Brussels, 8 April 2008
To be checked against delivery
An ageing population, shifts in risk from employers to workers as jobs and pensions become less secure, the promotion of flexicurity and its key feature of slotting people into new jobs quickly as old ones disappear, the need for affordable child care, these are all factors which points inexorably to higher tax levels rather than lower ones.
Yet in many countries, tax increases are a political suicide note.
Not only might they repel voters. But equally seriously, it can lead to the flight of the wealthy or enterprises to cheaper, low tax locations.
This last point is a major factor in countries’ tax policies. Almost all countries are competing, ever if they do not always admit it.
- Toyota - France
- German systems of allowances
- Belgian attractions for multi-nats
- British non-doms
- Irish set their corporate rates lower than UK
- Luxembourg very competitive
- Not to mention countries and territories outside the EU
- Monaco
- Channel Islands
- Andorra
- Isle of Man
- Gibraltar
- And then the West Indies
- Kiln of Lloyds of London
- Bermuda
Arranging corporate tax is profitable business. Barclays manager responsible has been the highest paid guy in the bank. Tax becomes almost voluntary or a matter of considerable discretion.
And it is a staple of the work of the big accountancy and consultancy practices.
With mobility on the rise, the temptation for workers is to follow suit is high.
Work in a different country to the one in which you live. Cheap air travel helping that process. Play one system against the other. We know it is done at the high economy levels. But it is not just the Chairman of Deutsche Post. It can spread.
Is the answer flat taxes?
These rest on the assumption that provided people and companies do not have to pay too much, they will willingly pay around 20% as a contribution and that the exchequers will actually receive more. Tax evasion will have been reduced, honesty will prevail and the State’s revenues will improve in a real win-win situation.
We have had a look at flat taxes in those countries where they operate. And I have to say that we are not impressed. Some people will go to great lengths not to pay even modest rates of tax – that is a fact.
Some of the benefits of flat taxes to State income have been exaggerated and reflect better growth rates, rather than lower tax rates.
Turning now to employment taxes, including social security. There is wide variation between different EU member states with the highest equalling 50% of the costs of wages.
The extent to which they have hit employment levels is difficult to compute but undoubtedly they are likely to have had an effect although one that is often exaggerated. To give one example high social changes and employment related taxes are often held to be a major constraint on employment growth in Wallonia but the same rates and levels apply in Flanders where there are some very prosperous hotspots with nearly full employment . There are other factors at work. So easy generalisations do not always fit the facts.
My final point is given the strength of single markets’ four freedoms
- Of people
- Of goods
- Of capital
- Of services,
and given the trend towards globalisation, nation states are having a harder and harder time of it. If a critical mass of people become mobile, how can the income tax base be maintained. Must taxes on consumption, which by definition are not progressive, become the main way forward. Or must we more towards greater international common action.
We have that a little in relation to the most notorious tax havens – the work of OECD. But it does not go much further than that. I know that no government is likely to give up the right to set taxation levels. To do so would be the virtual end of the member state.
But can there be some EU wide agreement on corporate tax levels at least. Can monetary union be complemented by a decree at least of economic union so that ‘beggar thy neighbour’ policies do not always prevail. And would it be totally impossible to try to get a greater increase of agreement in the IMF or OECD, or in bilaterals with the USA and others, on the taxation of corporate income. A big question but a crucial one.