One noteworthy feature of Brexit coverage is British commentators and even worse, officials, reassuring themselves and their audiences that the EU’s firm insistence that the UK will not be able to cherry-pick will melt when they understand that the UK has real bargaining leverage.
Based on the arguments I have seen so far, the Eurocrats aren’t at any risk of these supposed trump cards working out as envisaged. For instance, over the weekend the Telegraph published, George Osborne is threatening the EU with a giant tax haven right on its doorstep. From the story:
Either way, Mr Osborne had a helpful suggestion today. Britain needs to act fast to signal to international investors that it is going to be a hospitable and profitable place to do business. His statement that Britain should aim for corporation tax rate of 15 per cent is not a bad start. That would be a cut of 5 percentage points and give us the lowest rate in the G7 by some margin….
But there’s also another, cannier reason why Britain should do everything in its power to appeal to large corporations that employ people across the EU: it improves our negotiating position. As I’ve written, I believe getting a good deal from the EU is going to be extremely tough, because there are powerful forces on the continent determined not to grant us full single market access if we want any concessions on free movement.
One strategy we should use to loosen their resolve is to give the EU an idea of what an excluded Britain on the edge of the market might look like. And one potential answer to that is obviously: a giant tax haven..
The logic of cutting taxes in response to Brexit is obvious. If the EU decides to make it more expensive and difficult for businesses based here to sell their goods and services into its market, we will need to offset that cost in order to encourage a similar level of investment as we currently enjoy…
The underlying message it sends to the EU is a harsher one: if you wilfully lock us out of your market, you leave us only one way to compete. And you won’t like it.
A top international tax expert dispatched this idea in a terse three sentences. First, the UK’s 20% tax rate is already an inducement…and how many companies are set up there just for the purpose of the tax rate? There are a lot of other factors, like access to raw materials, markets, and quality of workforce that factor into these decisions.
Second, for the UK to be a tax haven, there would need to be no withholding at EU borders. That in turn depends on EU directives and EU/EEA membership. That’s Ireland can be a corporate tax haven. It’s in the EU!
Tax Justice Network addressed variants on this theme in a recent post:
Just before the Brexit vote we quoted Adam Posen, President of the Peterson Institute for International Economics, about what might happen in a post-Brexit Britain:
“If you’re anti-regulation fantasists to begin with, you start going down the path, ‘Oh we can become an even more offshore center. We can become the Cayman Islands writ large, or Panama writ large.’ And this frankly is the way I think this also spills over to the rest of the world, is that the UK decides, ‘Hey, regulatory arbitrage, letting AIG financial products run in London, actually destroyed the US financial system, but didn’t hurt us – made us a lot of money. Let us continue down this path. Let us be the ‘race to the bottom’ financial center. And I think this that’s where this going, because they’re not going to have any other option. It’s not good.”
And this is already being played out. Take a look, just for example, at this quote from Chris Cummings of the extremely peculiar and powerful TheCityUK (and by extension the City of London Corporation), illustrating Posen’s point very exactly:
“It is vital that action is taken to reinforce the global competitiveness of the UK as a place in which and from which to do business. This will help to mitigate the risk of prolonged uncertainty while a new relationship with the EU is negotiated.”
Or calls from London’s mayor to turn London into a mini-state, which would have appalling race-to-the-bottom effects. And we noted yesterday that this applies to tax, particularly corporate as well as financial regulation.
The fools’ gold of corporate tax cuts
The Financial Times this morning is running a headline Brexit: George Osborne to slash corporate tax rate:
“In his first interview since Britain voted for Brexit, Mr Osborne said he wanted a leading role in shaping Britain’s new economic destiny, laying out plans to build a “super competitive economy” with low business taxes and a global focus.”
Or, in the area of taxing rich individuals, take a look at this Financial Times story:
“Brexit could lead to the scrapping of tax rises for wealthy foreigners living in the UK . . . some people may benefit from the need to shore up the UK’s appeal to mobile investors, as well as greater freedom over the design of tax incentives.”
As we have pointed out many times in the past: corporate tax cuts, particularly in the current climate, are the worst kind of stimulus. They reduce economic growth – for several reasons, including these:
a) Corporate tax cuts don’t attract useful investment! This Chancellor, George Osborne, has already cut the corporate tax rate, again and again, over this parliament and the last. As we’ve identified, his government’s own advance assessments, and those of the independent Office of Budget Responsibility, have predicted zero impact on the tax base – that is, no new investment or at least no profit from any new investment that is made. This is consistent with analysis from the US Joint Tax Committee, that profits are only really shifted in response to much more dramatic cuts: you have to get the rate down to 5% or even 1% to compete with the big boys of Luxembourg or Ireland for profits shifted in from elsewhere. Real investment, meanwhile, is driven by fundamentals like infrastructure, labour skills and (yes) market access – tax rates just aren’t a primary concern.
b) Corporations are sitting on cash piles: profits are high but they aren’t investing, because demand isn’t there. Tax away some of those useless cash piles, spend it, and increase demand, thus increasing investment – and growth. Corporate tax cuts are like pushing on a string: if they aren’t investing their cash piles, why would corporate tax cuts help?
c) The lower corporate taxes go relative to income taxes, the more rich people convert their income into corporate forms, to escape relatively higher income taxes. This is a pure, inequality-boosting redistribution – and as the IMF and many others remind us, higher inequality means lower economic growth.
d) The ‘incidence’ of corporate taxes falls largely on capital owners/shareholders: and many of those shareholders are foreigners: over 50 percent in the case of the FTSE 100 firms. The leakage from corporate tax cuts is tremendous. Not only is there this ‘external’ leakage to other countries: but there is upwards leakage too, from ordinary taxpayers to a relatively much wealthier group: corporate shareholders.
e) When they say ‘competitive’ they mean showering goodies on large players, at the expense of smaller, less mobile local players. This hurts the small and boosts the large: increasing monopoly – with the counter-intuitive result that ‘competitive’ tax policies reduce competition. With all the market-harming, inequality-boosting results.
f) Doing this provokes others to follow suit, in a continuous process of ‘tax wars.’
The list does not stop here: also read
- Ten Reasons to Defend the Corporate Income Tax – TJN
Tax haven route won’t work for post-Brexit UK, OECD says – Tom Bergin, Reuters. A slightly confused document, but
New research: ‘competing’ aggressively on tax reduces growth – Fools’ Gold.
It follows from all this that an increase in corporate taxes will boost economic growth. Corporate tax hikes are the one component of austerity that is painless: it’s corporate tax cuts that deliver the pain.
Those who have advocated for tax cuts before – and even KPMG, for goodness’ sakes, one of the top lobbyists for corporate tax cuts – don’t think this is a good idea.
Yves here. The Brits are admittedly just starting to wrap their minds around how a Brexit might work in practice. What is disconcerting is the tendency to try to brush aside rules. As we’ve stressed, the EU is very by the book in how it interprets its laws and regulations. The UK negotiators will be in for an unpleasant surprise if they fail to come to term with that before they sit down for serious talks.