Economic illiterates of the day (7)

While perusing the IFS site for the original press release on which this story was based, I stumbled across a fine piece of f***wittery entitled "Globalisation demands reform of UK corporation tax".

*Sigh* let's look at a few basic facts, first:

1. Globalisation is a good thing, it has been around since the globe was invented, whatever rules you invent, 'globalisation' (aka free markets) will adapt and work its way round them.

2. If you can choose from different countries where to set up a business, tax is not top of the list. Depending on the type of business, you ask: Does it have a stable legal system, rule of law, security, honest government officials? Then you look at costs - what are wages, rents and raw material prices? How good are transport links (for people or finished goods)? How reliable are banks, telephones, power supplies? If a country ticks all those boxes, only then do you worry about the tax system - and its not just the headline rates that matter, simplicity and stability is just as important. For example, corporation tax is higher in India and China than in most of Europe and they don't much adhere to the 'rule of law', but the wage differential is so huge, that doesn't matter much. Similarly, corporation tax is higher in the USA than in most of Europe, but their Sales Tax is much lower than European VAT (the worst tax of all).

3. Before we worry about 'encouraging FDI', let's worry about existing UK businesses. If the UK is an attractive place to do business, then we don't need to worry so much about FDI - there'll be plenty of UK businesses expanding here, rather than relocating abroad. If they locate manufacturing in the Far East, there's not much you can (or should) do to stop them. If you're worried about UK businesses relocating largely for tax reasons, then I've got a list of the main changes that would make the UK more attractive here.

4. There's one tax I missed off that list - and which the IFS press release doesn't even mention - Business Rates. Let's assume that we stripped out the buildings element from the valuations and harmonised the rates for occupied and unoccupied sites and allowed local councils to keep all the proceeds (rather than it being pooled nationally). Let's bung in Stamp Duty Land Tax and corporation tax on capital gains for good measure and rename it 'Site Value Rating'.

5. Now, there are plenty of things on a business' checklist (see point 2 above) that local councils can influence. Let's take for example Crossrail. Let's imagine that Bill Gates, in a moment of generosity, stumps up the £12 billion it will cost to build, and off we go. Who benefits? Will businesses benefit? Well, yes, of course, but by the same token, their rents (actual or notional) will go up. So who benefits most? People who own land and buildings around where the stations are, as they'll be able to charge higher rents (or sell their land for higher prices).

6. So why not do a proper cost-benefit analysis. Assuming an annual running cost (operating losses, interest payments and amortisation) of £1 billion, would the rental value of properties in the Crossrail 'catchment area' go up by more than £1 billion? If yes, it's worth building, if no then it isn't. If the potential increase in rental values seems low, then assume that planning permission will be more generous and re-run the exercise.

7. Let's assume that it is worth building, then as long as Site Value Rating (and Land Value Tax on residential land) collects the bulk of the increase in rental values, the project is self-financing! And if the extra proceeds exceed the cost, they can be used to reduce other, more damaging taxes (VAT and National Insurance).

8. Now, going back to a business thinking of setting up in the Crossrail catchment area. Has the area got good tranport links? Yes, obviously. Are the rents value for money? Well, they probably are, as they are market rents . How about taxes on production? Well, they've just been reduced and simplified (the landlord has to absorb the SVR - he can't charge more than market rent, can he?), so that makes the area more attractive as well. (and yes of course, gummint spending and the corresponding tax burden is far too high, but I'm trying to explain why Site Value Rating is the least-bad tax).

Trebles all round!

But, getting back to the IFS press release, it kicks off by saying "Corporation tax should be reformed or replaced by a higher VAT rate (offset by lower National Insurance contributions) to reduce disincentives to invest in the UK..."

*Bleurgh*

There are a couple of bright ideas, like harmonising tax rates between corporate and personal income, but this is cancelled out by the other dross, a lot of which is self-contradictory anyway.

PS, I did find the press release on the education funding story, but apart from giving a wonderful opportunity for the inevitable sarcastic remark, it wasn't particularly interesting.