Britain should embrace tax havens, new research shows

The present debate about tax havens has generated more heat than light

Tax havens are essential to maintain a healthy economy, limit the overall tax burden and improve efficiency in financial markets.

Turn down the heat, switch on the light, published today by the Institute of Economic Affairs, highlights the benefits of tax havens globally. The author argues that political pronouncements vilifying companies for avoiding tax lack any honesty – or understanding – that the issue at the heart of the current debate, tax competition, results from the actions of governments and not corporations.

This is unacceptable hypocrisy on the part of politicians. The government must recognise the importance of tax havens and stop simultaneously talking about the need to encourage business whilst also deriding tax havens and companies that use existing tax rules to minimise their tax bill.

   The importance of tax havens for the economy:

  • Punitive action on tax competition would damage growth.Without tax havens, big businesses would move away from the UK. If tax havens could not be used by multinational corporations in the UK, then a single rate of corporate tax would have to be set. If set too low, then corporations’ contribution to the overall tax take would fall. If too high, then business would move overseas, damaging the overall economy.
  • Tax havens play a key role in limiting the tax burden. The existence of tax havens, coupled with high mobility of capital, means governments are constrained in the tax rates they could otherwise apply – crucial for both wealth and job creation.
  • Tax havens improve efficiency and liquidity in financial markets.Without tax havens, many innovative products would be stifled by punitive tax regimes. Offshore tax havens allow the UK to make the most of its comparative advantage in financial services and avoid potentially damaging double or triple taxation on investment returns.

The levels of tax paid by multinationals currently are a direct consequence of the way the government’s own tax rules:

  • The target of attracting mobile capital into the UK has been a constant tax policy of successive Chancellors. In the next two years corporate tax receipts will fall to their lowest level since 1984/85.
  • The UK government has not only reined in the impacts of its own anti-tax haven rules, but also introduced a special regime for the taxation of income from patents – the ‘Patent Box’ – to allow mobile forms of income to be taxed more lightly. This will reduce tax revenue by £720 million in 2014-15. There are also other special allowances designed to reduce taxes for certain types of business.
  • Politicians either do not understand that corporate tax policy in the UK is part of process of tax competition – meaning a worrying lack of grasp of sound economics – or they are displaying an astounding level of hypocrisy, heaping blame on corporations to score political points.

Commenting on the research, Professor Philip Booth, Editorial Director at the Institute of Economic Affairs, said:

"The present furore about tax havens has generated more heat than light. Politicians of all stripes are playing a dangerous game vilifying businesses for taking advantage of the tax systems that they themselves designed. British politicians can therefore hardly complain when other countries do the same and when businesses take advantage of those rules.”

Notes to editors:

To arrange an interview about the report please contact Stephanie Lis, Communications Officer, slis@iea.org.uk or 07766 221 268.

The full report, Turn down the heat, switch on the light: a rational analysis of tax havens, tax policy and tax politics, written by Jamie Collier, can be downloaded from www.iea.org.uk.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.

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