The threat that Britain might soon become a “corporate tax haven” – issued by its chancellor, Philip Hammond – revealed a fundamental truth about Brexit. This is not just a decision about the UK’s relationship with the European Union; it is also about what kind of economic and social model the UK will have in the future.
As the UK disengages from Europe, politicians have to consider how its role within the global economy will be redefined. This inevitably raises questions about its domestic policies and institutions, and how these might need to adjust to a changed international context.
Hammond’s speech made clear that the UK government plans to use this uncertainty over the shape of its socio-economic model as leverage within the Brexit negotiations. The danger is that these negotiations open the door for a major transformation of the UK’s social model, one that is not necessarily endorsed by the electorate.
Race to the bottom
The threat of a tax haven model would be an adoption of the “race to the bottom” approach to globalisation. This strategy views cutting tax rates, regulation and often labour rights, as the surest means to attract internationally mobile capital. The idea behind the threat is that, despite the EU playing hardball over access to the single market, the UK could siphon off investment flows and business operations that might otherwise have located on the continent.
This would put pressure on EU members to similarly lower their tax rates or provide other business-friendly incentives in order to remain competitive. And this would jeopardise their commitment to the existing social model, which balances economic growth with high living standards and working conditions for all.
In taking this route, the UK would be endorsing a similar model to small European states such as Ireland and Luxembourg that have attracted foreign investment by lowering tax rates and regulatory obstacles.
Such an approach is not new to the UK. In fact, Hammond is really talking about accelerating and deepening its commitment to a process that is well underway. The UK social model has long been more market-liberal than that commonly seen on the continent, with lower public spending (relative to GDP) and a less extensive welfare state. It is often viewed as closer to the American model than any comparable European state.
The UK already has some of the least accommodating trade union laws in Western Europe and a pro-business attitude towards regulation. The corporate taxation rate was lowered substantially under the Coalition government, falling from 28% in 2010 to just 20% by April 2015. Within the G20, the UK now has the joint lowest corporate tax rate. Plus, the UK (and the City of London in particular) lies at the heart of a wider network of Crown dependencies that offer low tax rates and conditions of secrecy that attract global financial assets.
A clever bargaining chip
The tax haven idea is not, though, simply about redefining Britain’s position within the global economy. It is also part of a narrower set of interests within the UK economy. With the loss of EU passporting rights now looking much more likely in the wake of Theresa May’s Brexit speech, the tax haven idea can be interpreted as a message to the City.
The City’s status as an entry point to the wider European market was one of its major competitive advantages. With single market membership now in jeopardy, and major global banks reassessing their commitment to London, the incumbent Conservative Party will need to think about ways of compensating for the decreased attractiveness of the City as a base for European operations. Pushing further along the tax haven model may be one answer.
If the tax haven proposal is more than just a clever bargaining chip, then we should be worried. It is doubtful that inward investment, without progressive taxation, will lead to a social model that distributes wealth more evenly across society. In fact, it may well lead to a decline in overall government revenue, endangering the supply of government spending for important services such as the NHS.
There is also no guarantee that foreign investment would be distributed evenly across the geography of the UK. Much more likely is that investment would focus on the high productivity region of London and the South East, deepening the vast spatial inequalities that define the UK economy.
A growing divide
One of the major riddles of Brexit lies in the willingness of a Conservative government, traditionally supportive of the City, to act so clearly against the financial sector’s interests. Hammond’s comments hint towards a willingness to make other concessions to keep the City onside.
The tax haven model may well offer some comfort to the global financial services firms based in the City of London. It promises a framework that slashes the costs of doing business and keeps London internationally competitive. The danger is that in offering a panacea to the City to balance against the costs of Brexit, the UK government sacrifices what’s left of the UK social model.
Opting for this strategy would also signal the UK’s disregard for global inequality. It would be defining its position in the world as a home for the assets of wealthy corporations and individuals that seek to avoid taxation.
One of the big political battles ahead will be to push for a post-Brexit settlement that commits the UK to the politics of equality and opportunity throughout the country. Not one that sacrifices a social model to appease the City, exacerbating the very divisions that brought about Brexit in the first place.