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Thursday, June 19, 2014

Going Beyond Maurice Saatchi's Cutting Corporation Tax Idea

    Maurice Saatchi has produced for the Centre For Policy Studies (and implicitly for the Tory Party) a proposal to abolish Corporation Tax for all but the 10% of largest companies and also abolish Capital Gains Tax for the same people. Saying

"The Policy outlined in this document will:
 abolish Corporation Tax for 90% of UK companies
 reduce the deficit faster than predicted by the OBR 
 expand employment faster than predicted by the OBR
 increase competition and challenge Cartel Capitalism
 let millions of people grow tall. 
These millions of individuals will enjoy:
 the opportunity to say “I am the captain of my ship”
 more money
 more freedom
 the first step on The Road from Serfdom.
The nation as a whole will benefit from:
 a change in culture as big as “Own your own Home” in the 1980s
 greater economic growth and lower unemployment than forecast by the OBR
 more competitive market places
 more freedom and independence from Big Government and Big Companies."
 

   I have been pushing for CT cuts since before I started this blog in 2004. Basically following the example of Ireland where they cut CT, in a series of steps to 12.5%, and reduced regulation, particularly on housebuilding and achieved a 7% average growth rate.

    So what do I think of Saatchi's slightly different proposal? It is an improvement. His is costed at £10.5 bn. Mine of cutting all CT by slightly more than half would cost just over a billion more. Not much difference. However by concentrating it all on smaller companies he gets some advantages - smaller companies provide more employment growth; smaller companies tend to be more innovative, until they grow into bigger companies; smaller companies have more difficulty borrowing so profits are more important for expansion.

    He also has the advantage of being able to run it through an economic model. Lets take advantage of that.

    The conclusion is that this £10.5 bn cut would increase growth by about 0.8%, though not in the first year because the investment has to work through. That means that by the end of a 5 year Parliament that growth would have replaced all that tax cut. Saatchi says that this 0.8% estimate is "conservative" and I agree. Indeed that is 1 of 3 reasons I believe the position is much better than he offers:

1 - Irish growth was 7% - 4.5% better than ours. Even if we assume more than half was due  to the regulatory cuts (not the common feeling but probably true) and that, because Ireland is so much smaller than us, having lower taxes opened them up to proportionately more investment than us we still come out with the growth potential being around twice the 0.8% given. Also Irish growth did not take a year to take off and this is reasonable if investors see an improved investment opportunity - they will not wait, but start investing immediately, if they can.

2 - Increased national debt is only a problem in relation to the size of the economy. If we have growth of an extra 0.8% in the economy, debt can increase the same without making payment more difficult. Indeed if the size of government is unaltered there is actually proportionately more uncommitted money in the economy, though this is only a marginal effect.

Our current national debt is £1.4 trillion so 0.8% is £11.2 bn, just slightly above initial and maximum borrowing.

3 - If you have a growing economy you need to increase the money supply to keep prices stable. Money in UK circulation is rather larger than 1 year's gdp. In fact it was £2,200 bn in 2010 - presumably about £2,400 bn now. So an extra unexpected 0.8% growth means we can and should print £19 billion extra.
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   This is not estimating conservatively but it is the realistic best estimate and if we don't do it there is no reason to believe reality will be conservative either.

    So clearly we should go with this asap.

   I would go further - promise that the take on CT and other business taxes will not be allowed to rise - if the economy grows, as it will, increasing the tax take, we will raise the level at which CT comes in (and when it is fully abolished, business rated and other such taxes). This means investors can look forward to a stable profitable investment, which is all they need.
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    But I would like to see this as merely the start.

    The formula for economic growth is:     Economic Freedom + Cheap Energy

    Low business tax is only part, the smaller part, of economic freedom. The greater part is not having parasitic state regulation. At least tax money goes back into the economy, albeit in less efficient ways and excluding the cost of government taxing and returning it. Wealth destroyed by regulation, for example 98% of the cost of electricity, is gone forever.

   So we should should cut regulations wherever possible. As a minor effect that also cuts government spending a bit - it costs government all of 1/20th, to regulate, of what it costs the productive economy to be regulated.

75% of housing cost is regulatory - 34% X 75% = 25.5%
(I assume this includes heating it)

The EU regulations come to another 5%
(assuming the cost is equally borne by the people as by the government sector which is an optimistic assumption)

Remaining portion of income that goes to the value of what we actually choose
100% - 25.5% - 5% =69.5%

That 69.5% is, in turn reduced proportionately by all the other factors. Take off commercial building costs (est 2.5%), electricity charges through the rest of the economy (est 2%),accountancy (7.5%), child care (est 2.5%), assorted other (est 10%)
Total 24.5%

Therefore percentage of income we nominally get to spend which we actually get in our pockets & spent on the product not the surrounding regulation
69.5% X (100% - 24.5% = 52.5%
  
     But if the regulatory part of economic freedom costs us more than the tax part the other side of the equation, cheap energy has even more potential. Roger Helmer has written of the advantages of letting decisions on electricity be made on economic not ideological grounds.

    The correlation between growth in energy use and in gdp is undisputable.

Enerconics1_html_m68263661
        It has been calculated and indeed is undisputed that app 98% of the cost of producing electricity here is governmental parasitism. 

       Nuclear is currently 40% of the average cost of our power basket.
China is building at 0.27 our costs.

Because China is building in three years and us in ten we have seven years foregone income while paying interest – assuming the normal 10% return that is 1.10^7 = 1.95
Assume China is not entirely without state parasitism – say 10% 
VAT and carbon levies 20%
How much could cost be reduced if it was allowed to mass produce reactors - three fold seems a conservative estimate.

60% X 0.27 X 1/1.95 X 90% X 1/1.20% X 1/3 = 0.0208 or 2.08% of current costs.
97.92% parasitism.
       Major reductions, not quite as major, could be done by allowing the market to produce shale gas. Any reduction on electricity costs, not just one as major as this, if the laws of supply and  demand work, would produce a many fold increase in energy use and therefore a many fold increase in gdp.

       Indeed I have previously proposed a 24 point programme to the world's fastest growth, which includes my original CT cutting proposal, and it would work. Theoretically we might expect most of the proposals to increase growth by about an average of 2% a year, Some more, some less.

       In practice we might be limited to a bit above the 20% growth Guandong province in China managed for years. Certainly the theoretical maximum, if we make growth our "Number one priority" (Scottish labour leader Jack McConnell promising at 2 elections - he knew what people want even if he lied about giving it) cannot be lower than the actually achieved maximum.

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      Saatchi's proposal is a very good one, well thought out and verified. It is a small fraction of our potential.

       

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