2011

Labour Left
Dr oin Clarke

[LABOUR LEFT & GOOD CAPITALISM]

This paper outlines a vision for the Labour Partys new relationship with Capitalism in a post NeoLiberal Age.

Contents

The Blairite view on why a relationship with big business is important for Labour ..................................................................... 2 Problems with establishing an unethical relationship with big business ......................................................................................... 3 Some business sectors rates of profit are extortionate and unethical........................................................................................ 3 Exposing the myth that big businesses profits are excusable because they pay lots of tax ........................................................... 5 Corporation Tax Cuts do not aid small business in the way intended ...................................................................................................... 7 The myth that large profits of oil and gas are excusable because they spend so much on Research & Development ........................ 10 The myth that large profits are excusable because they swell our pension pots ................................................................................ 10 Labour Lefts vision of Good Capitalism ........................................ 12

Labour has always been a party of business. From the most left wing leader right through to Tony Blair it has been accepted that the best way to create a healthy economy is to provide encouragement for business to grow. The major difference between the two strands of Labour business thought is why and how it is desirable for business to grow. This paper lays out a vision as to how the Labour Left can embrace good capitalism in a post Neo-Liberal age.

The Blairite view on why a relationship with big business is important for Labour
One the one hand you have a very healthy view from Blairites that strong business growth including the oil, banking and pharmaceutical sectors creates large profits and therefore contributes considerably to our tax yield. These companies also provide crucial stability to the pension pots thus meaning that we all benefit from the success of big business. Big business, it is also rightly thought, have the best means at their disposal to invest billions in research and development that help position the UK as a leading innovator.

Those who view the world as a global market also argue that we need to attract inward investment through low Corporation Tax rates and incentivised grants. This for example led to the Republic of Ireland attracting the investment of Google and Intel - no small feat. The incentivised grants and targeted state aid pursued by Mandleson helped position the UK as a leading nation in the assembly and production of cars. Rightists also think that state help for small businesses is a crucial method of unlocking entrepreneurial spirit, innovation and by logic employment as businesses grow.

This is a perfectly viable approach to business.

And so for lots of healthy reasons I applaud the reasoning of Blairite thinkers who wish to create a pro-business party. Above all else, they wish to use the proceeds created by their love affair with big business to pay for tax credits, investment in the NHS as well as our schools. Their argument is coherent, logical and entirely plausible. Thus, the Blairite case for cosying up to big business can best be summarised as follows.

a) Tax yield to aid investment in public services b) Pension Pot stability c) Investment in research and development d) Low Corporation Tax to attract inward investment e) Helping SMEs and thus creating employment f) Creating knowledge based economies thus improving pay

Problems with establishing an unethical relationship with big business

There is one major problem with the Blairite approach to business. It doesn't work and it hasn't worked. If only it did I would be fully behind Labour cosying up to big business. Let me lay out in full why I think Labour's approach to big business has not worked. In the latter part of the paper I will offer my views on what we in Labour Left envisage could do to rehabilitate our relationship with business, so that a more sustainable and ethical relationship with business thrives.

Some business sectors rates of profit are extortionate and unethical.

Profit is the difference between the amount gained for goods sold and the amount spent in manufacturing, advertising, storing before selling them. If it costs me 60 pence to make a tuna sandwich but I sold it for 2.00 the profit would have been 1.40. In the graph above,

profit is calculated in % terms. Thus if my business makes 10% profit on net investment of 100 then I have made 10 profit. Each company thinks strategically about its place in the market, the value of the product they are selling and the rate of profit they think they can make. And so they have in mind a rate of profit they aspire to. The actual graph above is the actual (yearly) rate of profit (net) achieved in the UK between 01/01/2005 to 31/03/2011. For the most recent year (2011) the quarterly rate of profit achieved was used.

The chief issue is that the companies in the UK we have been relying on to make profits to maintain our pension pots and provide taxes make very unhealthy portions of profits. This analysis excludes the financial sector because I wished to focus upon other aspects of business. But it is clear the UK oil and gas make very unhealthy profits. In Q3 of 2011 Royal Dutch Shell PLC & BP made 7.7bn profits between them. These unsustainable profits often come at the expense of the customer. We have recently witnessed 17-23% price rises in gas and electricity for example.

To make this easier for people to conceptualise, I have calculated the total (net) profit by sector across each of these four categories for the years 2005-2010. The

UK manufacturing sector has indeed struggled. Across the 6 years in question it managed a total profit of just 12.1bn or c.2bn a year. During that same period, foreign companies have extracted profits of 87bn from UK citizens. The service sector (excluding financial) has made total profits of 66bn but this is dwarfed by the staggering 120bn of profit made by the Oil & Gas sector. At its crudest, profit is made at the expense of others because essentially you are over charging them. Now when that profit rate is low (say 10%) then one could justifiably say that it is just and ample reward for the initiative and hard work shown by

the sales, manufacturing and production teams who engage in the labour. But profit rates certainly of 15% or higher start to become unethical. The 120bn profit made by the Oil & Gas companies in this period is nothing short of unforgivable. And so in a post Neo-Liberal age we must be profit applauders but also profit hawks. Applaud where responsible profit is made, hawk where ill-gotten gains are identified.

Exposing the myth that big businesses profits are excusable because they pay lots of tax
The second myth that we need to expose about big business is that they contribute greatly to our tax receipts. (see below)

In 1996-7 Corporation Tax accounted for c.8.5% of total government receipts. That declined under New Labour. In fact in 2010-11 the final Labour budget, there was a real terms 6billion less raised as a proportion of tax receipts than there was in 1996-7. It has continued under the Tories although thus far at a somewhat smaller gap. In 2011-2 George Osborne plans to raise 2.5bn less in corporation tax as a proportion of total government receipts than Ken Clarke did in 1996-7. As well as this, the proportion of taxes paid by large businesses has declined as SMEs bear the brunt (see below).

The proportion of Corporate Tax paid by big business (onshore) has been in decline for the last decade. In 2001, big business accounted for 85% of Corporate Tax payments but by 2008 that had fallen to 62% after falling steadily for the previous 7 years. This year, we think big business is set to pay 67% of the overall Corporate tax take, but that is still a marked reduction from 2000. In fact, the total amount of Corporation Tax due to be paid this year is 3,200,000,000 lower than it was in 2000. So, why is this the case? Well, apart from preferential Corporate Tax reductions in recent years by both A Darling & G Osborne, the large companies have very elaborate methods of avoiding paying tax. NewsCorp, Vodafone, Barclays etc. have all in recent years managed to avoid paying large sums of tax on their profits. The graph above partly reflects that. In the same period, the amounts paid by small business have grown threefold in the same time frame.

The main reason for this is that large corporations have been allowed to get away with tax fraud that costs the UK government up to 288bn per year. In fact, recent data extrapolated from the World Bank by Richard Murphy suggests that the shadow economy could equate to tax revenue losses of 345 billion per parliament (see below).

The graph shows the HMRC estimates of Tax Unpaid for the most recent data available which happens to be 2008-09. In total there is 42billion regarded as being unpaid. This takes the midway point between the highest and lowest estimates. Were the highest HMRC estimates to be included then the figure would be close to 57bn unpaid tax for one year. Richard Murphy using data extrapolated from the World Bank shows the figure to be 69.9bn per annum. So, the figure I use above is regarded by experts as a gross underestimation. But a second reason the Blairite business model has failed is because we cannot trust big business. There would be 0.0p of a deficit had these companies paid the tax due over the last decade.

Corporation Tax Cuts do not aid small business in the way intended
Of course the other myth propagated by those who favour low Corporation Tax rates year after year (1% every year to 2014-5) is that they are a great way of incentivising small businesses. But this misses the point. Big businesses more than ever are attracting a larger share of retail expenditure and it is clear that this approach is failing to have the desired benefit (see below)

Various reductions in taxes (profits taxes) are often heralded as efforts to help small business. In effect, they are the opposite. Corporation Tax cuts aid big business by increasing their profitability much quicker. Since they are much more able to compete on pricing and they rely on bulk sales as opposed to high profit margins these companies as you can see dominate our market. For every 1 you spend in a retail outlet, 76.9p is spent in a company that employs more than 100 people. Never mind that, only 13.8p is spent in a company that employs less than 10. England is not a nation of shop keepers, and Darling & Osbornes Corporation Tax cuts give big business a competitive advantage.

It gets worse. Since the Tories VAT and Corporation concoction has been unleashed on our economy, the larger companys sales growth has been rising faster. Companies employing less than ten grew just 3.3% last year. Small businessmen fear bankruptcy every time a VAT deadline approaches while the big companies guaranteed share of the market gives them

much more protection. Take a moment to glance at the Companies employing between 40-99 persons. They grew at 13.3%. Even companies over 100 employees who are said to be finding it tough actually grew their sales by 3.8%. That means that companies employing more than 100 grew their sales 13% quicker, proportionately than small companies. The sales gap between small businesses and large corporations is growing. Smaller businesses interests are better served by protecting them from the big competitors. This can be done in lots of fairer and simpler ways than clumsy Corporation Tax cuts that facilitate greed of multinationals

But there are also problems with providing tax relief for SMEs in the blind hope that they will create employment. In fact, more often than not SMEs are unable to afford to employ anyone. Of the 4.5 million businesses that exist in the UK, 74% of bosses employ no staff members thats right none.

Recently, the Prime Minister boasted that small businesses would provide the back bone of the recovery and in particular a reduction in unemployment. Cameron shrugged off youth unemployment by suggesting that small businesses would help shrink unemployment. We are taught by Cameron to regard small businesses as the engine room of entrepreneurial spirit in the UK. We are led to believe that their inventions, wealth creation and profits lead to employment and growth. But this is the stuff of fantasy. Small businesses do deserve special state aid for lots of reasons. They average turnovers of just 60k per year and for the most part they survive in a perpetual state of uncertainty that there business might not last. It is right and proper that targeted measures be used to give them the added security to gain peace of mind so that they can make medium term decisions to expand and increase stock.

The myth that large profits of oil and gas are excusable because they spend so much on Research & Development
Another mistaken myth about big business is that their large profits lead to increased expenditure in research and development. But of course this is quite lazy thinking, since big business does not also invest in R & D but rather in speculative & explorative projects that are designed to boost their profits further (see below).

The graph above shows the investment in R & D by energy companies in the last 20 years. Some of the apologists for the profiteering of energy companies like to make a fuss over the sums spent by energy companies in Research & Development. But this ignores the fact that R & D spending by energy companies has practically halved in the last 20 years. There is no justification to the argument that high profits are excusable because they are ploughed back into R & D. Crucially, only 1/3 of R &D expenditure comes from the oil & gas industries. R &D expenditure in Coal alone is just under 1/3 of expenditure in R & D. And so, it is not a given that encouraging profit leads to greater technological innovation. In fact, very often the most profit is gained in the fast buck- that is to say simply over charging the customer for poor services.

The myth that large profits are excusable because they swell our pension pots
The neo-liberal claim that the stability of our private pension pots is so crucial that we should applaud the unethical profits of big business is one that we hear often, but it also one I wish to

examine more closely. It is my view that the numbers of people actually paying into private pensions in the UK are that low that we need to re-examine our entire pension policy. In fact, there is much to applaud about the Tory and Lib Dems aspiration that the level of support provided by the basic state pension should double in the future. The truth is that the cost of living crisis has got so bad in the UK that fewer people can afford to make private provision for their retirement (see below)

A good way of measuring how much people are struggling financially is to look at their ability to save. In this case I have examined people's contribution to their personal pension funds for their retirement. These are not company pensions but personal ones. In 2008 there was 7.6million such pensions in the UK, but that dropped fairly dramatically to 6.3m as the credit crunch bit. This is worth dwelling upon for a moment for it means that less than one fifth of those of a working age are contributing to a private pension. Should we really allow big business to go on making extortionate profits in the name of projecting a small minority of workers?

There has been quite a wide regional disparity in those abandoning personal pensions. For instance in the entire north of England less than 1.5million people have a personal pension ('09). Some of the drop offs have been dramatic. 27% of people in Yorkshire and Humber ceased contributing to their personal pension. The figure was 22-3% for the North East and West Midlands. One fifth of people in the North West stopped contributing to their personal pensions in the same period. The fact that the % drop off in the south of England has been

much lower might suggest that they are coping with the recession better than their northern counterparts. It might also be that because they can expect to live much longer in the south of England that there is a more pressing need for them to keep up their pension payments. Either way, it is a regional disparity that shines a light upon the inequalities of the North South divide.

Labour Lefts vision of Good Capitalism

So what is Labour Lefts alternative vision? We, in Labour, should continue to encourage profit, continue to target small business for tax relief and continue to provide state aid for inward investment. Corporation Tax need not go back to 2005 levels but further cuts to Corporation Tax should be halted immediately. In future companies should be set strict criteria before they qualify for low Corporation tax. Thus; 1. A standard 25% Corporation Tax could apply to all companies. 2. To qualify for reduced increments of 1% companies would have to demonstrate that a) b) c) d) e) f) g) h) They employ a workforce of 95% UK citizenship =1% reduction Their rate of profit is ethical, for example below 20% = 1% reduction They locate all non-essential services in the UK eg. Call centres =1% State investment or incentivised grants for inward investment are repayable on demand if bad business practice is exposed. Their raw materials are sourced where possible from the UK market = 1% Their shareholders, company and owner are domiciled in UK = 1% They receive an A* audit on international financial transparency = 1% They exercise ethical pay & bonus restraint for top earners = Qualify for some tax

exemptions. i) Commit to part funded PhD Studentships to re-skill UK workforce = Earn state investment in HR facilities. In short, Labour Left would like to advocate incentivising good business practice. We would like to reward companies with lower Corporation Tax where they are seen to comply with a mode of business practice that aids the UK. If companies fulfilled the necessary criteria of good practice, they could end up with Corporation Tax receipts of 19%.

Seven Revenue Raising Suggestions from Labour Left

The Graph above shows per annum how Labour would advise raising revenue between 20112015. The sums above would raise nearly 14 billion pounds a year but not

hurt ordinary people. The sums raised are shown in billions per year. (Click the graph to enlarge if needed).

1.

In the midst of an austerity package, it was cruel, heartless and entirely unethical, that

Darling and Osborne should plan to cut Corporation Tax. When you can say that the nasty Tories who were kicked out in 1997 taxed profit more than Blair or Cameron did, you know there is a problem. We in Labour Left would reverse the Corporation Tax cut and halt any future cuts. We are open to the idea of allowing reduced rates of Corporation Tax for companies that meet the criteria for good business practice. The money saved from this would be used to provide state aid for small business especially though VAT holidays, or car/boiler scrappage schemes.

2.

Businesses, including banks, can offset this year's profits against last year's losses. This

has allowed banks to escape 17bn worth of Corporation Tax in the last year. This should stay for SMEs as they struggle through these difficult times, but the government have craftily neglected to tell us that the banks who returned to profit this year are exempt from paying taxes due to last year's losses. We would close this loophole for large companies.

3.

Virgin Media and other telecoms businesses make rapid profits for minimum fuss. Their

quick growth model gives nothing back. Too often, they make their profits from those who cannot show restraint when building up large telephone bills. Added to this they manage to avoid paying large amounts of corporation tax due to the use of various accounting practices. In Labour Left, we think get rich quick companies have a duty of care to our citizens. For this reason a telecoms tax is a good way of recouping some ill-gotten profits for the benefit of the nation at large. The monies recouped from a telecoms tax could be used to restore the cuts to Winter Fuel Payments as well as aiding families with grants for home energy saving projects such as loft insulation.

4. Labour Left has been looking at for some time now developing a fair method of taxing landed estates. There have been several models proposed and one is available from our Labour Left website. The most important thing is the principle. It is right and proper that large landed estates make some annual contribution, as well as those who designate their wealthier homes as part time occupancy. Any funds gained from a Land Tax would be used to part fund an affordable housing programme. 5. Speaking of part-occupancy there is currently a Business Rate loophole that allows

businesses who claim they are not using their property for a period of time to gain exemption from business rates. The treasury itself estimates that 0.5billion is lost through fraud in this way. LABOUR LEFT would recommend closing the loophole, and using the money to invest restoring the future jobs fund.

6.

A recent article showed how $7bn had been added to the value of the nation's gold in

just 18 months. Some of this, say 200m, should be sold annually to help alleviate the pain and pace of cuts, and look at restoring EMA.

7.

Lastly, I have been developing the idea of a Vice Tax. The purpose of the tax would be

as much about ethics as it would economics. This would be a method of getting gambling companies, tobacco companies and large alcohol trading companies to commit to a 200m annual tax. A watchdog would be given powers to fine the companies if they were seen to be

passing it on to the customer. This money could be used to invest in mental health services and other addiction treatment courses.

We believe that the methods of raising revenue above are devised with ethics in mind. They are an attempt to do the right thing. The primary focus is shifting the burden away from ordinary people onto those able to pay.