It’s all about demand pt 2: why most companies won’t flee proper tax or a living wage

This post is probably not going to be read as widely as my post at the weekend about Danny Boyle and the message of his Olympic opening ceremony to the UK’s government and people. I wish it would be, as it’s at least as important – but the unfortunate reality is that, for the majority of people, economic concepts aren’t as attention-grabbing. But if you’re reading this, thank you – and I think you’ll find it worthwhile, as I’ll try to present some thinking which I regard as entirely sensible but which you’ll almost never hear on TV or radio, or in most of the print media.

The idea seems to be resurging (not that it ever went away!) among right-wing politicians/commentators and in the media (not to mention commenters on this blog) that a fairer tax regime, or a living wage requirement, will simply result in a lot of companies ceasing operations here and moving elsewhere – and in rich individuals likewise leaving and taking their money with them.

We’re supposed to believe, therefore, that expecting these people to pay their way properly is unrealistic; that we just have to accept the status quo in which the rich are powerful and mobile enough to do what they want, while the rest of us have to bear the brunt of cuts in pay and services to balance the economy because ‘we’re all in it together’ (but not them); that we have to continue subsidising business by giving benefits to people whose employers won’t pay them a living wage.

Because of this, this morning I reblogged my post ‘Economic recovery: it’s all about DEMAND, stupid!‘, which outlines why the government is pursuing a hopeless cause in claiming it can balance the budget and generate an economic recovery by cutting public spending. Assuming, of course, they even want an economic recovery – it would give them a better chance of re-election, but the ‘crisis’ provides a useful excuse for their ideologically-based, small-state measures, so it’s a close call.

This post forms a kind of ‘part 2’ to that one. I believe that this country can afford to implement proper, effective tax and pay regimes that makes companies and the rich pay their fair share – and that, while it may not be easy, it can be done. Most companies, and probably most rich individuals, will not simply move elsewhere – and those that do will be no real loss to the country or to the economy. Here’s why:

63+ million people – and rising

Companies, and the individuals who get rich from them, will bitch and moan about taxes, and try to minimise their tax liability, but in the end, if there’s demand, and profit to be made, they will want to be there to exploit the opportunity. The UK’s population of over 63 million people, according to the most recent census data, represents a massive opportunity. Companies are going to get out of paying tax if they can, but in the end if they can’t, they’re going to take the pain so that they can take the profit – and with some legislation to require any company selling in the UK to maintain a tax-registered presence here, we can make sure they can’t find ways to avoid it. I’d even go so far as to pay some good tax-accountants very well indeed to help close off any loopholes and make sure the legislation was well-constructed.

Cost of doing business

This is a key aspect of business mentality that rarely gets a mention in the debate on the consequences of fair taxation. There are all kinds of costs and inconveniences that companies would prefer to avoid, whether it’s cost of compliance with legal requirements on safety, emissions etc or – in some countries and cultures – the cost of freebies, lavish entertainment for key clients and decision-makers and even bribes. If a company thinks they only way it can operate successfully is to carry these costs, they will – it’s ‘the cost of doing business’.

This means that the key issue the UK needs to address is not tax-rates and wage ‘competitiveness’ – it’s loose legislation. We don’t need to participate in the ‘race to the bottom’ on salaries and tax rates, where ‘success’ is prostituting ourselves more cheaply than others in order to tempt companies to come and take advantage of us because it’s cheaper than anywhere else.

On the contrary, it’s being prepared to value our ‘honour’ and defend it – and insist that companies who want to make profit in the UK, and enjoy the benefits of living and operating in an open, free society, demonstrate that they’re prepared to truly invest in, and partner with us in maintaining and extending, what’s good here. A ‘marriage‘ rather than a cheap ‘one-nighter‘, basically. If that’s the cost of doing business, and it’s backed by a proper mentality and legislation, companies will bite the bullet – including paying their workers a living wage, and paying the executives they install to run their UK entities whatever they need to to compensate for the tax they’ll pay as individuals.

Better part of something than all of nothing

Again, a key part of the business mentality. Every company wants to price its products or services so as to make the maximum profit. But in a competitive environment, they have to price to win the business. The mindset is ‘better X% of something than 100% of nothing’ – better to win the business and make some profit on it, than to lose it and make nothing.

Similarly with tax and proper pay. These might be a ‘cost’ that companies would rather avoid, but as long as there’s profit to be made, most companies will prefer to make what profit they can and pay the tax and wages (if we give them no choice) than to make nothing. It’s common sense – though not that common among the people who write and say what we get from the media and the government.

If they don’t, someone else will

It’s a big one, this, and it links full-circle back to the first point. This country offers a market of 63 million, relatively well-off people who like good products and services, and will usually pay for them. If some companies decide that a fair level of taxation is too high a price to pay to operate in this country, we should buy them a nice leaving card and wave them off with a smile. Why? Because if they don’t want to exploit the opportunity to sell their products or services, someone else will.

One of the simplest, most reliable and undisputed laws of economics is that of ‘supply and demand’. Basically, this law says that if demand exists for something, somebody is going to set up a supply to satisfy that demand. If one company leaves and doesn’t meet the demand for what it was offering, either someone else will come in to do so – or someone already here will set up a company to do it. And – in a properly, rigorously taxed system – they’ll do so knowing that paying their taxes fully is part of the ‘cost of doing business’.

Employment will be maintained, even increased. New ‘blood’ in an industry will bring fresh ideas, innovation, ways to solve problems – and new companies will have experienced people available who are no longer working for the companies that decided to bail out, so they’ll enjoy the advantages of experience as well as of new thinking.

We don’t need to fear the threats of those companies who say they’ll leave if we tax them more – in most cases it’s a bluff, and where it isn’t we won’t miss them and will probably be better off for them leaving. After all, if they’re not paying their way fully, there’s not much point in having them here.

It’s better for them as well as for us!

Now, this is a really big one – and it goes against everything the right-wingers want us to believe about the inevitability of the status-quo of spending cuts, low taxes, frozen and even lowered wages etc. That way of thinking – so prevalent at the moment – is actually insane and self-defeating.

Companies and rich individuals are perpetuating a contracting cycle of lower pay and low (sometimes almost non-existent) taxation that enriches them in the short term, but in the long term will have two effects unless they see sense and choose a different path: it will reduce the number of people who can afford to pay for what they offer, and so destroy profits; and it will undermine the fabric of society until it collapses or combusts, and the resulting upheaval, collapse or revolution will make the money they’ve so assiduously hoarded worthless. What use being rich if society is collapsing around your ears, or the angry hoards are at the door baying for your blood and your children’s? It’s insane to pursue such a path.

Even in the shorter term, it’s actually better for companies to operate in a country where the social structure is strong and people feel secure and valued rather than enslaved and exploited. In the end, if you pay peanuts, you do get monkeys – or at best people who will do the least they can get away with doing, and who won’t care about the quality of their work as long as they can avoid the consequences. Far, far better to have people who take pride in their work, who feel they’re a valued part of a family rather than a disposable and preferably-avoided commodity. This excellent post by blogger ‘McDave’ encapsulates why.

If you want people to invest themselves in your business, to bring their creativity to what they do so it gets done better and everyone learns best practice from each other, to care about what they do and to make sure it’s done to the best of their ability, you have to pay them properly.

Similarly, while right-wingers might claim that the rich will leave, and the best executives won’t come to the UK to run companies, if we tax them more, it’s essentially a red herring. Living in a society where people are valued, protected, content and decent has a massive value that we shouldn’t undersell. It’s not something that suits the argument of the low-pay, small-state advocates – but to see the truth of it, just look at those companies that operate in dangerous or poverty-stricken countries, and the higher salaries they have to pay to get anyone to work there.

A reasonable, sane person (do we want any other type running companies here?!) will see that it’s worth the additional cost in tax to live in a country that isn’t turned into a danger zone by poverty and injustice, where their kids can walk the streets safely and without being confronted by poverty and degradation as they go because the vulnerable are looked after properly. And again, if they don’t – others will, or capable people already in this country and who value it, will step up and probably do a better job anyway. A rich person who doesn’t value a decent, strong, just society is a sociopath or a short-sighted idiot, and we’re better off without them.

In effect, the right-wingers who want to give away our state institutions at the lowest possible cost, and effectively pay people and companies to exploit us, want us to believe we’re so weak and worthless that we don’t have any choice but to give ourselves, our rights, provisions and freedoms for next to nothing – that if we don’t, nobody will come and we’ll all be left bereft.

They want us to believe we don’t deserve and can’t have any better, and to be so entrenched in that perception that we daren’t even consider whether there might be a truer, better way – and whether, in cold cash terms, the vast market opportunity we represent allows us to demand more of those who want to make money here.

They’re lying.

19 responses to “It’s all about demand pt 2: why most companies won’t flee proper tax or a living wage

  1. Another excellent, well argued piece. Someone put this man in charge of everything.

      • Well for sure I’d say put you in advisor’s role for sure. Too often the people whispering in the ears of the Emperor have forked tongues. It would be good to have people of honour and integrity with sound morals on the right hand of power.

        And a big thanks for linking me in there.😉

  2. Thanks very much – you put it all so well and concisely. I am going to share this around as much as I can

  3. Very clear .. and easier to understand than Marx’s contradiction of capitalism. The right are always saying that the banks can’t be regulated because they will relocate but fail to mention that no other country will want the risk of having to bail them out and get clobbered in the way that the UK has! I remember reading a couple of years ago, that Barclays had wanted to relocate to New York but the US authorities had rejected their attempt.

  4. You know what, if I didn’t know better I’d almost read this as a right wing post. No, I haven’t gone mad, and unfortunately I don’t have much time to reply right now so this could be a relatively short one but you’re arguing against a vision of people on the right that I’m not sure exists now or ever has existed.

    As a person who is a self confessed right wing libertarian, my main beliefs are in the free market economy, small state and personal liberty. I’ve always found it incongruous when people call themselves liberals and then call for tighter and tighter regulation and higher taxes, how on earth do you square those two?

    Anyway, back to your points here, firstly fair tax? I’m not sure anyone would argue with that, companies should pay their fair share of tax. I’d argue and I’m certain many if not most tax accountants, lawyers etc will tell you that the reason companies and rich individuals pay so little tax, if any is the tax system after god knows how many government changes is too complex. So complex in fact that you can drive a coach and horses through it, earn millions of pounds and pay not a penny to government. This is clearly wrong, and while I admire you saying let’s pay for some really good accountants to close the loopholes, it won’t work because as you say, supply and demand. The private companies and individuals will always pay more than government to find a way around the tax laws, until it gets to the point of absurdity. The simplest solution is scrap the tax laws and start again, let’s have a simple, fair system of tax. Right now as individuals we’re taxed on our take home pay, plus NI, we then pay VAT on goods we buy. If we buy a house we pay stamp duty, if we make a profit we pay capital gains, we’re taxed to watch TV, taxed for where we live (council), taxed again to drive our car, to go abroad in the forms of passport/airport etc, we pay taxes to import goods, tax on alcohol, cigarettes, taxes on savings and then to top it off when we die we pay a load more back to the state then too. Do you think anyone would really vote for this if we had a clean slate? We pay well in excess of 60% tax in this country when you take it all into account, possibly more depending on your income and mostly with the exception of inheritance tax this hits the poor, the very people who shouldn’t be hit. So let’s start again, have a fair rate of tax, without loopholes or clawbacks or anything else, so we all pay our fair share. Now the part I imagine we’ll disagree on is how much? Personally I would advocate a flat rate 30% tax, let’s have a level playing field where we’re all given a fair chance to make a comfortable lives for ourselves.

    As for rich people leaving, well that depends on the tax rate. The problem is if you do have a progressive tax rate which gets higher and higher as you earn more you will lose the richer people, at a certain point it becomes a negative. The argument people don’t leave is farcical, look at France right now or Britain in the 60’s, the Beatles weren’t exactly happy when they wrote the infamous song about the taxman. Taxing the rich ’til the pips squeak’ is pointless, it simply won’t work, so surely you’re better to have a fair tax system which they will happily pay into. There’s plenty of thriving economies out there with low simple tax rates, Poland, Switzerland, Hong Kong, Singapore to name but a few. The rich stay in these countries because there’s no point in avoiding the tax, if it’s a fair tax you pay it. If it’s more than half what you’re earning it’s clearly not a fair system and why would you pay it, or stay? If you can convince rich people to stay, pay taxes, buy goods and employ people then surely that’s the best of all worlds?

    I think you’re probably right about major companies, there’s a massive opportunity here, it’s unlikely our biggest companies will leave, even if you up the regulation and higher the minimum wage etc. The problem isn’t the bigger companies, it’s the smaller companies which account for a huge chunk of our economy. I speak as someone who’s owned 2 different businesses, a property company and a chain of retail shops. Around the year 2000 when I first started in business times were ok, I was making a decent profit and employed about 4 people, nothing big. Later in the decade, up to 2009 I had moved into retail and was employing about 30 people and I have to say it was not easy. The regulations were awful as was red tape, firing someone who was just a dreadful employee simply wasn’t worth the hassle. The living wage as I understand it is meant to be £2 an hour higher than the national minimum wage (I could be wrong!)? For me that would have upped 15 full time employees by that amount, so an extra £30 an hour, 40 hours a week, or £1,200 a week, note that’s without increasing managers pay to keep them above the people lower down the chain. That would have decimated my profit margin to the point it wouldn’t have been worthwhile continuing. I’d have actually been earning less than my own managers taking that amount from the company. Not to mention I was working sometimes 16 hour days 6 days a week anyway. Large businesses will find ways round legislation, or will find ways of making themselves profitable, smaller ones are where your issues lie. It’s tough times out there right now, very tough and if you employ a handful of people you need encouragement, not more red tape and more costs. There’s thousands and thousands of small businesses on the brink of bankruptcy as it is, let’s not push them over that brink just yet.

    Oh and for the record I totally support people being paid more, if you do a good job then you deserve all the rewards! That’s practically at the core of what I believe in.

    • Long comment – I may miss something, but just point it out if I do!

      As you rightly guessed, we agree on the simplification of the tax system but probably not on the level and certainly not on a flat tax. Flat taxes favour the rich (again) and penalise the poor, whose basic living expenses represent a far bigger propoertion of their income. To be fair, tax rates have to rise as income rises. It may not be ideal from the point of view of a wealthy person, but nothing’s perfect, you can’t please everyone all the time, etc.

      You suggest I’m arguing against something that may not exist, but the neoliberal ideology in its more extreme forms, which certainly do exist, would happily do away with all taxes, with the possible exception of some kind to pay for the armed services. The low-tax, small-state ideology is basically a variant of ‘nature, red in tooth and claw’, and the people who support it tend to (I’m not saying there can’t be exceptions) see themselves as, if not apex predators within that system, at least fairly high up the food chain. That’s why they’re comfortable with it – they’re not the ones likely to lose out. They’ll talk about how philanthropy should be the solution to poverty etc – but effectively, that’s just saying ‘someone else can pick up the tab if I don’t feel like it’. Such a ‘safety-net’ has so many holes that it’s no protection for the vulnerable at all.

      I pay 40% tax on a fair chunk of my income, plus NI, plus VAT etc, and I’m perfectly comfortable with that. I see it as the cost of living in a decent society that takes care of all its members, including those who can’t pay their own way because of disability, the vagaries of the employment market etc. I think that’s as it should be – the money to pay for it has to come from somewhere, and I can afford to pay more than many. And if I can think that way on my relatively modest income, then those with hundreds of thousands, millions, or billions can certainly afford to think so too, and we shouldn’t be shy about expecting them to.

      I’m all for simple, loophole-free taxation, but there’s no reason at all a progressive system can’t have those characteristics. It just has to be backed by political will and proper regulation and enforcement. We’ve discussed what some measures to achieve that might be. Of course it’s always a situation of ‘build a better mousetrap’, but the same applies to crime prevention/detection, fraud-prevention, anti-hacking, anti-virus etc, and that doesn’t prevent people from believing it’s right to get into the race and aim to get and stay a step ahead.

      As for the minimum wage, of course there are going to be difficulties adjusting, but as a small-state libertarian, you can’t think it right that we taxpayers are having to subsidise business so that it can get away with paying low wages?

      Those adjustments can be made. If successive governments hadn’t allowed the situation to continue and worsen for so long (Labour made a start with the minimum wage laws, but didn’t go far enough), it would be something we’re used to rather than something we’d have to adjust to. Lots of countries (the Scandinavians, for example) manage to pay a living wage, have a very strong social safety net AND be richer than us. So it can be done. That said, I wouldn’t be averse to some exemptions or leeway for small businesses, as long as the rules were drawn well enough to prevent large businesses creating subdivisions to gain small business status. Possibly, once I’d seen the figures.🙂

      • I think the essence of our disagreement is pretty much tax rate and what it should be, we’re not a million miles apart on anything else. I agree tax hits the poorest far harder than the richer in our society, for that reason I’ve always argued for a much higher threshold before we pay any tax. Probably somewhere around the £20k mark so that far fewer people share the tax burden at all.

        I see where you’re coming from on progressive tax, I’m just not sure it would make more in terms of net revenue, as soon as tax is progressive people find ways to avoid the higher bandings, the root of our problem. Most of the countries with a fair flat rate don’t see anywhere near as much (if any) tax avoidance as we do and generally have a very healthy tax take. As long as we’re collecting enough money for what the state needs to do I’d argue that it’s pointless to implement progressive tax purely for ideological reasons. It would be very interesting indeed to be able to find out how much tax was avoided last year, and how much extra the state could have if the tax laws were changed, I would guess substantially more than in our imperfect system. After all if you’re a millionaire and you can so easily avoid tax, you probably will.

        As for the minimum wage, I agree it would be beneficial for more people to earn a ‘living wage’, I just don’t think state legislation is the best way of achieving it. Especially as our businesses are strangled with so much red tape as it is. I certainly don’t want the state having to top up wages either, either through tax credits or housing benefits. I’d prefer to see some kind of tax breaks for companies that do adopt a decent living wage policy and government cutting red tape for smaller and medium businesses to keep the economy growing.

      • As long as the government is making enough revenue to do what it needs to do, we’re probably not a million miles apart on the issue. The problem is, it isn’t making enough – and the Conservatives are so adamant that they only way to balance the books is to cut that they never even mention – and nor do most of the tame media – that the option of increasing/tightening taxes is never even mentioned as an option.

        Would a 30% flat tax be better than a system where rich people get away with single-figures? Definitely. But better to find ways and make laws so that the very rich pay a much higher percentage. They can afford to.

  5. I am sympathetic to your views but as ActuarialChris states managing an economy is a tricky subject.
    What are your views on what is happening at the privatised Hinchingbrooke Hospital in Cambridge.
    [no reply from MP yet about BBC blackmail. It must be a difficult subject!]

    • Nobody said it’s easy! lol But the philosophy and morality we bring to the task matter, and play a huge part in deciding the outcome.

      I’d have to research the Hinchinbrooke case in more detail before I could comment. It’s something I plan to do, but haven’t had time for yet. I’ll say more once I have.

  6. Pingback: Cameron CPC2012: a litany of lies, hypocrisy and misdirection | skwalker1964·

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