Charles Elphicke: Gordon Brown - from Sherriff of Nottingham to King of Inequality

Charlie Elphicke is a research fellow of the Centre for Policy Studies and Deputy Chairman of the Cities of London and Westminster Conservative Association. In this article he highlights the ever-widening gap between the poorest and the richest under Gordon Brown's misguided tax and benefits systems.

Remember the legend of Robin Hood? It is a ripping yarn with all the ingredients of a good old fairy tale. A good guy, Robin Hood and a bad guy, the Sherriff of Nottingham do battle. The good guy wins and all ends happily when good King Richard pops up at the end and puts a stop to the unjust taxing of the poor. Everyone lives happily ever after.

Move from medieval times to the present and the new millennium sees a harsher reality. Here is the latter day Sherriff of Nottingham, Gordon Brown, increasing the proportion of taxes paid by poorest, while cutting benefits. Yet he is not sent packing in ignoble disgrace. No, he is about to become the King. Yet it is hard to think of a person less deserving of the crown. For he is the King of Inequality.

Charles Elphicke: A little knowledge is a dangerous thing, a lot will make you rich

Charlie Elphicke is a research fellow of the Centre for Policy Studies and Deputy Chairman of the Cities of London and Westminster Conservative Association.

Whether it’s the cost of our homes, running a motor or simply enjoying a family day out, year on year these costs increase faster than our pay rises.  This is why so many people have a sense that we are running faster, only to stand still.  One way to increase earnings is to increase the knowledge and skills of the workforce.

We are saddled with a Government stuck in cold management speak, going on about all the dangers of the modern world.  It talks endlessly about globalisation, productivity, outsourcing, China and India.  Yet it fails to chart a strong course ahead.

When we return to Government, at the heart of our programme must be to make Britain an economic powerhouse.  Our country should be a more positive, proud, innovative, vibrant, cutting edge and richer place to live in.  Each and every one of us wants to be more wealthy, yet we want to be richer in terms of our sense of wellbeing and enjoyment of life.

Charles Elphicke and Stephen Hammond MP: Halving business taxes would help make Britain richer

Stephen Hammond MP is Member of Parliament for Wimbledon and a Shadow Transport Minister  Charlie Elphicke is a partner with a leading international law firm, a research fellow of the Centre for Policy Studies and Deputy Chairman of the Cities of London and Westminster Conservative Association.

Time was when UK business taxes looked inexpensive and the UK was seen as an attractive location for inward investment. Not any more.  Britain’s business taxes have stayed at the same level while other countries have been making big cuts. This, combined with an increased regulatory burden, has not only ceased to make the UK a location for inward investment but is forcing UK domiciled companies overseas.

The international evidence shows that we can cut business taxes without losing revenue – and at the same time boost inward investment, jobs and prosperity.  So why not do it?  In fact the evidence indicates that we could reduce taxes for large businesses from 30% to 15% and small business taxes from 19% to 10% over the course of a Parliament. 

Why cutting business taxes will be good for Britain

Cutting business taxes means that the incentive to avoid tax, and the complexity of tax legislation, is reduced. Business would benefit from greater simplicity, lower compliance cost and less money wasted on tax compliance.

And it’s a big, bad world out there.  Globalisation has taken hold whether we like it or not.  We are in competition with other countries and this includes tax.  The 2006 KPMG annual tax survey found that the average business tax rate in the EU is 25.04% and OECD 28.31%.  In 2000, the average OECD rate was 34.1%, and the EU was 35.44%. 

So while in Britain we have been standing still at 30% under Labour, our competitors have cut business taxes on average by 8-10%.   The result is that non-oil business tax revenues have been pretty flat at a time when the economy has been growing.

Cutting business taxes will not mean lower revenues

A number of countries have reduced business taxes with striking results:

• Ireland cut its corporation tax rate from 38% in 1996 to 12.5% in 2002 and saw business tax revenues rise by 170% between 1996 and 2002.
• Australia reduced its corporation tax rate from 36% in 1998 to 30% in 2001. Business tax receipts rose by 116% between 1997 and 2004.
• South Africa reduced its corporation tax rate from 35% in 1998 to 29% in 2004. Revenues rose by 259% between 1999 and 2004.

Other countries have not reduced business taxes and seen stagnating revenues:

• The UK business tax rates remained at 30% between 2000 and 2005. In 1997 were £30.4 bn - in 2004 receipts had increased by 12% to £34.1.
• The US has a 35% rate of Federal Tax plus State Tax (usually around 5%) making an overall corporate rate of about 40%. In 2000, revenues were $255 bn and had barely increased by 2004.
• Japan has an effective rate of corporation tax that can reach 41%. It saw revenues fall from ¥18,720 bn in 2000 to ¥18,075 bn in 2004.

It is not a given that a drop in the tax rate will always produce a rise in tax revenues, especially in the first period after the cut. However, the evidence tends to suggest that a drop in rates will raise revenues and the J-curve effect predicts that this effect will increase over time. What does seem certain is that tax revenues will not fall in the long run - and therefore the sterile debate about tax cuts vs. public expenditure does not hold validity for corporate tax rates.

Less tax means more inward investment

Countries that have been cutting their rates of business tax have seen benefits from higher foreign direct investment (FDI).

The countries which reduced corporate taxes between 1995-2004 saw the following increases in FDI:

• Ireland: net FDI inflow of US$92.7 bn.
• Australia: net FDI inflow of US$44.4 bn.
• Czech Republic: net FDI inflow of US$39.4 bn.

In contrast, those countries which did not reduce their business taxes saw the following reductions in FDI:

• UK: net FDI outflow of US$404.1 bn.
• Japan: net FDI outflow of US$223.5 bn.
• US: net FDI outflow of USD $50.2 bn.

So let’s make Britain richer

We believe that in sharing the proceeds of growth between public expenditure and lowering tax, business taxes should be a foremost priority. The halving of business taxes over the lifetime of a Parliament should increase tax revenues over that period, accelerate economic growth and cause inward investment to return. Indeed, a consequence of lowering business taxes, cutting regulations and introducing business-friendly policies would be that the City of London would be the financial centre of choice in the European time zone.

Brooks Newmark MP and Charlie Elphicke: Next steps on tax for the Tories

Brooks Newmark MP is Conservative MP for Braintree and a member of the Treasury Select Committee.  Charlie Elphicke is a research fellow of the Centre for Policy Studies and Vice Chairman of the Cities of London & Westminster Conservative Association.

Tax cuts of £21 Billion were proposed by the Tax Reform Commission last week. The proposals represent one of the most radical tax shake ups in history. However, Shadow Chancellor George Osborne is right when he says that economic stability must come first.

Yet, those who worry about whether we have gone soft on taxes should draw comfort from the fact that George Osborne has made it clear that he does believe in cutting taxes, when affordable.  And quite right too as all this tax is not holding back our pockets and our choices - it is slowing the future growth and prosperity of our nation.

As has been commented on this web site before, what happens with the deficit in the public finances and the scale of public spending is going to be critical, but would obviously be a premature debate at this stage. So the Commission cannot be seen as a ready-made agenda to be taken off the shelf, dusted down and implemented in 2009. For that would result in an unfunded mandate and would run counter to Shadow Chancellor George Osborne's quite proper determination not to be reckless with the public finances.

The Commission report is best seen as an expression of priorities to be engaged in as and when affordable by a Shadow Chancellor that does believe in lowering taxes when possible.

Charles Elphicke and Stephen Hammond MP: Taxcutters versus stabilisers?

Charlie Elphicke and Stephen Hammond search for some harmony in Tory economics.

Once again the Conservative Party faces the great choice – promise tax cuts or promise stability and spending. Strong views are expressed on either side.  The tax cutters say the voters are finally fed up with being overtaxed and will respond.  The stabilisers says that if we dash for tax cuts, we will throw away the hard won lead the Conservative Party has achieved in which party is most trusted to handle the economy. 

But is there really a disagreement when we stand back from the rhetoric and look at what is really being said?

Labour’s record

Labour’s record on tax is dismal.  Never has a Government taxed so much and wasted public money with such a vengeance:

• By the time of the next election, the tax burden will have gone up 4.2% of GDP compared with 1996/97;
• Since 1996/97, the tax burden has increased by the equivalent of £6,182 a year in real terms for every household in the UK (or by £9,098 in cash terms);
• Between 1996/97 and 2009/10 (the time of the next general election), the tax burden is forecast to rise by £8,153 a year in real terms for every household in the UK (or by £12,881 in cash terms);
• The poorest in our society face the highest marginal tax rates
• Taxes still year are £492 Billion.

So not great.  And since much of the tax rises have been by stealth, the poorest are picking up a lot of the tab.  So much so that all Labour’s redistribution appears to be cancelled out by higher taxes.  The result is that the poorest have not done better overall than the rest of the population under Labour.

Worse still, all those extra taxes are holding us back.  All Labour’s extra taxes are cutting Britain’s growth by up to 0.5% a year – over ten years that would amount to our economy being 6% smaller than it should be.  It may not sound like a lot, but that 6% will amount to £3,143 less cash per household each year. So with Labour’s high tax policies, we are losing today and we will be losing even more tomorrow.

Most people want to improve their lot , would want their neighbour to do well (ideally marginally less than themselves) and their country to be a great economic powerhouse, the envy of the World.  The great Cecil Rhodes said you’d won the lottery of life by being born British and there is that little bit in all of us that really wants to believe it.  Labour’s high tax policies make the dream harder to believe …and to achieve!.

Stable tax cuts

The case for cutting taxes therefore rests on us all being richer, having more choices and cutting first taxes that fall on the least well off who cannot afford to pay.

The case for stability is based on the fear that the electorate will not tolerate any reduction in public spending – therefore tax cuts are out and any surplus must go to plugging Labour’s excessive borrowing and improving public services ahead of any reduction in taxes.  In other words, it presents itself as the mature, gravitas laden approach.  And as the economy grows, some of that growth will go to more spending on public services, some on reducing taxes – a sort of “judgement of Solomon” approach (except we do not know if it will be 50:50 or something else).

Within all of this, there are points of agreement:

• There is strong evidence that cutting business tax will be self funding and a spur to economic growth.  So a pledge to cut business taxes from 30% to 15% on this basis would please the tax cutter and the stabiliser;
• Pensioners and the poorest in our communities paying so much tax without the means to pay it is a blot on the political landscape and should be given priority;
• Britain should be an economic powerhouse and, frankly, growth shouldn’t be a problem if we ensure supply side freedom.

Moreover, the stabilisers’ case is that the proceeds of growth should be shared.  Let us take the example of the projected growth in tax revenue between now and the end of the current Parliament as a simple example.  GDP is projected to rise by £150Bn a year and the tax on this will amount to 39% in total  - after taking into account whole economy inflation (using a "GDP deflator") the extra annual tax will amount to around £50Bn a year. The stabilisers might argue that half of this amount should go to reducing borrowing and then reducing taxes while the tax cutters would be delighted to have a pot of tax cuts to consider. So is the gap really that great and is there room for a stable tax cuts accommodation?

On the face of it, applying the judgement of Solomon analysis, the tax cutters would be delighted to have a pot of £25 Bn of tax cuts to play with.  However, the fly in the ointment is that the stabiliser wishes first to get public borrowing under control.  So the real issue is therefore likely to be where the balance is to be struck between reducing public borrowing and reducing taxes in the Tory Government – and the potential accommodation lies in the balance being struck at a point that both the cutter and the stabiliser can accept.