Thursday, March 10, 2005

"Re-heated Reaganomics"?

That was the accusation levelled at Alex Salmond's plans to cut corporation tax to 20% and reduce business rates below the English level by the Scottish Labour Party. "Reaganomics" was the term coined to describe old Ronnie's policy of cutting taxation on the assumption that a more business-friendly environment would create growth, which in turn would generate tax revenues that would more than compensate for any lost through the tax-cuts.

Combined with extravagant increases in defence spending, Reaganomics nearly bankrupted the country. So, is it fair to describe the SNP's policy thus? Probably not: the idea that Britain has lower taxes on business than the rest of Europe is something of a myth; it's personal taxation that is lower and, as I understand it, the SNP plans to increase this in the unlikely event of them coming to power. This would put Scotland into a similar position as Ireland, for example, which combines higher personal levels of taxation with lower rates of corporation tax. Spain, under the recently elected PSOE, have a similar policy, I'm led to believe.

The impetus behind this is intra-EU trade; because competition favours those countries with lower levels of corporation tax, the trend across the continent is towards their reduction. This raises the question as to how low will competition push taxes on business and, for those of us who feel companies with large profits could do with contributing their fair share to national exchequers, can anything be done about it?

Presently, most EU member states have signed up to the single currency but there's more resistance to tax harmonisation because, apart from anything else, this would break the "no taxation without representation" rule. Personally, I favour the opposite: I don't favour a single-currency at present because the resultant inability to use interest rates as a safety valve can have a hugely detrimental effect on the domestic economy. This concern tends to be dismissed by pro-Europeans but the recent economic history of Germany (re-unification) and Argentina suggests that it shouldn't be. Moreover, while fiscal policy can be used to obviate the effects of a monetary shock, the stability pact that circumscribes the ability of national governments to do so is being included in the proposed constitution - at the insistence of Germany and France, despite the fact that both countries have breached this in the last couple of years.

An EU-wide common rate of corporation tax, on the other hand, could protect against the erosion of member states' tax bases against intra-EU competition and have the advantage of making transfer payments in time of economic recession automatic. This could be a mechanism to avoid a situation where EU-states compete for inward investment by slashing their rates of corporation tax - a likely outcome, in my view, of increased intra-EU trade within the framework of a single monetary policy.

No comments:

Blog Archive