4 reasons a tax haven Brexit is bad news for Britain

europe-mapsmall-848x450A low-tax, low-standards economy will jeopardise generations of progress writes Laurie MacFarlane.

Chancellor Philip Hammond has warned that the UK may be forced to change its economic model if it is locked out of the single market after Brexit, sparking fears that the government sees the UK’s future as “the tax haven of Europe”.

Meanwhile, Donald Trump has promised a quick trade deal between the US and the UK after he takes office on Friday, with the Transatlantic Trade and Investment Partnership being mooted as a starting point for negotiations.

With Prime Minister Theresa May expected to confirm today that the UK will be leaving the European single market, the UK now faces being locked into a low-tax, low-regulation standards path for decades to come.

As we warned back in November, a race to the bottom in terms of corporation tax, regulation and labour costs will only jeopardise the long-term social and economic health of the UK. Here’s why:

1. The UK is already a low-tax, low-regulation economy

During the last Parliament the government cut the main rate of corporation tax from 28% to 20%. As part of last year’s Budget the government then announced that corporation tax will fall to 17% in 2020 – the lowest tax rate in the G20.

The government has also overseen a programme of mass deregulation under the guise of ‘Better Regulation’, with the departments responsible for climate change, the environment, work and pensions and health and safety being hit particularly hard.

The result is that today the UK has the second lowest level of product market regulation in the developed world, and the fourth lowest level employment protection legislation.

This means that, even as a member of the European Union, the UK has already become a low-tax, low-regulation economy. It is simply not possible to cut further without seriously undermining environmental and safety standards and social cohesion.

It wasn’t so long ago that people regularly got ill from the food they ate, or got dismissed from work unfairly. That this is no longer the case is the legacy of hundreds of years’ of hard-fought progress on regulatory standards. It’s essential this isn’t reversed.

“the reality is that aggressive tax cuts would spell the end of the UK’s model of public service provision”

2. Further cuts will mean fewer public services

According to the Institute of Fiscal Studies, the corporation tax cuts since 2010 have cost the government £10.8 billion a year in tax revenue. Cutting the rate of tax further to 10% would increase this to around £20 billion a year in lost revenue.

At a time when the NHS is facing a “humanitarian crisis” caused by lack of funding, slashing taxes further would be nothing more than an ideological move to fundamentally reshape the UK’s economic model and roll-back public services.

Despite the Chancellor saying that he hoped the UK would “remain in the mainstream of European economic and social thinking”, the reality is that aggressive tax cuts would spell the end of the UK’s model of public service provision.

3. It won’t lead to higher investment and growth

Proponents of cutting corporation tax argue that it leads to higher business investment and economic growth. However, numerous studies have shown that this is not the case, and that it can even have the opposite effect.

This is because corporation tax cuts can result in businesses hoarding cash rather than investing – a phenomenon that Mark Carney has described as ‘dead money’. Given that tax cuts also suck revenue and spending power out of the government sector, this has the overall effect of depressing demand, investment and growth.

This is exactly what has happened in the UK. Despite the repeated cuts to corporation tax since 2010 business investment has stagnated, while the UK’s large corporations are sitting on a cash pile estimated to be in excess of £500 billion.

Slashing corporation tax even further amounts to nothing more than a handout to already cash rich corporations, many of whom are already avoiding paying the tax they already owe.

4. It won’t improve ‘competitiveness’

There is little evidence to suggest that low corporation tax is related to the ‘competitiveness’ of an economy. While there is reason to be sceptical about the concept and definition of ‘competitiveness’, there is no discernible relationship between corporation tax rates and measures of competitiveness in international comparisons.

Every year the World Economic Forum assesses the competitiveness of various countries’ economies to produce a Global Competitiveness Index. The US has one of the highest corporate tax rates at 40%, but is deemed to have the third most competitive economy. Bosnia & Herzegovina, on the other hand, has a corporate tax rate of only 10% but ranks number 107 in the index.

“Many firms have chosen to invest in Britain in recent decades because it served as a gateway into the EU single market”

The reality is that firms choose where to locate based on a variety of factors such as infrastructure, education, skills and, crucially, market access. Tax rates typically come lower down this list of priorities. Many firms have chosen to invest in Britain in recent decades because it served as a gateway into the EU single market. The impact of leaving this market will more than outweigh any marginal financial gain that may arise from a cut to corporation tax.

A race to the bottom is not the solution for communities that feel left behind by our economy. Far from addressing the flaws in our economic model – already low-tax, low-standards – it would double-down on those flaws.

A UK business model that reduces inequalities and makes sure no community gets left behind instead means stronger standards for our economy, fair taxation and investment in the public services we all depend on.

Brexit entails a once in a generation reshaping of our laws, relationships and economy. The future of the country hangs in the balance, and it is up to us to build it.

 

This article was first published on the New Economics Foundation website: neweconomics.org

Comments (6)

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  1. bringiton says:

    What they have been allowed to get away with as part of the EU in terms of regulation,or rather the lack of it,will no longer be tolerated once they are out.
    The EU will not allow a banana state on it’s western border to undermine it’s institutions and trade.
    The Tories know this,which is why they are desperate to form a new trading bloc to make up for what they are going to lose in Europe.
    They have turned their backs on their “friends and allies” in Europe through their clearly stated aims of leaving the political and social union and are now striving to retain merely some sort of trading deal.
    There is little or no political good will towards England’s Tories anywhere in Europe and that will leave them with few options other than becoming a Belize or Cayman Islands with a Global begging bowl constantly in use.
    I suspect that is the situation England’s Tories have been trying to achieve for some time.
    Trumpland beckons.

  2. c rober says:

    hard to offer any argument , other than my usual housing.

    By assets the banks mortgages must be higher than at least 50 percent of industry , remember technically they own your home until the last payment.

    With today and unaffordable mortgages , 7x multiples as the norm , the lack of dead money being spent on more housing , the lack of tax not leading to job creation and hand outs wanted for trades training , then the only way for remaining competitive is then the staffing via low wages….or automation to keep the rich in the manner accustomed.

    So therefore we will be once again serfs but only if cheaper than a robot or computer , tenants to landlords , or expected to shuffle off our mortal coils to reduce care costs and pension bills for the states greater good portrayed as caring socialism – well at least for the ones today in School as their parents and grand parents suck the teet dry.

    The UK has shot itself in the Foot , it offers nothing to the People of Scotland , a hard brexit is not for its choice its been chosen for them (both for UK and Scotland) , and the EU will retaliate with tarrifs by the back door.

    This may be the watershed moment for the UK – ending in the only way back being via subs or god forbid the EURO.

    The having to rejoin with a euro doesnt sound as bad as you might think , if the valuation of the local currency of the last few to adopt was in their short term favour , increase on up to 5o percent of face value of the their national currency . That sort of instant BLOAT on the markets , in say pound converted to EURO at 1 – 160 would create an insane amount of currency to inject into the euro concept and a bounce needed in the nearly decade old fiscal funk.

    So perhaps I am offering a tin foil hat reasoning for the brexit means rebrentry?

  3. Derek says:

    It looks like TTIP is dead in the water in Europe, although its Canadian equivalent has scraped through EU approval. TTIP is heavily biased towards American business: any company given a contract may well be able to sue the pants off a European government if they seek to change the wording or financing of the deal. So expect trouble down the line if the Conservatives sign us up to TTIP, because it’s more than likely any Westminster quango, including the NHS, will want to change the deal; it’s what big organisations like this do, largely because they can’t work through the details of large contracts beforehand. They get it wrong and then pay through the nose to fix things they should have spotted earlier.
    Not just Westminster. I expect it would apply to similar contracts in Scotland and across Europe. The trick is not to sign a global deal that puts your head in a noose.
    May will sign us up to something like TTIP at the drop of a hat because she’s desperate to prove that Brexit can lead to trade deals outside Europe. We will repent at leisure, long after May and her pals have moved to the Lords.

    1. c rober says:

      Your not wrong with TTIP 2.0.

      Its exactly what May is after for England , the bending of equal partnership towards UK(Englands) businesses from its “partners” , be that the EU , or the former colonies and in its own union … not that it hasnt been that way internally for over 300 years , so they do have a working model to play with.

      America will break the Back of the UK , the EU eventually did the maths. Bhopal anyone? Front of the Q , aye right , thanksgiving one wearing a turkey suit.

      If the EU does what I think it will , a very hard brexit for the UK , then it will try to use the NI route into EIRE.

      While that may be beneficial for continuing the bias of UK trade towards the lesser partner EIRE , the open border with NI will be used as a UK hub via EIRE micro companies I fear.

      But EIRE puts its EU trade through English ports , without that free movement apres brexit it has a problem for EU exports unless its Around the Coast of Scotland via shipping – or through it post yes for indy. But do we have the likes of a super port as seen in the South Coast of England – no.

      However EIRE in such a scenario should watch out – bending those euro rules , or allowing them via NI/EIRE corporations , it may see them suffer for it, just as they are being spanked for with corporation tax. Of course the NI open border may well be given the boot by the EU – ie no open borders means no open borders – just like brexit means brexit.

      I wonder who owns the Irish ports these days , now that a brexit is happening the English ports used by EIRE for the last 30 years wont have freed movement of goods onward to the EU …. something their Electorate outside the cities should perhaps start thinking about. Especially if the French get their usual touchy selves again with blockades of ports and roads.

  4. Alf Baird says:

    Some of us have been arguing for many years that Scotland’s lack of economic growth and worsening international competitiveness was due in large part to the Tories privatisation of numerous former public utilities (energy (incl oil/gas), ports, airports, aggregates, etc) being sold (at discount prices) to offshore tax haven ‘investors’ (i.e. friends and family of Tories), in addition to ongoing land speculation, much of that also offshore owned, and elite universities acting as corporate educators for the worlds wealthier families. So this is not something that we will experience post Brexit – it is what Scotland has already experienced over the past 30 years. See: http://reidfoundation.org/2016/01/sort-out-our-ports/

    Being tied to the UK union has already made Scotland into the economic basket-case it is today. Thankfully this is all very easily rectified (e.g. through state policies in favour of people rather than offshore tax havens, far better regulation, Annual Ground Rent etc), but it will require independence and a very capable leadership to ‘drain the swamp’ Scotland stands to inherit.

    1. c rober says:

      Or we can elect oor ain version of Trump , then 10 years later sit scratchin oor heids and wonder what went wrong.

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