The real losers of the UK becoming a tax haven

For months the public and governments around the world have been totally mystified at the lack of any plan coming from the UK government on how it intends to extract itself from the European Union following the Brexit referendum in June 2016.

On Sunday the British Chancellor of the Exchequer revealed the hand of the May government. As seems to have become the tradition, he did so in a European newspaper. It appears that the UK is now openly threatening to turn itself into the world’s largest tax haven if the EU does not yield to its demands for free access to the European market.

Of course this is not the first such statement in this area, and the Tax Justice Network has warned about the tax haven tendencies of the UK for some time. Over the last few years the UK has adopted several policies which have increased the attractiveness of the UK as a tax haven for foreign profits. These include slashing corporation tax rate to 17%, slashing capital gains tax, allowing rich people to buy UK citizenship, offering non-dom status to rich people, and changing the law to allow UK corporations to hoard their foreign profits in tax havens.

Shooting ourselves in the face

The UK government has generally justified its policy of tax cuts by the ideology of ‘competitiveness’. The idea that cutting taxes stimulates economic activity, leading to greater tax receipts.

The ideology is demonstrably wrong. On the UK government’s own generous figures the estimated increase in tax collection generated by economic growth stimulated by tax cuts will mean that the Treasury will only recoup around half the tax losses it has incurred through corporate tax cuts over the next 20 years.

The policy has also failed in other countries too. Most prominently in Kansas, where a programme of tax cuts was pioneered by the father of tax competitiveness, Art Laffer. The subsequent collapse in government revenue almost bankrupted the state.

Frequently cited positive examples of how tax cuts can stimulate economic growth, like Ireland’s Celtic Tiger, are largely mythical. Ireland had a policy of low taxation for many years before its growth story started. The explosion in the Ireland’s economy largely coincides with the country’s entry into the European Single Market, which in itself should act as a warning to the UK.

The UK currently occupies a particularly vulnerable economic position to the kind of policies being threatened by the Chancellor. The UK as a whole buys more from the rest of the world than it sells, and the UK government currently needs to borrow money to pay its bills. Slashing government revenue further and increasing the costs of imports is likely to hurt the UK more than it will hurt anyone else.

The UK’s negotiating partners in the EU recognise this too. The German Conservative member of parliament Norbert Röttgen commented that the threats of tariffs and tax cuts were tantamount to  “self-harm and an expression of British helplessness”.

Abandoning the welfare state

But these uncomfortable truths are unlikely to persuade the UK government to change course. That is because, remarkably, the latest comments of the UK Chancellor of the Exchequer appear to accept what the TJN has been saying for years. Namely that it is impossible for a tax haven to generate enough tax revenue to run a modern welfare state.

In his remarks to a German newspaper, Mr Hammond puts forward the idea that the UK may depart from ‘mainstream european economic and social thinking’ if it follows though in its plan to become a tax haven. The inference is clear, the UK’s pursuit of tax competitiveness, could lead to the abandonment of the welfare state. At threat is universal free healthcare, education, pensions, social insurance and all the other things that many people in the UK value, and are a core part of ‘mainstream European economic and social thinking’.

How many voters thought that that was what they were signing up to as they cast their ballot to leave the European Union?

TJN has written extensively about the importance of corporation tax in our publication, ten reasons to defend the corporate income tax.