Home > General Politics > Polly Toynbee and the missing mega-earner myth

Polly Toynbee and the missing mega-earner myth

Polly-ToynbeeLike my BlogComrade Dave, I don’t have a great deal of time for many liberal intelligentsia members of the UK broadsheet press corps. 

Indeed, it’s been interesting to note how, on at least a couple of occasions over the last few months, reporters from the scuzziest of the tabloids have got it much, much righter than the broadsheet wafflers. 

First, there was the Daily Star, calling it right over the East Lindsey strikes, and now in the last few days there’s the News of the World, with a mix of brave undercover reporting and an editorial line smacking of basic decency, sticking it to the BNP better than any well-meaning but essentially middle-class oriented hope not Hate campaign has been able to.

Given the ever lower esteem in which I hold Guardian/Times commentators etc., therefore, it will come as little surprise that I find the latest CommentisFree piece by commentariat queen bee Polly Toynbee a tadge disappointing and, erm, wrong.

In today’s piece, Polly turns her attentions to the Compass-led campaign for a High Pay Commission, presumably having taken a few days looking to see which direction the bandwagon was rolling. 

Fair play to Compass – they’ve got it to roll in the pro-Commission direction, and in so doing they have raised some useful debate about wealth distribution, albeit within the usual limited confines, and so Polly’s gone with it and decided she supports a High Pay Commission too.

Her problem, though, is that there’s been a lot of  broadsheet/blog comment about it already, and she’s a bit stuck for anything original to say.   

Having chewed her pencil for a while, she’s gone for the idea that a Commission would go around ‘challenging the self-serving myths of mega-earners’, and sets out the myth she thinks will be challenged by it.  The Commission, she says, would give us all information about how much high earners really earn, and that would enable voters to make decisions about distribution.

Or at least I think that’s what she says.  To be honest, it’s not very clear precisely what she thinks the existing myth(s) is/are.

The problem with this myth, though, is it’s not a myth.  Anyone you ask anywhere knows perfectly well that rich people earn/have a lot and that there’s a very wide gap between the biggest earners and the lowest earners.  What’s mythy about that?  It’s wrong, but it’s not a myth.

So Polly misses the bandwagon, and that if you like your self-serving myths served up on CommentisFree, is a shame. 

Because there is a very big mega-earner self-serving myth which, whether through rank ignorance or choice, she doesn’t mention.

This myth is best expressed by one of those mega-earners.  Here’s one Andy Jarm commenting in a right huff at Liberal Conspiracy:

‘I am a banker and trust me – this is the tip of the iceberg, thousands of bankers and other professionals are preparing to leave this country (it takes time to up-root and move your wife and kids abroad) – they will soon be doing the same jobs, servicing the same clients but from abroad and paying tax revenues to foreign governments instead of ours. There is only one result – the UK will lose immense tax revenues that are unlikely to come back.’

Now that, Polly, is a myth, and a very self-serving one at that.  Andy reckons if he doesn’t earn loads, he’s off, and thousands like him will join him.  Bollox!

To prove it’s not just Andy saying this, but that the whole thing’s got proper myth status, here’s someone else,  John this time, at Iain Dale’s site, saying the same:

‘Labour’s attitude to high earners is what pisses me off the most.They just openly ignore the fact that the high earners are the one’s running the business’s (sic) that provide their jobs, and that generate the most cash for the economy.

If we don’t look after them, or worse, target them like Labour want to, they’ll just bugger off elsewhere and it’s the people who will suffer the most for it.

After all, it’s the high earners who are the most mobile.’

Equally bollox!

Much as though I’d really love Andy and indeed John  to bugger off elsewhere, and though it may possibly be true in Andy’s particular case, his argument is essentially (as I think I may have noted) bollox, put forward in order to scare us all into thinking they will go, a bit like Paul Daniels or whoever it was who threatened to emigrate if Labour came to power, but never actually quite got round to it.

Let’s just look at the claims they’re making.

Are they really suggesting that a wealthy person earning, say, £200,000 per year will actually decide to remove her/himself from the UK lock stock and barrel because s/he is required to pay 5% extra on the £50,000 earned above the threshold, that being £2,500?

That’s the cost of a weekend skiing trip or some other luxury, and it would cost an awful, awful lot more than than that in terms of the costs ‘sunk’ in living in the UK, plus the new costs associated with a move abroad, to take their bat and ball and skis elsewhere.

And where would they go? I’m not going to bother with detailed research on personal taxation levels in other parts of the world, but have a quick look at wikipedia and see if there are any genuinely attractive options in the countries with lower tax regimes than ours for your average £200,000 earner.   Moldovia and its flat tax rat really that attractive an option? 

There’s a reason rich people choose to live in London.  It’s London.

They might try a London-like tax haven to save their £2,500, the nutty commenters may say. Try checking out how much it costs to buy permanent residency on Jersey, and see if that equation stacks up except for the ridiculously rich (that’s the way the States of Jersey like it).

So why then is the right, and the rightwing press, so fixated with what in reality is this ridiculous idea that ensuring total flexiblity of pay at the high  end, and keeping tax for upper earners low, is what keeps the wealth in the country?

It’s because it’s a convenient fiction, that’s why. It’s because it suits those high earners – who don’t want to pay a bit more tax into the system they depend on to keep their labourers serviced and health and in a position to make them even wealthier – to have us think that they and their fellow high-earners will be off at the drop of a hat or a Commission

Of course they won’t. They’re here either because they’re from here, and for all the usual reasons don’t want to live somewhere else, but also because this is where the vast majority of them skim their surplus value.

What the right says about high taxation and the exodus of personal wealth is essentially bollox, and it’s time to call their bluff, whether through a High Pay Commission or through – my preferred route – collective action.

This is of course just the personal taxation issue. Of much greater economic significance for the economy as a whole is the matter of the tax regime as it affects corporations.

Again, the right would have us believe, because it suits them and their capitalist friends, that if the tax regime is too burdensome, then all those lovely companies that bring us jobs will just up sticks and head off elsewhere where the government is more ‘understanding’ of the needs of big business, and corporation tax is lowered to suit.

This all sounds a bit more plausible than the notion of rich individuals buggering off abroad because they’re asked for a couple of grand as a contribution to the poor.

But it’s still not true. There is simply no empirical evidence to support the claim.

Indeed the reverse is true. As my favorite academic Colin Hay puts it in Why We Hate Politics:

‘Predictions of the hemorrhaging of invested capital from generous welfare states are almost certainly misplaced. A combinations of exit threats and concerns arising from the hyper-globalisation thesis about the likelihood of exit may well have had an independent effect on the trajectory of fiscal and labour market reform…….. Not only have the most generous welfare states consistently proved the most attractive locations for inward investors, but volumes of foreign direct investment (expressed as a share of GDP) are in fact positively correlated with levels of corporate taxation, union density, labour costs, and the degree of regulation of the labour market (2007: 131-132)’

The key words here are the ‘hyper-globalisation theory of exit’.  Hay goes on to argue that empirical findings simply do not back up this thesis, and that, just as with personal taxation, the notion that businesses always go to the lowest taxed economies (and by extension the least well-funded welfare states) is simply a convenient fiction, designed by capitalists to drive down their costs, increase their surplus value, while at the same time freeloading on welfare states for healthy, well-educated labour.

There isn’t space in even this longish blogpost to go into all the empirical findings, but Hay relies particularly on the superb research set out in Duane Swank’s ‘Global Capital. Political Institutions and Policy Change in Developed Welfare States (2002)’, in which the myth of the ‘flight of capital’ is debunked with evidence the right is keen to ignore. Probably the best summary actually comes on the back cover of the book, which, though it’s a little wordy, is worth quoting in full:

‘This book argues that the dramatic post-1970 rise in international capital mobility has not, as many claim, systematically contributed to the retrenchment of developed welfare states. Nor has globalisation directly reduced the revenue-raising capactiies of governments and undercut the polticial institutions that support the welfare state. Rather institutional features of the polity and the welfare state determine the extent to which the economic and political pressures associated with globalisation produce welfare state retrenchment.

In nations characterised by majoritrarian electoral institutions, pluralist interest representation and policy making, decentralistion of policy-making authority, and liberal program structure, the economic and political pressures attendant on globalisation are translated into rollbacks of social protection.

In systems characterised by inclusive electoral institutions, social corporatist interest representation and policy making, centralised political authority and universal and social insurance-based program structures, pro-welfare state interests are generally favoured.

Consequently globalisation has had the least impact on the large welfare states of Northern Europe, and the most effect on the already small welfare states of Anglo nations.’

(See also, amongst other sources, Cooke, W.N.; Noble, D.S. 1998. ‘Industrial relations systems and US foreign direct investment abroad’,in British Journal of Industrial Relations, Vol. 36, No. 4 for research on the more specific positive correlation between foreign direct investment and ‘progressive’ labour relations.)

In short, the right is trying to sell us a lie when it talks about the mobility of capital (and high earners), and the need to keep taxes down. And as the OECD itself neatly summaries in this short book, what we end up with in neoliberal orthodoxy is a ‘race to the bottom’ on tax rates, as exemplified in the rock bottom rates in East European countries (look at the Wikipedia entry on tax rates in Europe again).

The myth that low taxes are needed to make wealth happen – a myth not even believed by Multi-National Corporations when their bluff is called – becomes a self-fulfilling prophecy, where labour suffers most.

And that, is what Polly should have said, though I accept it would have needed a bit of editing for CommentisFree.  Then she’d be a proper commentator like me.

Categories: General Politics
  1. August 25, 2009 at 11:04 pm

    I suspect you are right with regard to the flight of persons – but capital flight is not unknown within British history, and certainly well-known throughout the world. Various governments in our past have tried to prevent it, or have been forced to devaluation by it. It need not be caused by an increase in taxation: more likely is that it is caused by high public expenditure and an increase in public debts, with potential to default on loans. That was what caused the flight in Argentina in 2001.

    As for Polly Toynbee, well the less said the better. She’s inconsistent and hypocritical – like most of the people who write for CiF.

  2. August 25, 2009 at 11:37 pm

    But errr… it is already happening: http://online.wsj.com/article_email/SB125115257255854987-lMyQjAxMDI5NTIxNTEyNTUyWj.html

    You are right on the wider point. Globalisation does not favour an explicitly smaller welfare state model. In fact, a large welfare state combined with good infrastructure and reasonably flexible labour markets can attract plenty of capital investment. There is no “race to the bottom”, rather globalisation forces states to offer good value for money in the services they choose to provide. Nor is there in terms of tax take: there is an equilibrium point at which no government can attract more investment to counteract the losses from lowering the tax rate.

    The point is, right now, Britain is probably on the “tax too high” side of that equilibrium.

  3. August 26, 2009 at 2:21 am

    Nick – there is a race to the bottom in terms of wages and taxes. The UK govt doubled taxes on the lowest earners whilst cutting corporation tax. And anyway, why should it be the case that capital is so footloose?

  4. paulinlancs
    August 26, 2009 at 9:00 am


    The capital flight from Argentina was the result of extreme IMF-based policy, slashing public expenditure, which led to riots at the end of 2001 and the fear by the wealthy of revolution.

    My argument here is that in current circumstances there is little chance of major capital flight, but that the prospect of it – and the institutional half memories of it that you raise – is used as a tool to keep tax down etc..

    Yeah, let’s leave Polly Toynbee.


    Thanks for this link – v interesting. As you’d expect me to say, though, I think this kind of article is precisely the kind of ‘use of capital flight threat as tool’ I refer to above, and in the article, and that it can’t be seen as objective evidence. Sure, and as I acknowledge in the main OP, there will be a few mega-rich who will move and/or move their taxable cash (or hide it ever more effectively), and these may or may not be balanced by the arrival of the more or less taxable cash of other mega-rich people, but I don’t think you can extrapolate a general trend from that. Equally, I accept that hedge funds, utterly mobile by their very nature of not actually being anything in the real world, might head off for Switzerland, but I do doubt whether this is really solely to do with the personal taxation, as the article suggests, and in any event – wealthy (and taxable cash concealing) as they are, we are still only talking about a very small percentage of the overall economy; whatever the importance of the high finance industry to the UK’s GDP as a % of it, other sectors where there is a hypothetical chance of capital flight remain much bigger combined.

    (In passing Nick, i’ve not forgotten about the need to come back to the cause-effect issue re: low pay commission that you raised on the other post. Other posts have taken over, as tends to happen a lot, but I will come back to your comment – assuming you are the same Nick.)


    Good point, Charlie. The whole OP is written within a paradigm which accepts total mobility of capital if that is what capital wants, and sets out to show that even in this case it is not often in capital’s actual interest (as opposed to professed interest) to be that mobile. But there is the alternative paradigm, where restrictions on capital are as tight as they are on labour, say.

  5. August 26, 2009 at 9:29 am

    Just re-reading the original article, I am reminded of that tale of Jacques Chirac and Tony Blair meeting and their argument about how the French welfare model keeps unemployment high – and Chirac defending that model, ending by saying something along the lines of, “Remind me, you are on the Left and I am on the Right?”

    It’s true that the states of Northern Europe have been less affected than Britain or the UK – but I think that Colin Hay’s reasoning is completely out of synch with what he’s saying. Firstly, I don’t think our electoral institutions have anything to do with it, secondly I don’t think social corporatism has had the effect in the direction Swank maintains and thirdly, both Britain and the US have universal social insurance-based program structures, so this doesn’t account for a disparity between Northern Europe and the Anglo-Saxon model.

    All this is back-of-a-napkin reasoning, you understand but hear me out.

    First, the electoral systems of the UK and US provide just as centralized government as France and Germany: the UK government is probably the most centralised of the lot, actually – not having to contend with a troublesome legislative branch or competing loyalties within the executive branch of government. So I don’t see how Hay can maintain that the more centralised a government the more it will favour welfare policies.

    Secondly, my experience of social corporatism is that it bends unions to the will of employers – not so much the other way around. Now, certainly during the 1950s, social corporatism allowed the TUC to extract some benefits for its members, but was this not a retardation of what they might actually have achieved had they used their increased numbers and militant organisation freely, rather than been sanctioned by social corporatism? I’m not sure that we can say that social corporatism works the same in reverse.

    Though this probably won’t count for much against some evidence, the perception of French and German governments since the fall of the Soviet Union have generally been that they are reforming the welfare state – i.e. reducing it. This is most pronounced with the latest generation of European leaders, but mostly that’s because their predecessors were resisted in their trends. The key point, therefore, is not social corporatism but unions and political groupings demonstrating an active will to resist.

    In this, Northern Europe has certainly been a little different from America and Britain: the French and German unions, while suffering overall from the same fatigue and disillusion as the UK or US, never quite had their watershed ‘1984’ moment when the damn broke and all the forces of reformist hell came washing over the landscape.

    I can’t dispute the idea of capital flight or your contention that it is largely a myth: I have no figures to hand showing the last time this phenomenon was thought to be present in the UK – but at the very least, I think that Colin Hay is wrong in how he presents developments on the continent and with the Anglo-Saxon model. We’re all trending the same way, and that surely has ramifications for the need for capital flight.

  6. Rufus
    August 26, 2009 at 10:18 am

    People who work in the city or the service industries are seein people EMIGRATE right now! See below out on bloomberg this mornin as just a taster of what is in store for us unless Brown’s tax and spend binge is swiftly reversed :-

    By Tommy Stubbington and Andrew MacAskill
    Aug. 26 (Bloomberg) — Andrew Wesbecher moved to London from New York in 2006 to sell software to banks and hedge funds.
    This month he joined the exodus of American expatriates fleeing high taxes and the city’s shrinking financial industry.
    “I’m the last guy to leave that I know,” said Wesbecher, 29, who worked for Tibco Software Inc. and lived in Notting Hill, the London neighborhood that’s home to billionaire Richard Branson and model Elle Macpherson. “We are all packing up.”
    The number of U.S. citizens in Britain fell 3.8 percent to 126,000 in the 12 months through September, according to the Office for National Statistics. The trend probably continued this year, with the Confederation of British Industry estimating the U.K. financial industry will lose about 45,000 jobs in the first nine months of 2009, or 4.3 percent of the total.
    Americans are heading home as Britain plans a 50 percent tax rate for those who earn more than 150,000 pounds ($248,000) a year and employers cut benefits for workers living abroad, reducing the allure of London. That comes a year after the U.K.
    said foreigners who have lived in the country for more than seven years must pay 30,000 pounds annually or give up the special status that shields overseas income from British taxes.
    “Expats feel the tone has changed; it’s less welcoming,”
    said Mark Tilden, a consultant at CRA International Inc. who wrote a report for the City of London last year on the impact of taxation on corporate relocation decisions. “London’s ability to attract talent has gone down.”

  7. August 26, 2009 at 10:31 am

    Rufus, while I am not disagreeing with you – after all, if London could rise to become commercial capital of the world under Brown, it could certainly fall down again – I think this sort of thing is tendentious.

    First of all, the statistics quoted in this article aren’t being read in context: i.e. is there a normal cycle of rise-and-fall in US-to-UK immigration? What do the statistics usually look like? Were we experiencing an abnormal high now correcting itself?

    The quote from Mark Tilden really crowns the whole thing – it’s just surmise. There’s no way the man knows how American ex-pats feel. He may have canvassed some of them, or the circle he hangs out with may feel that it’s ‘less welcoming’ due to higher taxes – but that sentiment itself is ridiculous. London offers all the amenities it ever did to people as people: it may not offer all the amenities it once did to people as tax evaders or salesmen.

  8. Rufus
    August 26, 2009 at 12:39 pm

    Polly’s above example is based on someone earning £200k per year. Maybe you think these are obscene sums of money but that is peanuts for the city – most semi-successful bankers and hedgies are making many multiples of that (if not tens of multiples) and for them the 50% tax rate means a lot of money.
    But the far bigger issue is the message this sends that bigger tax cuts are on the way in the future and that the rich are fair game for punishment. You might agree with that but it pushes people out of the country and stops them coming here. Also dont forget that in Europe you actually get decent state schools and state healthcare for your taxes and it was only the low british taxes of recent decades that made it sensible for most Europeans to come to London and leave that behind.

  9. August 26, 2009 at 12:57 pm

    Rufus, again, I’m not disagreeing with some of your sentiments but you haven’t actually provided any evidence to back up your case – just surmise.

    In answer to you, I’d say that the people earning vast quantities of money probably won’t be hugely affected by the 50% tax rate: they have accountants to negotiate their way around that, not to mention offshore tax havens and investment portfolios that get them rebates. It is more likely the ‘middle earners’ c£200,000 per annum, who will suffer.

    As for whether or not I think that’s an obscene amount of money to earn, speaking as a teacher on barely £20k after tax, yeah I do. But that’s not what is at issue here. If £200k was the most people earned, well let’s just say the more equal a country is, the less poverty and crime it tends to face.

  10. Rufus
    August 26, 2009 at 1:19 pm

    If there is less tax revenue there will be more poverty as the public sector will have to shrink (the money don’t come from anywhere else). It will soon shrink dramatically following the election – whomever is in power – as the UK really is broke – we just had the worst monthly current account deficit in our history.
    I can’t give you many more stats because this is a change that is happening now. Because I work with these people I see them preparing to leave, interview for jobs in Zurich, New York, Singapore etc, put their houses up for rent and enroll their kids in foreign schools. The taxes aren’t the only reason – they are simply a tipping point because the UK is fast on the road to providing US levels of public service with Scandinavian levels of taxes (not to mention the weather, crime and generally poor quality of family life in the UK).

  11. yorksranter
    August 26, 2009 at 1:45 pm

    One of the things I dislike about a HPC is that there is an obvious response to it – pay out the cash as profit rather than as salary.

    There are various ways of doing this, but the obvious one is to make the big earners shareholders and give them their money as dividends. Or you could convert (back, in many cases) into a limited partnership, in which case the distinction between wages and profits collapses for the partners. More crookedly, you could have people become self-employed suppliers to the company, setting the price of their services deliberately silly high.

    Or you could just decide to let the shareholders skim the extra cash. Either way, it doesn’t do much, if anything, for the office cleaners.

  12. August 26, 2009 at 1:54 pm

    Rufus: again, I agree with a lot of what you are saying – but actually now you are contradicting yourself. If people are leaving because tax is too high for too low a standard of public service (and bad family life, which, incidentally is connected to the sort of throw-away lifestyle engendered by the type of capitalism Britain represents) then they aren’t leaving merely over taxes. And on that score, Cameron and the Tories will be no different: relatively high taxes – though more of them on the poor and middle class – versus continued outsourcing and privatisation of public services.

    Yorksranter: I agree about the office cleaners, which is why I haven’t put my name to the HPC.

  13. August 26, 2009 at 9:48 pm

    Rufus – our economy is going to have to be more focused on agriculture, manufacturing, and extractive industries than the financial sector. Hence the government talk about food sovereignty and an industrial strategy.

    yorkshire ranter – I think you miss the point. As a demand, a HPC might not be perfect, but it focuses people’s minds on issues like why hardworking cleaners are paying a greater percentage of their income in tax than the suits whose offices they clean. The bigger the list of signatories, the bigger the fear of the ruling class. And we want them on the back-foot, don’t we?

  14. August 27, 2009 at 12:14 pm

    First, apologies for being late back to the conversation. As a generality, I should say that I’m never going to be capable of the kind of rapid fire conversation that Dave manages to engage in on his site, the like of which never ceases to amaze me. I am both less clever and, I suspect, less online. I will always try to engage with individual comments because that willingness to take on debate is what marks out TCF and what makes it one of the best on the blogosphere, whether or not you agree with the content of the OPs’; it’s very much his creation and with his ‘mark’, despite his occasional protestations that it’s a collaborative blog, but I simply can’t promise to do it as well as befits the blog.

    To the matter in hand, as best I can:

    Dave #5: One your first main contention about how Hay claims a causal link between extent of centralisation and welfare state extent, I’m afraid i’m stumped. I can’t see that assertion by Hay in the quote I provide, so you may be referring to the book, which I don’t have to hand (it was from library but I copied the quote for later) I don’t remember that bit. Can you, if you can be bothered, refresh my memory (again)?

    As regards the downsides of corporatism, I couldn’t agree more. My aim in the OP was not to defend this way of doing things, merely to point out that even within its constraints it offers a better model, in the eyes of FDI decision-makers, than the alternative ‘Anglo’ model. A limited point, I acknowledge, but focused on the idea of the ‘self-serving, and more importantly self-fulfilling prophecy that Hay brings up in more general terms (the globliasation thesis is merely an example of the broader ‘we get what we wish for’ structure/agency in-context-of-power-relations complexity model.

    Dave ad Rufus #6-#11: it will come as little surprise that I side squarely with Dave in this one. Not only is the article Rufus uses tendentious in the way Dave sets out, it is also a part of the very self-serving mythi building, in just the same way as the WSJ article that Nick points to at #1. I said in my OP that some people may decide to leave, either because they have been fed enough of the WSJ line to make them believe it – wine bar discussions can also be self-fulfilling – or for the other reasons Dave sets out as examples. More importantly, the article and all evidence presented tends to come from the ‘high finance’ world, and are not reflective, I contend, of the wider mega-earner culture (the 200k example is my random one by the way, not Toynbee’s). As Charlie says at #13, the challenge in any event is to move away from high finance as a relative precarious GDP growth etc, to ‘proper’ industries.

    Rufus #10 etc: as a general comment, I’d contend that those who suggest we can’t afford to let the higher earners go by taxing them too much are the same people who argue that it’s not worth raising the tax too high because these mega-earners will find ways of avoiding the tax anyway. There’s a lot of eating cake and having it too there.

    Yorksranter, Dave, Charlie at #11,#12, #13: I’ve actually changed my mind a little bit about the HPC over the last week. Initially I was firmly in the YR/Dave camp that the target was wrong, and that the call deflected from the real issues of low pay, but in fact – whether deliberately or unintended consequence – the call for the HPc has raised some of these issues, as Charlie contends, I think, albeit within a very limited circle ie. the liberal media/blogopshere intelligentsia. I’ve no huge problem with the HPC, but I’ll be put my efforts – such as they are – eleswhere, as i think they’ll be better spent focused on the LPC effectiveness (or not) discussion that Nick at @1 has sought to engage with (and I’ve not yet done a main OP about).

  15. August 27, 2009 at 1:07 pm

    @Paul; I may be mistaken as to the author – the text I’m referencing is the second block of text that you quote in your article. Re-reading your article, the text might actually be from the back cover of Duane Swank’s book.

  16. August 27, 2009 at 1:30 pm

    Dave #15: Ah, that makes sense now – would have been worried if Hay had come up with such nonsense. Again, the Swank book is back at the library (I actually photcopied the backcover for future ref) but from memory a lot of the wider political analysis is not very illuminating, and in this case (albeit he’s only identifying decentralisation as one factor) he’s plain wrong, but that doesn’t invalidate my general argument based on his data.

  17. August 28, 2009 at 7:51 pm

    Nice blog, good writing!

  18. Barney Stannard
    September 2, 2009 at 11:18 pm

    Far too late I know, so I won’t expect a reply. I have only recently discovered this blog, so I’m taking the opportunity to go through the back posts and add tuppence whenever I think it might benefit (which isn’t often)…

    Absolutely agree about the flight of the rich individuals, particularly now there is this global campaign against tax havens. The few that will move will be the Hedgies, but most of them have gone bankrupt anyway… The majority of banks, brokers and the rest are all piled into the Square Mile and Canary Wharf for a reason – it’s so much easier to talk to clients and all the infrastructure and expertise you need is there. Good evidence of this is Numura upping sticks from Lehman’s old Canary Wharf ground and pitching in the Square Mile.

    Secondly, there is absolutely no evidence that higher (to a degree obviously) corporation tax causes firms to relocate. KPMG did an excellent report on this two or three years back (or maybe even more recently). There are far more important things to most businesses than marginal differences in corporation tax.

    But the “firms leaving” argument isn’t the only (or a particularly logical) argument against raising corporation and “high-income” income tax. This is clear because most anti-tax arguments actually originate in closed economy models. The arguments these models make are (at least) twofold: first that high taxes lead to ultimately lower tax takes; second that they are distortionary, and therefore lower economic efficiency. The net result of both is argued to be no benefit to anyone.

    Briefly taking the first argument: this is not the Laffer curve in pure form. It is a long run version e.g. productive potential of firms is lessened by higher taxes each year, so by (say) 20 years or so time the compounded loss of growth leads to a net (over those 20 years) reduction in tax takes.

    The distortionary argument is very similar. Basically it says that higher taxes will shift expenditure from high producing activities (investment) to low producing activities (government spending). Given the amount of Government money spent on healthcare and education I somewhat doubt this argument cuts too much ice.

    The open economy argument is that by raising tax rates you increase the rates of return that firms’ projects need to reach in order to be viable. This will push capital overseas to projects with higher rates of return. Firms don’t up and move, but banks redirect their capital from, say, UK firms to Brazilian or Turkish or German firms.

    The evidence cited in the original post (the net inflow to high tax, high regulation countries) isn’t prima facie very strong (though I’d need to see the stats to say for certain). The huge inflows into the developed world (with its relatively high corporate taxes [because avoidance here is actually hard, unlike a lot of the developing world where I could probably avoid corporation tax], very high labour costs, and fairly stringent regulation) are to do with the savings rates in China et al creating a vast savings glut which had to leave those nations and head over here (particularly the US where it was given to lots of poor people with big mortgages to get into debt with – cue subprime).

    The argument is pretty static, so it ignores the long term benefits of healthy, educated workers with a good standard of living, that higher taxes bring about. Ultimately growth is a function of capital stock – part of which is labour (in a technical sense). Getting the balance between short term physical capital stock growth, which relies on high corporate profits, and long term labour capital growth is very hard. I have no idea of how you would go about projecting the “right” level of tax, as past data comes from a very different set of economies.

    Not sure where that went…hope it was of some interest.

  19. Barney Stannard
    September 2, 2009 at 11:20 pm

    Oh and as for the “financial services aren’t proper industries – we need to make things” argument… Quite frankly, a load of cobblers. I can’t really even be bothered to elaborate. Yes, finance is probably too big in the UK, but really…

  20. September 3, 2009 at 8:19 am

    Barney, your comments on taxation are very considered what do you make of the argument about incentives? It’s become something of a “given” that bonuses caused excessive risk-taking, but I feel this is unlikely to have been a major causative factor.

    That said, you seem to be questioning the concerns people have about the decline in domestic manufacturing and agriculture when you say the “we need to make things” argument is “cobblers”. Are you of the opinion that we should not worry ourselves with actively rebalancing the economy and allow a correction to take place?

  21. Barney Stannard
    September 3, 2009 at 8:54 am

    Bonuses…rather a tricky one. It is something of a political given that they caused excessive risk taking, whilst many economists and financial commentators are rather less sure, including those who are rather anti-banks.

    It is certainly the case that the current bonus structure didn’t help: very high short run bonuses don’t fix peoples’ interests in the long term that much (though obviously it is in their interest to earn massive bonuses for as long as possible). Certainly corrective work needs to be done: what I don’t know – I don’t work in a bank, so I simply don’t know what they’d respond to, though stock options seem quite a good idea.

    I would argue that far more important was the system itself. I could quite literally talk about this all day, but restricting myself to points relevant to bonuses.

    (a) That the risks were so great was very unclear. Subprime shouldn’t have done so much damage; it was some rather nasty unforseen consequences that led to the crisis.

    (b) Even if you thought the risks others were taking were excessive, there was an awful lot of pressure to join in, otherwise investors would held elsewhere. There is a famous quote from the then CEO of Citigroup in about 2005/6, where he says “It’s like musical chairs. While the music’s playing you have to keep dancing, but I’m not sure how many seats will be left when it stops.”

    So whether the bonuses were high or not, sufficiently similar behaviour may well have occurred.

    Re the “making real things argument” there are two strands. The first is that finance is too big which causes us to be unstable and unheathily takes away talent from other sectors of the economy. There is probably something in this. Certainly it is probable that a lot of clever people are in the City doing jobs which earn a lot of money but don’t add much value to the economy. What this argument entails I’m not sure. Maybe finance will shrink as saving rates in Asia fall – maybe it requires nudging (e.g. with a Tobin tax). I don’t know.

    The second strand is that finance isn’t a proper job. I think someone above hinted at that, though maybe I am doing them a disservice. Quite frankly finance is really very useful. It is crucial that capital is directed to the right investments. This maximises the value added by this capital and, barring distortions, should maximise wealth (How this is distributed is of course another matter). The City, whether it is brokers, traders (or speculators as you may prefer to call them), corporate financiers, private equity etc etc is all part of this. Each job has its specific role to play.

    The City taps into a wider trend. In the UK we have a very highly skilled workforce and very good high-tech infrastructure. We should concentrate on intellectual jobs – this is where we are stronger than the developing world. This of course includes high-tech manufacturing – Silicon Valley, whilst not British is an excellent example of what I mean. There is also a strong positive correlation between these kind of jobs and life expectancy expressed in quality of life years, even accounting for income differences inherent in the social makeup of those employed in the different sectors. Perhaps the Silicon Valley example lends fuel to the fire of those who say the City is too big. But it also strengthens the case for freerer immigration and better education.

  22. Nick
    September 3, 2009 at 3:28 pm

    Sorry, was just passing through when I saw the exchange with the other Nick – different one I’m afraid. (I’m the NMW one if this isn’t too confusing.)

  23. September 3, 2009 at 10:30 pm

    You hit the nail on the head about finance jobs being useful in concentrating wealth, Barney – and this process causes some upheaval here and around the world. And that’s why there’s plenty of complaints.

    Since the banking crisis has led to mergers, many more highstreet branch closures will take place – and I expect there will be greater sympathy for those facing redundancy, but there should be sympathy for those in the City who have been made redundant.

    Btw, Barney, what do you make of the argument made by Will Hutton and others, that we need regional development banks and that we lack the investment infrastructure…

  24. Barney Stannard
    September 4, 2009 at 12:14 pm

    Will Hutton is an interesting one. I am sometimes impressed with the strength of his arguments, but too often he writes in such a condensed and assertive form that I don’t really follow him: I understand both his premises and conclusions, but the bit in the middle seems to escape me.

    As such I don’t usually bother to read him that much. So I don’t know too much about his regional banking ideas, or his comments on investment infrastructure. What I could find was pretty sketchy, so I caveat all my comments.

    That said, the idea of regional banks is highly problematic. Regional banks find it very hard to avoid highly correlated assets. House prices, employment rates, business profits etc; all tend to rise and fall together within a region. Banks that only lend in this region are thus exposed to a lot of risk, because their bets are in very few pots. A national or international bank has a much wider choice of assets and can therefore lower the correlation of the assets it chooses to hold, therefore lowering its risk. The classic example of this is the collapse of thousands of US banks in the Great Depression. There is good evidence that larger banks with greater geographic spread of assets were more likely to survive that period.

    As a coda, one of the primary ideas behind securitisation is that it allows banks to diversify geographically without having to expand their infrastructure. It is this reason that Lord Turner cites in his report when assessing how to regulate these products.

  25. September 4, 2009 at 9:26 pm

    I think his argument is something like we need regional banks, not geared towards profit maximisation that will lend to businesses. So I think he’s talking about combining the function of regional development agencies with lending.

  26. Barney Stannard
    September 8, 2009 at 8:32 pm

    That seems to me like it would suffer from excessive concentration. Also, it brings to mind another point; RDAs are repeatedly criticised for failing to support cross-regional investment. They are overly focused within the arbitrary regional boundaries.

  1. November 22, 2010 at 7:48 pm

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