Nicholas Shaxson: Why a ‘Competitive’ Economy Means Less Competition

Yves here. Nicholas Shaxson explains how a “Competitiveness Agenda” is being used to set industrial policies that favor the creation of what used to be called “national champions,” as in Really Big Companies. Never mind that neoliberals officially oppose anything so interventionist as industrial policy….

By Nicholas Shaxson, the author of Treasure Islands, an award-winning book about tax havens. Originally published at Tax Justice Network

The ‘competitiveness’ of a country can be taken to mean many things. Many people, such as Martin Wolf or Paul Krugman, have argued forcefully that it is a meaningless or dangerous concept. On another level it’s a question of language: you can make national ‘competitiveness’ mean whatever you like.

But there is a very common use of the term out there – what we are starting to call the Competitiveness Agenda – which accepts a particular meaning for the word ‘competitive.’ This agenda involves special pleading to bestow perks such as tax cuts on capital (or on capital owners), on the basis that if they aren’t pampered they will flee to other more hospitable jurisdictions. (Whether they would actually do this is another matter: the point here is that the scaremongering is often effective in securing pork for capital.)

The special pleading goes along the lines of: “Give us this tax perk and your whole economy will be more ‘competitive.’ ”

Remember that ‘competition’ between (and the ‘competitiveness’ of) countries bears absolutely no relation to competition between private sector actors (like companies) in a market. To grasp this, ponder the differences between a failed company that can’t compete, and a failed state.

The basic argument of today’s post is that the Competitiveness Agenda will tend to reduce competition in markets where it is pushed.

How so? Well, it’s pretty simple.

The firms that are most able to flee (or partly flee) to foreign jurisdictions are (naturally) the internationally-focused ones. That usually means multinational corporations — and that tends to mean big corporations. The locally-focused ones, which are most wholly embedded in the local economy and won’t flee, are generally the smaller firms.

So the Competitiveness Agenda will tend to give large multinationals advantages over smaller firms (over and above the advantages they already enjoy, such as economies of scale), enabling them to kill the smaller firms on factors (like getting particular tax breaks) that have nothing to do with genuine wealth creation and everything to do with wealth extraction.

End result: the big get bigger, and smaller firms die. There is less competition in markets.

Here’s a visual graphic to illustrate the process in action recently.

UK-corp-tax-ratio-small-to-large-business-300x187This graph shows how the tax burden on large companies in the UK has fallen relative to the tax burden on small companies. (Click to enlarge: find the data sources for that graph, and further explanations, here).

Though there are other reasons for this dramatic slope, ‘competitive’ changes to the UK corporate tax system have been a big contributory factor: the headline tax rate for big corporations has fallen by over a third, from 28 to 18 percent, while the small company tax rate has hardly budged (it was 21 percent, then was unified with the main rate at 20 percent; and the unified rate is due to fall to 18 percent by 2020).

A ‘Competitive Banking Sector Means Monster Banks

Now the same generic process is underway concerning the UK’s big globe-trotting behemoth banks like HSBC, and smaller ‘challenger’ banks which the government says it is keen to promote. The International Tax Review (ITR) describes this in an article entitled UK Financial Sector Pushes Back against Punitive Tax Policy:

“A financial sector backlash against UK tax changes continues to grow as revenue figures become clearer. The changes, announced by George Osborne, Chancellor of the Exchequer, in July’s summer budget, include a new 8% surcharge that will be applied, from the beginning of 2016, to bank profits above £25 million, while the UK’s bank levy will be gradually phased out.

(The official explanation of the changes is here: the detailed budget policy costing are here on p16, although for some reason they won’t break down the impacts of the two separate tax changes.)

To summarise, two things are happening here.

  • One tax — the bank levy — is going down. Crucially, it’s going down due to ‘competitive’ pressures: as Bloomberg summarises:

“the chancellor pared the levy on banks’ assets, bowing to pressure from lenders that have threatened to leave London.”

Until now, only the biggest 30 or so banks in the UK paid the levy: costing them over £8bn since it was introduced in 2010 in the teeth of financial and economic crisis.

  • Another tax — the new 8% surcharge, which will apply also to smaller “challenger banks” and building societies that are currently exempt from the existing bank levy — is going up. This will spread the tax net to 200 or so banks, with only the very smallest falling under the £25 million threshhold.

(It may be telling that in the official explanation for the bank levy, and even in the detailed budget policy costings, the government has not broken down the revenue impact into its two components. We’ve submitted a Freedom of Information report and will let you know the result here.)

Fortunately, the UK’s financial press and some politicians have noticed what’s going on. The publication City A.M., normally a cheerleader for the big banks, has an article by Labour Party official Alison McGovern MP entitled George Osborne’s damaging bank tax changes are a blow to competition in the sector. She wrote that the twin moves

” . . . will act as a tax rise for small challenger banks and building societies, who pose less risk to our economy, while the big international banks get a much better deal. It risks stifling competition and acting as a restraint on sensible lending. . . a responsible government would be trying to promote more competition in the sector.

Our emphasis added.

This, of course, reflects exactly the same generic process that’s been driving the UK headline corporation tax rate changes: a falling burden on big players, and a rising burden on smaller ones. Overall, it will tend to kill the smaller players.

In short: a ‘competitive’ tax policy for the financial sector means reduced competition in banking. And, as one of many other side effects, more dominant monster banks which pose still greater threats to financial stability.

Endnote: We aren’t necessarily arguing that competition in the financial sector is always a good thing: if, for example, banks ‘compete’ to take ever greater risks at the taxpayers’ expense, this can result in overall harm. The point of our post is to describe and illustrate the generic point that the pursuit of national ‘competitiveness’ and the Competitiveness Agenda is generally likely to reduce competition in markets.

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  1. Clive

    As rightly mentioned, a case in point is HSBC, serially threatening to “abandon” UK jurisdiction and the associated regulatory “burden” in favour of, presumably, more accommodating countries with either less “constraints”, “red tape”, “business hostility” or better corporate welfare. Or both.

    They last tried this stunt in response to the UK’s bank levy (a pretty meagre attempt to reimburse the long suffering taxpayers a small percentage of the true cost of backstopping mega bank balance sheets) with China reported to be the lucky leading candidate. The recent China wobble will I suspect put that on the back burner for a while.

    But yes, SMEs don’t tend to go jurisdiction shopping like huge corporations do because they don’t have the political clout or the network of bought media and sometimes bought lawmakers. Big businessman have those things and so so they can play that game.

  2. Sam Kanu

    This has been going on for a long time – the State Dept abroad basically operates for and at the pleasure of big US companies – only. That is not merely a part of the foreign policy – it IS the foreign policy.

  3. say_what?

    Talk of competitiveness when banks are, in effect, a government enforced/subsidized cartel?

    I suppose pirate* ships used to compete among themselves too while, as a class, looting everyone else?

    *Actually banks are closer to privateers, government-chartered pirates.

    1. shinola

      Ah, yes. England, East India Co. & pirates turned “privateers”. The “business” model is nothing new…

  4. tegnost

    Thanks, this will come in handy when I’m grappling with stubborn free marketeers. Really?… Bankers leaving the City of London, where do they plan to go?

      1. say_what?f

        And their lender of last resort? And from whence their deposit insurance? And who’ll enforce their contracts including foreclosures?

        Governments have banks by the short hairs and should act accordingly.

        Door, arse, etc should be the message.

  5. RBHoughton

    There is no competition in the AngloAmerican perversion of capitalism, at least not in the way Adam Smith meant it – i.e. working harder, providing a better good or service, going the extra mile for your customer and, that old favorite, ‘the customer is always right.’

    We haven’t done that for a long time and we completely repudiated it after demonetisation.

    We do advertising now and we do that notorious sales practice of ‘market-adapted pricing’ whereby the most popular product owner sets the prices and everyone else discounts off that.

    The only time there is competition of the traditional sort is when some new entrant comes to market and he invariably discounts below the agreed profit levels than his competitors have set. He is instantly assailed with lunch invitations by his industry cartel and put on the right track.

    In many countries there are Competition Authorities that are supposed to create and maintain commercial competition – pah – they seem to be just an extra on the expense account.

    1. MaroonBulldog

      Competition Authorities? Dialectic is needed.

      Dialectic on market failure: Two schools of economic thought:

      Thesis: “Fresh water school of economics”: markets are generally competitive, market failures are rare, government intervention is seldom justified to restore competitive conditions.

      Antithesis: “Saltwater school of economics”: market failures are relatively common, government intervention is often justified to restore competitive conditions.

      Synthesis: “Economics is bilgewater”: market failure is all there is, and government colludes to keep it going.

  6. MaroonBulldog

    In a competitive market, producers suffer indignities and consumers reap the benefits of competition. (Because, in a competitive market, no producer is big enough affect prices.)

    Business doesn’t like competitive markets. That’s why we seldom observe any. (Oh, did I say “seldom” when “never” would be more accurate?) Business prefers government intervention to reverse the order of things. So accommodating government intervenes and creates all manner of regulations to create barriers to entry and to facilitate collusion–as long as the collusion is done in the open, in the regulatory forum itself, and we get: A collusive market, where consumers suffer indignities and producers reap some of the benefits of collusion. (The balance of the benefits are reaped by regulators and politicans as their fair share of the boodle–that’s why we call the collusive market system “crony capitalism.”)

    To sum, the key points are: Competitive markets –producers suffer indignities so consumers may benefit. (Not observed).

    Collusive crony capitalist markets –consumers suffer indignities so that producers may benefit (sound familiar?)

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