Yes, We Can Raise Corporation Tax in a Pandemic

The Labour leadership's attempt to brand a corporation tax rise as 'austerity' is politically inane, economically backwards and a gift to the Tories. But they won't mind – the only real aim is to signal that Corbynism is over.

At the start of the pandemic, the Labour leadership settled on its line for fiscal policy: you can’t raise taxes during a recession. It’s likely that Dodds and Starmer took this line straight out of the mouth of a professional economist.

The state, the argument goes, should not be taking demand out of the economy during a recession by raising taxes or cutting spending. Instead, it should be supplementing demand lost from lower incomes in other parts of the economy by increasing its spending through higher borrowing.

This sounds a lot like common sense. In fact, it’s arguments like these that the Labour leadership has been putting forward for the last five years or more. As Shadow Chancellor, John McDonnell frequently argued that the reason austerity was so destructive was that it took demand out of the economy too soon after the financial crisis, and therefore compromised the speed of the recovery.

These questions of aggregate demand have led some to argue that any failure to oppose corporate tax rises by the Labour leadership would amount to supporting a renewal of austerity. The problem with this logic is that it is based on a profound misunderstanding of what austerity was.

Cameron and Osborne didn’t introduce austerity with the explicit hope of reducing demand in the economy. No government would set out to do such a thing – unless it was the inevitable side effect of another intervention. And the Conservatives had several other goals in mind when they introduced austerity in 2010.

First, there were a set of political aims. In the wake of a financial crisis that had generated significant cracks in the ideological edifice of capitalism, the government needed to ensure that discontent with the status quo didn’t translate into a wider movement for change.

The political aim of austerity was to disempower working-class people, keeping those with the greatest incentive to fight for the transformation of society so impoverished and indebted that they would not be able to take the risks associated with organising.

Furthermore, despite the weakness of the trade union movement in the aftermath of the financial crisis, the government couldn’t risk an increase in the power of organised labour. The low pay and precarity associated with the recovery from 2008 made many workers feel too insecure to fight for higher wages or better conditions.

Then there were the economic aims. The financial crisis had ripped out the heart of Britain’s financialised growth model. Where previously the nexus between finance and real estate had propped up demand in the absence of much productive activity, that nexus had now collapsed.

The natural response might have been to increase government spending in order to make up for the demand lost from the collapse of these sectors. The trouble was that most other areas of the economy had been so weakened by decades of financial dominance that trying to revive them through a coordinated approach to industrial strategy would have taken a great deal of state intervention indeed.

A Conservative government would never have considered such a move for the political reasons outlined above. Theresa May’s abortive attempt at introducing an industrial strategy in 2018 proves this point: it was too small to make even a modicum of difference to the foundations of the British economy and simply ended up angering Tory backbenchers.

Instead, privatisation and a continuation of the outsourcing agenda, combined with central bank quantitative easing that pushed up asset prices just as the pre-financial crisis growth model had done, were relied upon to facilitate state-backed capital accumulation. To put it another way, the British state has always and will always be more concerned with supporting the profits of the private sector than the living standards of the average citizen.

This brings us back to the question of corporation tax. Why would the Conservative Party, allegedly so concerned with protecting corporate profits, want to raise corporation taxes? For two reasons: firstly, they have the space to do so and, secondly, the political situation demands it.

The Conservatives have been steadily cutting corporation tax as part of the corporation tax roadmap introduced alongside austerity in 2010 (another obvious sign that tax cuts for the rich and spending cuts for the many go hand in hand). Corporation tax rates in the UK are now some of the lowest in the advanced world.

What’s more, the biggest and most powerful corporations are able to rely on all sorts of accounting tricks to avoid paying corporation tax altogether. You’re unlikely to see any action on tax avoidance from this government, which means many of the biggest multinationals will feel very little impact from the hike. Incidentally, this is also why business lobbying organisations aren’t kicking up much of a fuss.

The politics, however, is very smart. The tax hike won’t have much of an impact on the biggest corporations, yet the Tories can use this as evidence that they care about making the economy fairer, helping them to cling on to the votes they gained in the poorer regions of the UK at the next election. And if they want to raise taxes on the rest of us, they can point to the corporation tax rises and say ‘look, we’re all in this together.’

This just leaves the question as to why the Labour leadership has indicated that it would oppose the tax increases. As has been the case with most of the strategic errors that Labour has made over the past few years, the leadership is trying to be too clever by half.

They’re responding to the accusation that they aren’t providing an effective opposition by opposing the government on what look like progressive policy changes, which also puts clear blue water between Starmer and Corbyn. Some very clever economist probably also told them that this was, according to the textbooks, the correct thing to do.

The other factor they’re leaning on is the idea that corporation tax rises will compromise investment. There are many problems with this argument – some simple, and some more complicated.

To illustrate a few of them, consider the fact that some of the biggest UK corporations have been sitting on huge piles of cash for years, without ever seeing the need to invest it. For some companies, these cash piles have provided the buffers that have allowed them to weather the pandemic. For others, they have grown as profits have risen on the back of the shift in consumer spending habits seen over the past year.

There are two ways of getting at that cash: tax it, or encourage businesses to invest it. The first you can only do through some form of business tax increase combined with massive international coordination to curb avoidance and evasion. The second you do through public investment. When businesses are too nervous to spend themselves, it’s up to the state to do it for them, boosting growth to such levels that it ultimately becomes profitable for them to do so.

Neither of these lines are radical—personally I’d prefer to live in an economy in which ownership and investment were socialised—but they have the advantage of being rooted in reality.

When the next election comes around Starmer is going to have to approach the electorate with a compelling account of how the previous five years would have been different under a Labour government.

As things stand, he can’t claim Labour would have substantially changed the course of the pandemic, or that they would have made its impact less unequal. All Starmer can say is that he would have done pretty much everything Johnson has done, but with better hair.