Low taxes are a great incentive for business. Tax expert Chris Thorpe of Haines Watts, says he believes now it is time that the United Kingdom became a tax haven, like Ireland
When Adam Smith wrote his Wealth of Nations in 1776, the concern that taxes could discourage business was a live issue. In England at the time almost everything was taxed – bricks, windows, fireplaces, hats, playing cards (that one wasn't repealed until 1960!), candles, brandy and tea being just a few.
Indeed, brandy was five times more expensive than it was on the continent. Naturally people sought to avoid these taxes through all sorts of means, but the one which concerned the government most was smuggling.
In 1793 nearly half the tea consumed in England had been smuggled in. So endemic was smuggling that it became a way of life for many ordinary people (and many of those in authority), particularly in Devon and Cornwall with its miles of isolated coastline peppered with inlets and coves. Folk heroes of the time such as John Carter (nicknamed 'The King of Prussia') operating near Penzance sprang up and taverns such as the Jamaica Inn on Bodmin Moor were frequently used for storing contraband on the journeys from the coast to the rest of England.
Despite the enormous losses to the Treasury, Adam Smith described smugglers like John Carter as: "A person who, though no doubt highly blamable for violating the laws of his country, is frequently incapable of violating those of natural justice and who would have been in every respect an excellent citizen had not the laws of his country made that a crime which nature never meant to be so".
The implication was clear; it was the high levels of taxation driving otherwise law-abiding people to resort to smuggling.
Today professional gangs of criminals cost the nation an estimated £2 billion every year through the illegal importation of goods. A third of all cigarettes consumed in the UK are 'smuggled' in without duty being paid. Fuel smuggling and illegal use of red/green diesel is an increasing problem for H M Revenue & Customs. Several illegal fuel treatment and storage plants have been discovered in Northern Ireland recently. It is now believed that six per cent of all fuel used in the UK is being done so illegally.
Since Adam Smith's time when indirect taxation was the main grievance, direct taxation, like income tax capital gains tax and corporation tax now makes up roughly 75 per cent of the Treasury's income – with VAT contributing nearly 20 per cent. But the level of illegal cigarettes and fuel in circulation highlights that duties are causing the same problems now as they were in the 18th century. It is human nature to avoid paying taxes where possible – the higher (or more prevalent) the tax, the greater the level of avoidance and thus the greater the loss to the Treasury.
Levels of Corporation Tax have been subject to press focus lately, with giant companies such as Apple and Vodafone reportedly paying little or no tax. Apple was recently reported to have paid only two per cent tax on profits of $74 billion. Pressure groups such as Tax Justice Network have condemned companies who relocate to 'tax havens' – including the Republic of Ireland. Ireland's corporation tax rate of 12.5 per cent has attracted the likes of Google, Pfizer, Intel and subsidiaries of Apple. But why should a company be condemned for trying to lower its costs? Giant companies who have been subjected to condemnation for operating in lower tax jurisdictions employ thousands of local people – in Ireland two million jobs are dependent upon foreign investment. In Delaware (the USA's own 'tax haven') $860 million is collected in taxes each year from the companies incorporated there – that makes up a quarter of the state's entire budget. An incredible 60 per cent of all US companies are Delaware-incorporated, including 58 per cent of the Fortune 500 companies. If taxes were raised in Delaware and Ireland (as the EU is demanding), then those companies would leave.
The same applies with personal taxation; if a country has a low rate of income tax, people will move there and/or pay more in tax long-term and the economy will flourish. If taxes are raised then taxpayers will move elsewhere or look to avoid (or even evade!) taxes. After the 50 per cent additional tax rate was introduced in 2010, the number of individuals declaring income over £1 million fell from 16,000 to 6,000 – £7 billion of revenue was lost.
Tax havens attract enterprise, jobs and wealth. The objection many people have with them is the secrecy and lack of transparency – a reasonable objection, but not all tax havens need be tropical islands with 'dodgy' financial institutions. Any country can be a tax haven yet retain total transparency and legitimacy. To get out of the current economic doldrums we need enterprise, jobs and wealth, and that means we need low taxes. Britain needs to become a tax haven.
It is a basic principle of economics – if you want to raise taxes, you lower them!