Avoiding foolish tax competition

The Financial Times, Letter to the Editor, Tuesday 18 April 2006

From Mr Alex Cobham, Mr John Christensen and Mr David Spencer.

Sir, Kevin Phillips (Letters, April 13) writes that concerns about foreign takeovers eroding the UK tax base may be addressed by following the example of Ireland and cutting corporate tax rates to increase revenues. This reflects a dangerous misunderstanding.

The Laffer curve that suggested lower tax rates increase overall revenues has been firmly debunked by empirical research. The case of Ireland is - as Mr Phillips acknowledges - the result not of economic activity being relocated but simply the declaration of profits. The short-term effect is of course higher revenues on a given gross domestic product, producing an apparently higher tax yield.

But this illustrates precisely the dangers of tax competition. The Irish tax cuts have simply shifted profit declaration at the expense of other jurisdictions and with little overall economic impact (beyond an unsustainable housing bubble). This is a foolish game that can only be played for a finite time. The response Mr Phillips suggests, that the UK follow suit, will of course be just one more step in a race to the bottom that leaves the entire tax burden on labour. In common with Lex ("Corporate tax", April 12) we view this as likely to undermine rather than enhance economic performance.

We support a system that allocates corporate tax liabilities to the jurisdictions where economic activity occurs, rather than where profits can be shifted to, and thus leaves each jurisdiction with the freedom to tax at the rates they deem most conducive to economic activity and broader social goals.

This would allow genuine competition between competing locations, with the potential for more efficient production instead of simply lower corporate burdens that undermine government provision and fail to give businesses appropriate incentives.

Alex Cobham, St Anne's, Oxford/OCGG

John Christensen, Director, Tax Justice Network

David Spencer, Private Tax Attorney, New York, US