Mayor Sadiq Khan renewed his promise to make the capital a world leader in clean energy and air. Yet his focus was as much on people as power plants – in particular, the need for local authorities to lead where central governments will not.

Khan was there to introduce the screening of a new documentary, From the Ashes, about the demise of the American coal industry. As he noted, Britain continues to battle against the legacy of fossil fuels: “In London today we burn very little coal but we are facing new air pollution challenges brought about for different reasons." 

At a time when the world's leaders are struggling to keep international agreements on climate change afloat, what can mayors do? Khan has pledged to buy only hybrid and zero-emissions buses from next year, and is working towards London becoming a zero carbon city.

Khan has, of course, also gained heroic status for being a bête noire of climate-change-denier-in-chief Donald Trump. On the US president's withdrawal from the Paris Agreement, Khan quipped: “If only he had withdrawn from Twitter.” He had more favourable things to say about the former mayor of New York and climate change activist Michael Bloomberg, who Khan said hailed from “the second greatest city in the world.”

Yet behind his humour was a serious point. Local authorities are having to pick up where both countries' central governments are leaving a void – in improving our air and supporting renewable technology and jobs. Most concerning of all, perhaps, is the way that interest groups representing business are slashing away at the regulations which protect public health, and claiming it as a virtue.

In the UK, documents leaked to Greenpeace’s energy desk show that a government-backed initiative considered proposals for reducing EU rules on fire-safety on the very day of the Grenfell Tower fire. The director of this Red Tape Initiative, Nick Tyrone, told the Guardian that these proposals were rejected. Yet government attempts to water down other EU regulations, such as the energy efficiency directive, still stand.

In America, this blame-game is even more highly charged. Republicans have sworn to replace what they describe as Obama’s “war on coal” with a war on regulation. “I am taking historic steps to lift the restrictions on American energy, to reverse government intrusion, and to cancel job-killing regulations,” Trump announced in March. While he has vowed “to promote clean air and clear water,” he has almost simultaneously signed an order to unravel the Clean Water Rule.

This rhetoric is hurting the very people it claims to protect: miners. From the Ashes shows the many ways that the industry harms wider public health, from water contamination, to air pollution. It also makes a strong case that the American coal industry is in terminal decline, regardless of possibile interventions from government or carbon capture.

Charities like Bloomberg can only do so much to pick up the pieces. The foundation, which helped fund the film, now not only helps support job training programs in coal communities after the Trump administration pulled their funding, but in recent weeks it also promised $15m to UN efforts to tackle climate change – again to help cover Trump's withdrawal from Paris Agreement. “I'm a bit worried about how many cards we're going to have to keep adding to the end of the film”, joked Antha Williams, a Bloomberg representative at the screening, with gallows humour.

Hope also lies with local governments and mayors. The publication of the mayor’s own environment strategy is coming “soon”. Speaking in panel discussion after the film, his deputy mayor for environment and energy, Shirley Rodrigues, described the move to a cleaner future as "an inevitable transition".

Confronting the troubled legacies of our fossil fuel past will not be easy. "We have our own experiences here of our coal mining communities being devastated by the closure of their mines," said Khan. But clean air begins with clean politics; maintaining old ways at the price of health is not one any government must pay. 

'From The Ashes' will premiere on National Geograhpic in the United Kingdom at 9pm on Tuesday, June 27th.

India Bourke is an environment writer and editorial assistant at the New Statesman.

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