Tax Harmonisation: Cutting off your nose to spite your face

Today's FT reports that the Government have become so worried about the number of companies being driven to Ireland by high-tax Britain that they are considering supporting EU tax harmonisation. In essence, having gone a long way towards ruining our economic competitiveness with tax and red tape, they have decided the fault lies not with themselves but with our neighbours who have wisely created a welcoming environment towards business.


This corrosive idea that "tax competition" is a bad thing that somehow lets low tax economies "steal" revenue from high tax economies is one that the EU Commission and various Unions have been peddling for quite some time, and threatens to do a lot of economic - and diplomatic - damage.


Ireland's economic success, for example, has been founded on low corporation tax rates. Faced with companies like Shire moving to the Republic, the obvious path would be for UK Plc to emulate the Irish and cut our own rates to similar levels to encourage businesses to stay and to spur our economy on. The harmonisation approach is simply jealousy - trashing someone else's success rather than trying to achieve anything yourself.


The unfortunate thing is that whilst smashing your neighbour's new car in a fit of jealousy might seem the best thing to do at the time, it will swiftly have repercussions on the vandal as well as the vandalised.


First up, companies like Shire will simply go somewhere else that has low taxes, and instead of Britain losing out, Britain and Ireland lose out - not exactly the result you were after.


The obvious next step (obvious if you're a harmoniser, of course) is to try to extend the enforcement of high taxes. That's what's been happening in recent years with the EU trying, sporadically, to bully Switzerland into increasing its tax rates, and it's hardly a pleasant way for friends and neighbours to behave towards each other. Pressurising other countries to change their domestic tax policies in order to protect your economy from the effects of you high taxes is not only unedifying, it's anti-democratic. It's very revealing of the EU's true opinions that underneath all the guff about peace across Europe, the greater Europa and a brotherhood of nations, as soon as one country dares maintain some independence and uses it to be successful, the Commission rounds on them with threats.


Even if you eventually succeed in forcing the whole globe to have universally high corporation tax (God forbid), the only result is that the global economy is made more sluggish by the level of taxation, resulting in lower profits, reduced GDP, fewer jobs and more misery.


The alternative is simple. If Ireland are outdoing us because they have got a tax system that works well, we should emulate it, not try to stamp it out as so called "unfair competition". It's not as though they have some unfair advantage - we have the power to slash corporation tax tomorrow, we just choose not to. It's stupid policies on our part, not some kind of weasily deception from the Irish.


Politically speaking, the harmonisation approach does not only store up economic problems and human misery for the future, it will make life much more difficult for the Government as a whole. Britain is short on allies, especially like-minded allies, in the EU, so alienating Ireland on such a crucial issue is a bad move. Furthermore, it makes people like Kitty Ussher MP sound rather hollow when they claim to stand up for business and national freedoms in the face of top-down EU legislation, as she does elsewhere in the same FT edition.


The Government have mismanaged the public finances to such a degree that they are really starting to panic - they must be careful that their short term thrashing around to find a scapegoat does not result in the economy, friendly relations with our neighbours and our democratic right to self-determination taking a beating we can ill afford.

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