Private Eye doesn’t understand economics

Private Eye Queen 650

I have been reading Private Eye regularly for more than four decades and the latest edition is the most rabidly left wing one that I have ever read. It could have been written by Len McCluskey or James Purnell. And it starts with a leader article that shows stunning ignorance of basic economics, corporate finance, taxation and fiscal policy.

Basically they are having a very misinformed whinge about George Osborne reducing Corporation Tax from 20% to 18%.

Firstly let’s take a look at the history of UK Corporation Tax rates:

Tax corporation 650

As you can see Corporation Tax has been going down steadily since the early 1980s, no matter what shade of government is in power. There are extremely good reasons for this and if Private Eye understood these reasons then they wouldn’t have written an article that makes them look so silly.

The first thing to understand is that Corporation Tax is an extremely bad tax. When a company looks after its customers and is successful it earns money. This money is called profit and is the main engine in our economy. Corporation Tax is a tax on profit. But it is not a tax on all profit. Profit distributed to shareholders as dividends and profit given to employees as bonuses attract income tax. It is profit retained and used by the company that attracts Corporation Tax. It is this profit that is used for investment, productivity improvement and job creation. So taxing it causes direct economic harm as it removes the most important money from the economy. Corporation Tax is a government shooting its own country in the foot.

Secondly much economic activity is by companies that have international, multinational or even global activity. To quite a large extent they can move this activity around and there are several factors that drive them to do so. Many reject the UK, for instance, because Heathrow is such an execrable airport. But a major factor is obviously the Corporation Tax they have to pay, so the tax rate become competitive between countries. Simply lowering it gives a country a bigger economy as corporations shift their activity towards it. Ireland has built its economy on having a low Corporation Tax rate. This is so important to them that during their recent economic crisis they did not put it up. This policy has attracted companies such as Pfizer, Cisco, Apple, PayPal, Twitter, Amazon, Microsoft, Facebook, Linkedin and so on. The rate of Corporation Tax in Ireland is 12.5%.

Corporation Tax competitive rates 650

The third reason is somewhat counterintuitive. This is that the relationship between tax rate and tax collected is extremely non linear. So if you double a tax rate you might expect to double your tax take, when in the real world it may go down. Likewise if you halve a tax rate you may expect the tax take to go down when in reality it might go up. This is because people and companies adapt their behaviour according to how they are being punished. This has been proven very many times. When Alistair Darling increased the top rate of income tax from 40% to 50% his take from the people who paid this went down. When George Osborne reduced the top rate to 45% the rich paid a lot more. If he reduced the top rate to 40% he would probably collect more still. In economics this is called the Laffer Curve.

Laffer Curve Proof
Laffer Curve Proof

The left hate the Laffer Curve because they want to impose high tax rates on the rich out of pure spite and envy, not as efficient ways to finance the government. Private Eye seems to have fallen into this trap.

Envy graph 650

 

One hopes that this particular Private Eye article was written by an intern on vacation from a liberal arts degree at a polytechnic university because it shows no intellectual rigour or critical thought. It is just an ignorant Pavlovian reaction.

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1 Comment


  1. I agree entirely. It has been proven beyond doubt that reducing tax rates is highly beneficial too the economy & actually increases gross government revenue.

    The Left will never understand this as they are driven by envy and have no desire to do other than impose their will; by force if necessary.

    Reply

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