Coalition losing its way on tax wars

Allister Heath
IT is starting to look as if the British government has completely lost the ability to fight back against its critics, especially when it comes to tax. Instead, it keeps trying to appease them, attempting to move to the left of Labour on the issue and failing to understand that such a strategy is doomed to failure.

A heavily spun story on Saturday about the amount of corporation tax paid by Barclays triggered off another bout of banker-bashing. Yet the main reasons why the firm didn’t pay much UK corporation tax in the year in question (though it handed over £2bn in total to HMRC) included its use of the long-established rule which allows all companies to write off past losses against tax, as well as the fact that global firms pay taxes in all the jurisdictions in which they operate, not just in the UK. All companies in the UK do this; until now, it hasn’t been seen as a scandal. The ability to write off losses prevents firms from paying more tax than they make in profits over time or at least to make sure that they don’t pay an extremely high rate of tax on their profits.

That said, there is a very strong case for tearing up the whole tax system to make it fairer, more efficient, simpler and to ensure it only taxes income and profits once. The current tax code is scandalously flawed and in desperate need of radical reform. Loopholes should go in return for lower, flat rates. It is equally the case that the overall tax burden is already at cripplingly high levels in the UK, especially when compared with more dynamic economies in Asia. This is the kind of message one might have expected from a government that claims that Britain is once again “open for business.”

Yet in a bid to justify his balance sheet tax on banks and to tap into anti-City sentiment, the Chancellor chose to go along with the myth that taxes were too low on the City under Labour (in fact, they were extremely high in the aggregate at the height of the boom, far higher than now, giving Gordon Brown an extra incentive to keep supporting an unsustainable and disastrous bubble). His tactics will backfire. If banks don’t pay enough tax because they are able to write off past losses, then this must logically be equally true of millions of other firms. The pressure will be for even more tax hikes – what next, a balance sheet tax on all large firms to “compensate” for poor profits during the recession? In the same way that the Tories helped move the debate to the left when for years they refused to criticise Gordon Brown’s irresponsibly profligate spending plans, they are doing it again on tax. And given that they will never be able to-outbid Labour on that front, they will eventually lose the battle of ideas – and Britain will end up an even higher tax economy.

The latest incarnation of the perennial middle class anti-capitalist movement appears to have convinced itself that higher taxes on companies and “the City” could easily plug the budget deficit and eliminate the need for spending cuts. Given that the deficit is around £150bn, this is complete nonsense: at best, a few billion more could be raised but with disastrous consequences to competitiveness and jobs. If the government doesn’t want to see its popularity fall even further in the polls, it needs to tackle its critics head-on and explain why they are wrong-headed. The current short-termist tactics will end in tears.
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