From the TUC

Beggar-my-neighbour no substitute for an EU corporate tax policy

21 May 2011, by in Economics

Last Wednesday (18 May), the Prime Minister argued that competition over corporate tax rates was better than co-operation. He was, effectively, saying that there were no problems with the rest of Europe undercutting UK tax rates, or a beggar-my-neighbour race to the bottom, although he dressed it up as defending British interests! It never seems to occur to politicians who argue for the flexibility that allows them to undercut others also allows others to undercut them!

Answering a question from Conservative MP James Clappison, the PM opposed the idea of an EU directive for a common corporate tax base (not even a common rate, just an agreement over what can be taxed). He said:

“It is important that we keep our competitive tax rates and do not give the EU further coverage over our tax base.”

Of course, his argument is based on the idea that the UK would get benefits from having lower corporate tax rates than other EU countries. But there are two objections.

First, the UK loses out from low corporate tax rates because we lose the revenue that such taxes provide (even when companies go to the lengths that they do to avoid paying).

But second, the whole EU loses out when Governments think it’s in their economy’s interest to cut corporate tax rates, because it’s a recipe for a persistent downward spiral in such tax rates and therefore in tax revenues. And the comparative benefits to any one economy can be illusory because other countries can do the same thing. The only people to benefit are the multinational companies who can blackmail national governments because they can threaten relocation (something income tax and VAT payers like you and me generally cannot). As the WPP advertising company demonstrated by yo-yoing between Dublin and London, few jobs are actually moved when this happens. The big shareholders and top management just pocket a windfall and the chance to experience swanky restaurants in a different European capital city!

That’s one of the arguments, of course, for multilateral agreements – or just co-ordination – on tax policy. Ordinary people all over Europe would benefit from that.