Moves by the OECD and the EU to restrict the activities of tax havens, harmonise taxes and raise global tax rates threaten investment and economic prosperity according to a new study by leading tax lawyer Richard Teather published today by the IEA.*
The OECD and the EU argue that tax competition is dangerous and that low tax countries and tax havens should co-ordinate their tax policies to prevent competition and a race to the bottom as countries try to outbid each other by setting lower and lower tax rates.
The EU imposed the Savings Tax Directive in July this year in an attempt to prevent tax competition operating within the EU. Teather argues that the EUs arguments against tax competition are flawed. The proportion of GDP taken in tax in the EU hardly changed in the decade before the Savings Tax directive came into operation and at nearly 50% is higher than in any other part of the developed world. One can only conclude that, if those who oppose tax competition are right, tax rates would be even higher without it commented Teather. Tax competition is much more effective at the level of tax on capital because capital is more mobile between countries yet the proportion of tax taken from capital in the EU actually rose in the decade before the Directive came into operation.
Nevertheless, the EU measures do undermine Europes investment markets. In 2003, capital inflows into collective investment schemes in Hong Kong rose by 56%. Teather believes this was a direct result of investors anticipating the EU Directive and re-arranging their investment portfolios.
Richard Teather comments, Tax competition and the activities of tax havens are generally designed to prevent the double or triple taxation of income where different countries tax systems are based on different principles. They are incapable of driving down tax rates globally to very low levels. If attempts to eliminate tax competition work, it will be disastrous. If the attempts do not work, they will just create a lawyers paradise. The only people who will gain from the EU Savings Tax Directive will be well off lawyers and accountants.
The study goes on to show how the most damaging tax practices are not those of tax havens but those of established EU members states themselves. Countries such as Spain, France and Belgium have provided special tax breaks to particular industries (described by Teather as corporate welfare). It is right that these should be abolished, argues Teather. Teather also has proposals for the UK government:
The UK should work through the OECD and the EU to obtain more consistency across tax regimes to prevent double taxation of income.
The UK should put its own house in order, by removing its own special tax exemptions targeted at specific industries and by removing the double taxation that frequently occurs in our corporation tax and capital gains tax systems.
The UK should embrace and promote tax competition to help create a world of lower tax rates and higher economic growth.
The UK should adopt tax rates that are low enough to gain general acceptance so that punitive and illiberal measures are not necessary to prevent avoidance.