Raising corporation tax may seem like a vote winner, but it makes all of us poorer
Last year, parliament passed a law requiring the UK’s overseas territories (OTs) – including Bermuda, the Cayman Islands, and the Virgin Islands – to publish lists of the “beneficial owners” of the companies registered in them.
The sponsors of the law claimed it was a crime-fighting measure. Conservative MP Andrew Mitchell justified the law by arguing that “secrecy breeds wrongdoing” and “transparency is central to exposing bad behaviour and preventing it”. The wrongdoing he had in mind is money laundering and tax evasion.
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It’s hard to believe that this was the real reason Britain’s politicians were so keen on the law. After all, the OTs were already signed up to data sharing agreements with the UK authorities.
If the police or HMRC suspect the beneficial owner of an OT- registered company to be up to no good, their request for their identity will be provided within 24 hours.
The beneficial owners of OT-registered companies were already exposed to the rule of law. But the demand that their identities be published in advance of any warranted suspicion of wrongdoing exposes them to the rule of the mob.
Because these OTs impose no tax on corporate profits, people who register their companies there will be suspected of being “tax cheats” who are denying UK citizens to their “fair share” of other people’s incomes.
Let the vilification begin.
The prospect of public vilification increases the cost of registering companies in OTs. It should therefore reduce the number of UK citizens who do it. The European Union is doing the same, applying sanctions to firms that register in blacklisted countries.
This political hostility to tax havens is unsurprising. Corporate tax rates have been falling all around the world since the 1980s. As a report out tomorrow from the Institute of Economic Affairs highlights, this is a good thing because corporate taxation is one of the most inefficient ways of raising funds for government spending.
The loss it causes to the population far exceeds what revenue it raises. In this regard, it is far worse than land taxes, consumption taxes, and taxes on income from labour. But corporate tax rates have not fallen because politicians seek the most efficient tax system. They have fallen because of tax competition.
If politicians in large economies had not cut corporate tax rates, even more capital would have flowed to tax havens. Politicians seek votes, not economic efficiency. And, from a vote-winning point of view, corporate tax is a winner. The average voter has no idea that corporation tax is unusually inefficient.
On the contrary, voters are all too ready to believe that the cost of it falls on “rich corporations”, as Barack Obama absurdly put it, rather than people.
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Politicians would rather end corporate tax competition than win it. Hence the war on tax havens, the OECD’s publications bemoaning “destructive tax competition”, and the EU’s goal of tax harmonisation.
It’s a shame, and not only because it makes us poorer. It encourages politicians to abandon principles that they would normally hold sacred, such as the right to privacy of those who the authorities have no reason to suspect of a crime.