George Osborne, we were told, would be offering a “Robin Hood” budget. It is a bold piece of branding, ranking alongside Jeremy Clarkson’s heartfelt environmentalism. In most ways after all, the chancellor with his privileged upbringing is an unlikely Robin Hood.
But Mr Osborne is trying to tap into something rather deep in the nation’s psyche: the idea that the country is stuffed full of super-rich bankers, tax-evading multinationals and Lear-Jet-riding non-doms, and that he, Mr Osborne, is keen to rob from them to give to the rest of us.
Movements such as UK Uncut argue that if only Mr Osborne had the courage to play Robin Hood, the deficit could be banished without the need for cuts or tax rises for ordinary voters. About £80bn a year should do the trick. But are £80bn a year of easily harvested tax revenues simply sitting there, begging for Mr Osborne to collect them?
It seems unlikely. According to the comprehensive Mirrlees Review produced recently by the Institute for Fiscal Studies, most corporation tax ultimately translates into lower wages rather than lower returns for shareholders. This is because investors with overseas options – that is most of them – will be tempted only by higher pre-tax returns. They will invest less, and with less capital per worker, wages will be lower. The attractions of corporation tax are mostly political ones – voters fondly assume that corporation taxes are a free lunch.
But leaving that to one side, the sheer magnitudes involved don’t add up. Corporation tax revenue peaked at £46bn just before the crisis, and according to a recent report from Oxford university’s Centre for Business Taxation, more than four-fifths of this is raised from the top 1 per cent of companies. The Robin Hood fantasy is that these revenues can be almost tripled on a sustainable basis – through a combination of tighter tax rules, more vigorous enforcement, and higher rates of corporation tax on large companies. Mr Osborne thinks otherwise, and proudly announced that corporation tax rates would be reduced faster than previously planned.
Mr Osborne is on the right side of this argument. Corporation tax revenue, relative to the size of the economy, has for three decades tended to be higher than in Germany, France and the US, in spite of lower headline rates of tax. Also, while headline rates have plummeted from more than 50 per cent in 1982 to less than 30 per cent today, corporation tax revenue has barely budged relative to gross domestic product.
Mr Osborne might claim that lower headline rates of corporation tax lead to higher tax revenues. That is unclear. But all the Merry Men in the world will not triple corporation tax revenue. If any government were to try, businesses would scramble to relocate their operations – or perhaps just their accounting profits – to somewhere a little bit less, um, Robin Hoody.
What, then, about income tax? The chancellor dramatically failed to rob from the rich here: his increase in personal income tax allowances will not benefit the poorest, who pay no income tax anyway, but it will give a welcome boost to those in the 40 per cent tax bracket, who have as much to gain as anyone from higher allowances. Could Mr Osborne have found treasure here and spared the country from ferocious spending cuts? It is hard to see how. The top 1 per cent of taxpayers pay about 27 per cent of income taxes, or roughly £35bn-£40bn. That figure could temporarily be raised, I am sure – but by how much and for how long? The prospects for finding £80bn a year as loose change behind the sofas of the country’s super-rich look rather dim.
This is not to suggest that Mr Osborne’s hands are tied. Cuts were always inevitable – Alistair Darling had plenty in mind as he presented his final Budget last year. But Mr Osborne could have taken things more slowly, and he could also have focused more on tax increases than spending cuts. However what he could not do – because it cannot be done – is solve the UK’s fiscal problems by squeezing a few fat cats. Robin Hood, alas, will never spring to the dispatch box.
FT Comment 24 March 2011