Some surprising economic data

From the Mirrlees review into designing tax systems:

Despite some predictions to the contrary, countries are not being forced inexorably to tax less in an increasingly globalized and competitive world economy. Between 1975 and 2008, taxes rose as a proportion of national income in virtually every OECD country. On average, the tax take rose from 29.4% to 34.8% of national income. In no OECD country was there a significant fall in the tax take over this period…

Within the total tax take, we might expect that governments would find it more difficult to raise taxes from internationally mobile companies and people. In fact, revenue from corporation taxes has more than held up over the past 40 years—corporate income taxes accounted for 9% of tax revenues across the OECD in 1965, 8% in 1985, and 10% in 2008.

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  • Of course ultimately only people can pay taxes. Corporation tax must do one of the following:
    1) Reduce profits paid out to shareholders, largely pension funds
    2) Lead to higher prices for consumers
    3) Lead to lower wages for workers

    So corporation tax is either a tax on pension and other saving, a VAT-style tax but with no exemptions for things like food, or a form of income tax, without a tax allowance.

    This is why Jim Mirrlees taught us (and yes, I sat at his feet as a student) that there is no good basis for corporation tax, since you shouldn’t really levy a tax unless you know who will pay it.

  • Anthony Durham 28th Dec '11 - 12:35pm

    Or (4) Reduce directors’ take.

    Millions of people like me want company taxation to favour responsible behaviour. That means reducing the disparity between the pay of directors and of workers, and stopping companies offloading their costs onto the wider community. Am I being economically naive in believing that taxation is more than just a way of raising money?

  • Andrew Suffield 28th Dec '11 - 2:39pm

    Am I being economically naive in believing that taxation is more than just a way of raising money?

    No, just in thinking that levying taxes on a corporation will result in that money being drawn from the directors’ pool. This is particularly inappropriate when you could simply tax the income of the directors.

    (Also, despite making good headlines by taking their salary out of context, few if any companies pay their directors a substantial amount compared to the amount of tax the company pays)

  • @tim leuing

    Pension funds only hold 13% of the shares in the UK.

    The “think of the poor pension holders” argument against corporate tax is about 50 years out of date.

  • Timak – thanks for the details. I wasn’t trying to imply that people with private pensions were poor – far from it! Just commenting that we should think about who the final payee will be. As you say, if it reduces dividends/capital growth, 40%-ish of that will be borne by foreigners.

  • It’s interesting to see that OECD taxes, and hence (presumably) state spending as a share of national income, have risen over the last thirty years. This despite a broad trend away from socialist and toward more avowedly right-wing governments.

    Would anybody like to offer an explanation?

    My surmise is that to generalise very broadly, private expenditure tends to be spent on things like electrical and electronic goods, IT, and imports from China and elsewhere, all of which have got cheaper as time goes by. Conversely, the state tends to spend more of its money on labour-intensive activities such as teaching, doctoring, policing and recycling, which have not got cheaper. The result is that, if we want to maintain a constant balance between the quantities of private and public goods purchased, we should accept that an increasing percentage of our national income has to be devoted to public spending.

  • Malcolm Todd 29th Dec '11 - 9:20am

    @ Timak – I’m confused by your 13% figure. The report you link to says that “The proportion of shares on the London stock market owned by insurance firms and pension companies” is 26%. Do you have any basis for assuming that this is evenly split between pension and insurance companies? And is there such a huge difference between the two sorts of investment that we shouldn’t consider the insurance company holdings as being, similarly, largely to the benefit of their broad mass of customers?

  • Malcolm Todd 29th Dec '11 - 9:28am

    @ David Allen – the general principle is probably right; though excluding housing from your list of what private money buys is a rather large hole in the argument.
    I suspect that health and social security spending (including pensions) forms a large part of the answer — in other words, the effects of longevity. Throughout the OECD — even in the US — the state has a far greater proportional stake in these areas than in others. (Against that — in Europe, at least, spending on defence has fallen massively over the last 20 years at least, and I think rather longer: an area in which state spending is even more dominant.)

  • Richard Swales 29th Dec '11 - 10:09am

    @Anthony Durham “Or (4) Reduce directors’ take.”

    I can’t believe that reducing what someone else has can be a legitimate political aim – even when we are talking about your hate-targets like bankers and managers.

    When I lived in the UK, the highest wages I earned was when I was working for millionaires, and I was also on the wrong end of a high level of wage disparity. At the interview when I asked about pay, I wanted the figure in pounds, not as a percentage of the director’s salary because that is the figure that is important. When the rumour mill told me that the directors were on 7-figure salaries I didn’t think “whoops I’ve made a mistake taking the job, I should have stayed on the uniformly lower wages at the other place”, which suggests to me that for people who are in any way healthy, high wages are not the problem to fix but low wages.

    There are some people who see a Ferrari, and smile, want to admire it hope they (or their kids) will one day have something like that, and there are also some people who want to scratch it because they don’t want someone else to have what they can’t have. Even if “millions of people” feel like that we don’t ban Ferraris because we are supposed to do more than be chameleons going after whatever might get us some votes.

  • jedibeeftrix 29th Dec '11 - 6:13pm

    “for example there are far fewer military dictatorships about outside the OECD to balance the fewer numbers of stagnant economies inside it.”

    I’m not sure how that has any relevance to the statement about right-wing government?

  • David Pollard 29th Dec '11 - 9:38pm

    One of the things the LibDems have do do over the next couple of years is have a serious discussion of what ‘living within our means’ will mean for a future government. How much re-distribution is needed to produce a fairer society? How will the money be raised and what are the priorities for expenditure? And the sooner we can get back to Keynes the better – governments should save in the good times, spend when times are bad and balance over the economic cycle.

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