Response to Jolyon Maugham

Jolyon Maugham’s post on his “Musings on Tax” blog discusses (misrepresents would be more accurate) The British Corporate Welfare State: Public Policies for Private Businesses. Kevin Farnsworth’s response is below

My report on corporate welfare created quite a storm! Jolson Maugham’s post was at least more comprehensive than most. It is a shame that most of it was based on ignorance and an unwillingness to engage in MY arguments as opposed to simply repeating HIS prejudices.

JMs post is here:

JM: The 43 page paper that put the idea on the map in the UK – ‘The British Corporate Welfare State: Public Provision for Private Businesses‘ – doesn’t define it.

KF: JM does have a (slight) point here. I did not have a one-sentence definition in the report, but instead spent 11 full pages trying to conceptualise what corporate welfare is and what it includes. In retrospect I think that a one-liner would have been better. Having said that, because the way I define corporate welfare is crucial to JM’s criticisms of the claims of the report, it would have been better for him to contact me rather than the publishers of the report. If he had contacted me, or if he’d actually read through the first sections of the report, he would see that I address some of criticisms he makes of the report.
My website defines corporate welfare as follows and this fits with the main thrust of the work: “Corporate welfare consists the various ways in which governments service the needs and/or interests of private businesses”.
Drawing on this definition, the figure on page 9 of the report clearly maps the relationship between corporate and social welfare and the multiple ways in which both meet the needs of citizens and corporations. Rather than engage with this part of the report JM accuses me of not appreciating the fact that wider social objectives (or ‘public interest’) may underpin corporate welfare.

Here’s what I actually argue:

“The more closely we examine the public sector within the most successful economies, the more apparent it becomes that public services and the whole welfare state is as much about private businesses as it is about guaranteeing the well-being of citizens. Subsidies and grants have enabled businesses to and continue to expand, invest and make profit when the ‘free’ market has tested them to the verge of extinction. Governments and, by extension, taxpayers, have contributed heavily towards the costs of research and development as well as investment in new plant and machinery (see also Mazzucato, 2013). Governments have also facilitated and supported business investment in new regions, helped them to develop new technologies, provided infrastructure, helped them overcome local opposition and planning and other barriers to expansion. Government ministers and other senior members of the state, including the military and members of the royal family, have helped businesses to expand and sell their products abroad. Businesses also depend heavily on publicly-subsidised road, rail, shipping and air transport systems and many draw on centrally funded advice and state insurance services. Education and training services have helped to ensure that workers have the skills and qualities demanded by employers. The National Health Service has helped to ensure that workers remain healthy and productive. In-work benefits have effectively subsidised employers’ wage costs. And on top of all this, governments are major consumers of private sector goods and services.”
And this:

“Publicly-funded benefits and services that are aimed at meeting the needs and/or wants of private businesses is a key part of what governments do and have always done. Corporate welfare underpins capitalist economies and many of the most successful private companies owe their success to it, although not all companies need corporate welfare in the exact same quantity and form, nor do they depend on it to the same extent throughout their ‘life course’.” [p2]
I qualify my approach by arguing that:
“…private businesses also bring essential benefits to citizens and governments. They provide jobs. They contribute to the costs of the state through taxation on profits, and through the wages they pay to their employees. And, just as businesses extract benefits from social welfare, citizens extract benefits from corporate welfare.” [p2]

JM: allowances are the statutory equivalent of depreciation. They do no more than recognise that, in order to make profits (on which they pay tax), many businesses have to buy equipment (or “capital”) which then wears out and needs replacement. The report, quite wrongly, says that capital allowances “socialise the risks associated with private business investment.” It misses that capital allowances operate to reduce the tax paid on profits – the profits the business owner has to buy the capital assets to make – and if the business doesn’t make profits the cost of buying those assets stays with the business owner. Nor do they “subsidise the production of private profits” (to borrow from the definition). Rather they recognise that in earning those profits the business owner incurs costs.

KF: I maintain that capital allowances “socialise the risks associated with private business investment”. Risks, in this case, includes investment and most other types of business activity. And the purpose of many of the tax breaks offered by government, including capital allowances, is precisely to spread this risk, and the cost of the investment, beyond the individual company to taxpayers more widely. Governments have a clear objective in providing allowances. Capital allowances are the outcome of political decisions. JM appears to think that they are objectively determined, provided as of right as if all countries precisely agree on the tax treatment of business investments and allow businesses to write off all the costs they incur in earning profits. But they clearly do not. Nor do capital allowances in the UK extend this far.
The report makes use of data that is compiled by HMRC in their annual publication Tax Expenditures. The clue is in the name! These expenditures are defined by the National Audit Office as “being reliefs with similar aims to spending programmes”. The government effectively bears part of the costs of the investment made by the company in foregone tax revenues. Moreover, claimed depreciation does not necessarily bear any resemblance to actual depreciation. This is clear especially in the case of accelerated depreciation. The UKs Annual Investment Allowance, for instance, allows 100% of the value of eligible business assets in the first year. Some will be poised to argue that they simply smooth out the regular depreciation of an asset over a number of years. But in the intervening period, the company is effectively provided with a free loan (1).

Does this mean that tax expenditures are illegitimate and should be cut? No it does not, any more than pointing out the cost of the NHS means that we should cut it. But we do need to recognise they they confer a benefit to corporations and that they represent a cost to governments and the wider taxpayer. And we need to carefully scrutinise them and ask whether they operate in the public interest.
In short, tax expenditures are more the outcome of politics than economics. Tax allowances are provided to achieve particular ends – primarily to encourage investment and business expansion through boosting the rewards (or profits) from such investment (2).

To emphasise the relationship between tax breaks, expenditure and revenues, George Osborne has deliberately reduced capital allowances since 2010 in order to fund the reduction in corporation tax (3).

The NAO explains that principal tax expenditures – which include capital allowances –offer a low-cost way of providing financial support to businesses. A report by the DTI into subsidies in 2004 listed tax expenditures, including capital allowances, as one of the key forms of subsidy it was interested in. Internationally, the WTO, OECD and EU are concerned that tax expenditures provide competitive advantages to companies. International treaties clearly state capital allowances and other tax breaks as potential subsidies. An OECD study into tax expenditures in 2009 found that the UK provided more generous tax breaks than any of the other countries it examined. A good examination of how capital allowances (or depreciation allowances) operate as effective subsidies in the US (which has many parallels with the UK schemes) is highlighted here (4).

Deliberations of the EU’s Competition Directorate on which tax benefits constitute a form of subsidy to corporations also makes for interesting reading. And readers can look up some of the tax breaks offered by the UK government that it has referred to the European Commission on State Aid for approval. Yes, the British Government acknowledges that some corporate tax breaks risk falling foul under the EU’s State Aid rules. The fact is that tax expenditures are not simply a matter of accounting. They are politically determined. Capital allowances vary widely between states. They are also provided to achieve particular ends – primarily to encourage investment and business expansion through boosting the rewards (or profits) from such investment (5). And, of course, any asset that is written off against tax ultimately belongs to the company, not the government or the taxpayer.

JM: Subsidies and grants are support given by Government to business to influence levels of production, prices and such like. They include subsidies to bus and train operators to run services at particular levels of frequency and at particular price points. They include payments made under the Common Agricultural policy (the objectives of which can be seen at Article 39 here). They include regional aid to encourage business to invest in economically neglected regions. SPERI describes these payments as “unrequited” transfers but if, by this word, the implication is that Government is not delivering its perception of the public interest through them, it is wrong.

KF: This conceptualisation of subsidies is pretty standard. But few would seriously use it without expanding on the ways in which subsidies behave very differently than planned. Some academics (Zahariadis for instance) have argued that subsidies have actually taken the place of previous measures – most notably trade tariffs – which similarly claimed to be about people, but which actually ended up being primarily about protecting businesses. Regarding ‘unrequited’, JM’s initiation into the world of subsidies obviously doesn’t extend beyond the basics. This is a term that is used in standard international definitions of subsidy. Unrequited in this sense (actually in any standard dictionary sense) does not refer to the intention of the ‘giver’ but the fact that any transfer is ‘real’ as opposed to a simple exchange of equal value between parties. JM is right that subsidies and grants include these objectives, but I’m not sure what more he is trying to say here. He appears to be arguing that these should not be included as ‘corporate welfare’ because they bring other benefits apart from those that accrue to private businesses. On the basis of the ‘socialisation of risk’ definition that he has relied upon, subsidies and grants absolutely fit with this. And they absolutely fit with the conceptualisation of ‘need’ that is outlined in the continuum of social-corporate welfare on page 9 of the report. The main departure from my report and the work of others who discuss corporate welfare is that the benefits of social welfare and corporate welfare to citizens and businesses

JM: as “unrequited” transfers but if, by this word, the implication is that Government is not delivering its perception of the public interest through them, it is wrong.

KF: I have already touched on this above. I can only repeat my point that this demonstrates that JM did not read the report in full. The first 11 pages map the relationship between corporate and social welfare. Page 8 outlines the approach taken AND introduces the welfare continuum (p9):

“The approach taken to corporate welfare in this paper is deliberately broad. Most importantly, corporate and social welfare are viewed, not in binary terms, where provision might be viewed as benefiting EITHER businesses OR citizens, but in more nuanced terms where different forms of state provision might bring simultaneous and multiple benefits to individuals and corporations. The welfare continuum presented here captures the various ways in which public services benefit citizens and private businesses. Provision towards the top of Figure 1 might be said to most directly meet the needs of citizens; provision towards the bottom most directly meets the needs of business. And various forms of provision might bring indirect benefits to businesses.”

JM: The procurement figure of £15bn is arrived at by applying to aggregate Government spending on private sector procurement – including social care, defence, construction and so on – a rate of “average profits of 6.5% per annum in the period leading up to 2012” for the big four procurement companies. But does paying a price for government procurement that enables the provider to make a profit involve socialising the risks of private profit? Delivering goods or services to the public sector requires an investment of risk capital which is only made in the expectation of a return. The fact that this capital is risked can be seen from the share price performance of two procurement companies explicitly mentioned in the report. Over five years Capita’s share price has almost doubled but Serco’s has fallen by more than 75%. If the risks of investment are being socialised, they’re not being socialised very well. Remove that return and capital doesn’t get invested and the goods and services aren’t delivered.

KF: This point is bizarre in that it centres on JM’s narrow definition of corporate welfare. Dealing with this last point first, the definition of action according to its intended effect (say the socialisation of risk) is not in any way undermined by any subsequent unintended consequences. And JM must already understand this. Having said that, the argument again here falls down for similar reasons as the previous point.

So let’s deal with the issues. The justification for including procurement as a form of corporate welfare can be found in the long-established principle in work on state subsidies that such expenditure constitutes a potential subsidy. The DTI acknowledged as much back in 2004 (6), and the WTO’s agreement on Subsidies and Countervailing Measures (SCM) outlines similar concerns given that procurement involves purchases “under circumstances that do not accurately reflect normal market conditions” (see Governments often use procurement to try to assist ‘their own’ companies above foreign competitors (as my report makes clear). The size of the UK procurement budget is massive although it is near impossible to obtain a ‘coherent and complete picture’ of where this money goes (7).

The question is how much of the procurement budget constitutes corporate welfare? Here I have been conservative in my estimate. In an attempt to capture the potential ‘above-market’ rate within the procurement budget, I put together an estimate based both on the amount that approximates to the profits made by the big four procurement companies AND previous authoritative estimates of the above-market costs that government incur in procuring services as opposed to providing them itself. Both calculations result in a figure of around 6.5%. And it is this amount that I argue is the corporate welfare element of procurement expenditure.

JM: “the report ignores the legal requirement for government procurement contracts above a de minimis limit to be subject to open competition.”

KF: JM is right to argue for rigour in putting forward assertions, and this certainly applies to some of the assertions he makes. This point about competition is, as he must know, a non-starter. The procurement market is, as the government itself has recognised, about as far removed from open competition as it is possible to get. Others have illustrated this better than me, including Colin Crouch’s excellent ‘Strange non-death of neoliberalism’ or the detailed analysis of, amongst others, Dexter Whitfield and Allyson Pollock.

JM: Moving from the direct (£93bn) to the indirect (£180bn) measure of corporate welfare brings in measures such as working and child tax credits (because they enable workers to work for corporates), education and training (because they deliver to corporates a workforce) and the NHS (because good heath care contributes to high productivity). But are these costs to the public purse ones which “socialise the cost and risk of investment”?

KF: Tax credits do not simply “enable workers to work for corporates”. The report argues that they operate as a wage subsidy. Thus, they directly ‘socialise’ wage costs. The same could be said of aspects of the other services. The estimate of how much these are worth to businesses is very difficult to arrive at as the report acknowledges. JM doesn’t acknowledge that only parts of these budgets are included in the report, in fact he doesn’t really engage with this section of the report at all, apart from pointing out that the numbers are big….

JM: One could easily add law and order – which allows business to operate – and defence which protects it from confiscation by unfriendly powers. Indeed, it is tempting to ask whether there is any element of Government expenditure that does not deliver benefit to corporates; is the entire of state spending indirect corporate welfare?

KF: One could not easily add law and order precisely because it is difficult to split the costs between citizens and corporations. It IS important to ask whether there is any element of government expenditure that does not deliver benefits to corporates – and I have already provided an answer to this question. However, as my report makes clear, there are also benefits to citizens in much of this. What my report sets out to do is to argue against the general assumption, which JM appears to share, which is that government expenditure is solely, or even primarily, about citizens. Thus, it is important to ask whether there is any element of government expenditure that does not deliver benefits to CITIZENS. And “is the entire state spending indirect social welfare?”. My answer to this question is clear:
“The more closely we examine the public sector within the most successful economies, the more apparent it becomes that public services and the whole welfare state is as much about private businesses as it is about guaranteeing the wellbeing of citizens.” [P2]

JM: Without a clear distinction between that which is, and that which is not, corporate welfare are we left with any more than the idea that corporates cannot function without the state? Indeed, is it “corporate” the paper means or “business”? And why characterise a relationship where corporates are used to achieve Government policy as “welfare”?

KF: if we are left with the idea that private businesses (I do not use the word ‘corporates’ in the report and the distinction between the two in this context isn’t terribly important) cannot function without the state, this would be a big step forward. We can then deal with the question that is raised in the report about how we pay for it. This last question doesn’t make a lot of sense, but I think JM is asking why use ‘welfare’ to describe government policy/provision that assists corporations. I argue in my earlier work that this is important because it challenges a number of myths: 1) that governments provide only for citizens; 2) that private businesses ever really go it alone; 3) that there will be any real consequences for private businesses if governments engage in austerity programmes; 4) that since private businesses extract little of value from the state, taxes on businesses are less legitimate and should be cut…

By equating Government policy which benefits corporates to welfare payments made to individuals; by contending that “conservatively” 25% of all public expenditure delivers “unrequited” benefits to corporates; by suggesting that public policy purposes are advanced modestly if at all through that expenditure, the report seeks to steady and advance the narrative of corporate capture of the public sphere.

KF: more mischief making here. I do not, even in JM’s summary of my report, suggest that 25% of all public expenditure delivers “unrequited” benefits to corporates.. I don’t understand the last sentence – but it almost reads like an endorsement of the work. Or is he suggesting he has detected a wider ‘unspoken’ political aim of the work? Here he is literally making things up as he goes along!

No one could argue against proper scrutiny of individual policy decisions that deliver from public funds direct or indirect benefits to business. Nor would many contend that Government’s modes of engagement with business are perfectly delivered. But lump together tendentious assertions of value, couch the sum in the language of unrequited welfare, ascribe the result to corporate capture and you do no more than fuel a prejudice searching for a justification.

KF: if no one could argue against this, why does JM spend most of his review not engaging with this particular issue? I don’t want to deal with JM’s reassertion of ‘unrequited’ which, by now, he has convinced himself is my definition of corporate welfare. And in putting together the his arguments in the way he has, not to mention inventing an overriding political objective on my part – to draw attention to ‘corporate capture’ – he has outed his own prejudice which, in his assessment of my report, he has thinks he has found.

KF: In the final sections of his critique JM embarks on a voyage that includes fairytale and Faust. His main point is that it is a myth to suggest that it is possible to claw back £93bn in corporate welfare. But here his otherwise thoughtful critique turns to farce. He demonstrates that he has not really engaged with the arguments of the report and instead selected bits that he might disagree with. He imagines that I have argued that it is possible to find £93bn of spending cuts. He ignores the fact that I argue that there are multiple benefits to corporate welfare. That I argue most forcibly for greater transparency, accountability and a fuller debate on corporate welfare. This, for his benefit, is what I write in the conclusion to the report:
“So what is the answer? One solution would be to cut corporate welfare, especially those forms of provision that bring fewest direct benefits to citizens. But this would not be without its risks which are heightened by the lack of transparency/analysis/debate. Cutting back subsidies, grants and tax benefits would certainly impose huge costs on businesses, which may or may not be a cause for concern, but they may also have grave negative effects on citizens…There would be similar results if the government charged businesses the full economic costs of building and maintaining sufficiently good transport links, or forced employers to pick up the costs of health insurance. Many businesses would cease to exist if they didn’t trade directly and exclusively with the various arms of the state. It is clear that some forms of corporate welfare are essential, but more analysis on the relative costs and benefits of different types of provision, delivered in different ways to different businesses, is desperately needed in order to determine which represent best value for money and how best to organise corporate welfare in a way that maximises social benefits.”
Admittedly it isn’t the finest paragraph. But any reading of it would challenge the assertions made by JM that I am arguing that we should cut corporate welfare or that I believe there are no social benefits to be had from it.

So, after this lengthy review of my work, what are we left with. JM accepts that this is potentially an important area. But then he challenges the idea that we might include categories of expenditure that are widely accepted to constitute subsidies. He doesn’t really like the fact that we should widen the debate to include tax expenditures, procurement and tax credits. Even if he thinks I have stretched the argument too far, he appears to be unwilling to engage in this debate at all. And where he thinks my report fits well into his own world view, he simply makes it up as he goes along.

So here is my challenge to him. If he is genuinely interested in a debate about corporate welfare, let’s talk some more. He doesn’t dismiss the idea that businesses extract benefits and services from the state outright – so let him identify what constitutes corporate welfare. In fact, if he doesn’t like the concept of corporate welfare at all, let’s find another one. If he thinks the £93bn estimate is too high or flawed in parts, I’d be delighted to hear his? My guess would be that he won’t take me up on this challenge because his critique of my report suggests that his contribution to the debate doesn’t ultimately move us on at all. And I think this is probably his intention. A generous interpretation would be that he tries to engage with some parts of the report but misunderstand and misrepresents other parts. A less generous one would be that he does so deliberately in order to try to keep the issues off the agenda. This makes sense if you read his musings on Richard Murphy’s identification of the £120bn tax gap – which Murphy has clearly argued on a number of occasions couldn’t all be recovered (he argues that £20bn could be).

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