Tax haven hypocrisy


Housing and Planning
When it comes to the debate on tax avoidance, the coalition seems to struggle in two respects. The first problem is that the government seems unable to articulate the idea that the main contribution of businesses to welfare is not the taxes they pay but the goods and services they provide to consumers. Amazon, for example, makes tiny profit margins on huge sales and has transformed the value we are able to obtain across many retail sectors: the BBC regularly quotes Amazon’s corporate tax figures as a percentage of its huge turnover and not as a percentage of its small profits and the government does nothing to counter the left-leaning bias in this debate.

The second problem is that the government is hypocritical – this is noted in a new paper published by the IEA. On the one hand, the government likes to criticise tax havens as “sunny places for shady people”, a phrase regularly used by one senior minister. Simultaneously, the government is building Britain up to be a tax haven itself. The following three statements, for example, come directly from George Osborne (in the latter case from a Treasury document rather than from his mouth directly):

“We are building the most competitive tax system in the world.”

“I am delighted that Star Wars is coming back to Britain. Today’s announcement that the next Star Wars film will be shot and produced in the UK is great news for fans and our creative industries, and it is clear evidence that our incentives are attracting the largest studios back to the UK. I am personally committed to seeing more great films and television made in Britain.”

“The Patent Box will encourage companies to locate the high-value jobs and activity associated with the development, manufacture and exploitation of patents in the UK. It will also enhance the competitiveness of the UK tax system for high-tech companies that obtain profits from patents.”

The government is doing precisely what it is accusing “shady places” of doing. It is not only – quite justifiably – reducing corporation tax, it is creating deliberate tax avoidance schemes so that mobile international businesses – such as film making and those involving technical patents – will move their activities to Britain in order to avoid tax in other countries.

It seems that tax havens are a good thing if they are wet and windy places – such as Ireland, Holland and Britain – but not if they are sunny places.

As it happens, there are some really serious issues about the future of corporate taxation that need to be considered, but the government does not seem interested in addressing them. The issues include, for example:

  • Why are business rates so high? Business rates really do put domestic retail businesses at a competitive disadvantage and they are out of all proportion to the value of the services that businesses receive from local authorities.

  • Do we need to reform corporation tax entirely? For example should we ensure that the shareholders themselves are taxed on earnings or distributions rather than the companies being taxed on profits that are increasingly difficult to assign to particular jurisdictions. Debt interest is already taxed that way.

These are difficult problems for the government. A reduction in business rates would require significant spending cuts; the second reform would probably require widespread international agreement that would be difficult to achieve. Meanwhile, we might have to work with the system we have, warts and all. But let’s stop vilifying companies who only apply the rules that the politicians design and let’s stop being hypocritical.

We should also applaud our own financial services tax havens that benefit Britain and perform an important function. They prevent very damaging double taxation of investment returns for non-UK investors but still allow the City to supply financial services on an international basis to such investors. Abolishing offshore tax havens would be a disaster for the City. Secondly, tax havens promote financial integration and economic growth, and, according to a recent IMF paper, such financial globalisation is likely to increase government tax revenues.

Indeed, the same IMF paper suggests that general sentiment towards the market economy is the main determinant of national tax rates and not “tax competition”. This suggests that the fears of government ministers who worry about losing tax revenue due to tax competition are over-blown. It also means that supporters of a market economy need to make their case strongly and cannot rely on mobile capital to restrain tax-guzzling governments. Either way, we should stop complaining about companies which are simply obeying the laws designed by the very same politicians who do the complaining.

This article originally appeared on Conservative Home.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

3 thoughts on “Tax haven hypocrisy”

  1. Posted 21/06/2013 at 12:14 | Permalink

    “a phrase regularly used by one senior minister”
    -And who might that be, one wonders.

  2. Posted 21/06/2013 at 14:40 | Permalink

    Never mind about tax havens: as long as the British government keeps producing Finance Bills containing more than six hundred pages (!), as in both 2012 and 2013, it is obvious that it is the British tax system itself that needs urgent and radical reform. We can’t expect to be able to significantly simplify our tax system without some major political decisions, like abolishing some taxes, reducing tax rates, putting an end to some of the micro-managing, etc. etc. One of the reasons that there is a certain amount of aggressive tax avoidance is, of course, the existence of some very aggressive taxes! For example, it’s hard to think of a more aggressive move than the last Labour government raising the top rate of income tax from 40 per cent (where it had been throughout almost the whole of their thirteen years in office) to 50 per cent. This change was calling out for ‘aggressive’ avoidance and evasion. And it was absolutely typical of the pathetic attitude of the current coalition government to reduce the top rate only to 45 per cent. This guaranteed getting all the political flak (for reducing the rate at all) without even getting the benefit of a tax rate that wasn’t higher than most of our competitors.

  3. Posted 21/06/2013 at 18:11 | Permalink

    and the coalition replaced what was a formally described as temporary tax rate of 50% with a tax rate of 45% that was not decreed to be temporary

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