The Treasury is busy making another fine mess. Larger companies are asking their tax advisers if they could now save serious money by moving their head offices out of the UK. The sales teams in Ireland, Switzerland and the Netherlands are in overdrive contacting UK companies to lure them away with their much better tax offers. They are greatly helped by the Treasuryâ€™s decision to consult on the idea that multinationals in the UK should also pay tax on their overseas earnings! Boy are they celebrating in Dublin and Zurich â€“ itâ€™s their dream come true, the best knocking copy they have had on the UK for 30 years.
To many Labour MPs itâ€™s a simple question of social justice. They live in a world where big business is owned and run by the modern equivalent of Victorian mill owners â€“ fat cats who live and earn in the UK, who will always stay here, and who should be taxed to the hilt to teach them a lesson for being bad employers and for making so much money. If any of them use smart lawyers and accountants to move offshore, then they must be taxed for doing that and hauled back onshore so we can all benefit from the money they have to cough up.
As an MP who also needs to be re-elected I can see the natural attractions of pandering to peopleâ€™s jealousy by attacking the super rich, and taking so much money off them that I could offer good public services at little cost to constituents on average pay and below. Who wouldnâ€™t like that apart from a few super rich? The problem is it is not how the modern world works. There are not enough super rich who will stay in the UK and pay so much tax that we could make much difference to the tax all the rest of us have to pay. The great multinationals are not owned by a few modern mill owners in London and Birmingham. They are restless and footloose global companies owned by millions of shareholders, some big and many small. There is no substitute to being honest with people, and telling them that if they want more public money spent they and the neighbours have to pay it to the Treasury first.
Ironically Labourâ€™s demonology is directed more against the managers of large multinationals than against the owners. The Chairmen and CEOs earn big salaries and evoke Labour hostility for their pay rates, but usually they own very little of the company they work for. The owners are you and me through our pension funds, trade unionists, small savers and academic institutions of the USA through their big pension and endowment funds, and a host of owners world wide from charitable funds and sovereign funds through to rich individuals. The shareholder list of a large UK based multinational is far more ethnically diverse and global than the UK voters list itself â€“ something that should appeal to New Labour. Collectively these shareholders have the power to appoint, remunerate and dismiss the directors and managers, who are but hired hands.
Because these great companies are truly public companies no one person or group is in charge. A CEO may be powerful for a bit if he or she delivers good growth in earnings and dividends, but ultimate power is spread and is open to company democratic pressures. Threatening such companies with higher taxes in the UK is therefore potty. The professional managers want to keep their jobs. If there is an easy way of cutting the tax bill by moving to another respectable country that offers lower taxes than our own these managers have to look at it. If the atmosphere towards enterprise and dividends becomes too hostile in the UK and they are still based here they might be subject to shareholder anger. The shareholders and their representatives are unlikely to turn round and say we want to pay more tax and want to stay in a country that is moving against enterprise, especially bearing in mind how diverse the shareholder lists are.
When I wrote the Conservative Economic Policy review the Committee and I drew attention to the notable deterioration in the UKâ€™s tax competitiveness. Much of this has come about because other countries have improved their tax system so much to help enterprise. They are continuing to do so. Both main UK political parties seemed to take the message on board. The Conservatives are looking at moving to 25% Corporation Tax from the 30% we commented on. The Labour government responded by moving the headline rate down to 28%, a move in the right direction. Unfortunately Labour bought into part of the idea â€“ the UK must have low rates it can use to ward off foreign competition â€“ but not into the rest of the proposition â€“ that we need lower taxes overall, and simplicity and consistency in the system.
Businesses looking at coming to the UK â€“ and businesses asking whether they should stay â€“ want to know that they are not paying a big penalty in the form of higher tax for doing so. They also want to know the system will be stable. By this they mean they want to know that having arrived they will not be faced with changes that put taxes up. They will not complain if the taxes are cut.
There is one simple way for the Treasury to staunch the flow of businesses heading for the exit. They should announce they have no intention of changing the system of taxing foreign profits, having consulted. They should add that they are open to ideas for lowering business tax rates, and that future change will be in that direction. Such action will increase the amount of revenue they collect from business, by keeping more companies here to tax, and attracting more companies here to tax. The way Labour is going, they will discover that footloose international businesses are no longer â€œBritishâ€ owned by Tory voting mill owners. They are what they say they are â€“ fast moving successful suppliers of the global market, run by international managers on behalf of an extraordinarily diverse range of owners who feel no loyalty to the UK.