Much has been made in the media of Chancellor George Osborne's tax cuts in this era of austerity and falling living standards. One such critic is Owen Jones, who, in his new book entitled 'The Establishment: And how they get away with it' explores how the UK is cutting corporation tax rates at the behest of 'Big Business' and the City. I believe that this analysis, whilst partially true, fails to acknowledge the greater, more salient underlying reason of Globalisation and the 'race to the bottom'.
The 'race to the bottom' concept refers to the increasing competitive advantage nation states seek to pursue in order to maintain and attract capital. One method of gaining this advantage is through dismantling regulatory structures, such as when Thatcher initiated the so-called 'Big Bang' in 1986, when barriers were abolished between 'stockjobbers' and stockbrokers. Another strategy, initially pursued by Thatcher and continued by successive Conservative and Labour governments, is the reduction in the rate of corporation tax. According to proponents of the hyperglobalisation thesis, lower corporation tax rates render a country more attractive to investors, and consequently, capital. In 1984, the UK corporation tax rate was at 52%; by 2015 it will be 20%. At first glance, this may seem a dramatic decrease. However, it is imperative to compare the UK's rate to its competitors in the global economy. In 1996, a year before Tony Blair and New Labour came to power; the average rate of corporation tax in the G7 countries (Canada, France, Italy, US, Germany, Japan and the UK) was 43.5%, with the UK's rate at 33%. By 2010, the outgoing Labour government left the UK's rate at 28%; the G7 average was 33.4%. Currently, in 2014, the UK rate is 21%; the G7's is 31.1%. The 2014 G7 figure represents a marked decline from the 1996 levels of 12.4%. A similar trend is also repeated amongst European Union (EU) states. In 1996, the average rate in the EU was 38.1%, but in less than 10 years, by 2005, this figure had significantly declined by 11.8% to just 26.3%. These trends indicate that the pressures of globalisation are seriously impacting upon tax competition between states. Consequently, in order for the UK to endure as a desirable location for businesses, it has had to reduce its rate of corporation tax. Osborne has rightly recognised the significant threat posed by rival states within and outside the EU and has acted accordingly.
Often, the Left of British politics moot Scandinavian countries as alternative models of capitalism in whose shoes we should follow. However, increasingly so, these countries are also adopting lower corporation tax rates, thus questioning the reliability of adopting a copycat model. For example, Sweden, once heralded as a prime example of a co-ordinated market economy, has reduced its corporation tax rate considerably to 22% from 28% in 2008. This provides evidence to buttress the notion that there is increasing convergence on lower-tax regimes. In addition, socialist France, with its corporation tax rate of 33.3% is often cited as an economic model to emulate. However, a recent article in the Guardian illustrates how French entrepreneurs are increasingly moving to the UK, enticed by our lower taxes, thus providing some justification for Osborne's policy. Further evidence of the reduced capacity and autonomy of the nation state comes from North America, where the fast food giant Burger King is planning to move from the US to Canada. Here, it will benefit from not having to pay extra taxes on income earned abroad in addition to taking advantage of lower tax rates. Therefore, perhaps it is time that the Left concedes that the nation state's power has sharply eroded in the zeitgeist of neo-liberalism in which we live, and becomes more pragmatic, accepting that concessions need to be made in order to prosper.
However, this is not to argue for a complete reduction in tax to undercut other countries. Corporation tax rates should not drop below 20%. Its impact on public finances in an era of vast reductions in government spending would be unprecedented. What makes the UK such an attractive destination for businesses is its strong public services (such as law and order and enforcement of property rights; crucial to the performance of these businesses), infrastructure (although greater investment is needed), highly skilled workforce, highly functioning legal system and a national language that is also the international business language. None of these services are possible without the vital tax revenues provided by businesses. Therefore, in conjunction with reducing corporation tax rates, the current coalition and future governments must increase HMRC's budget meaningfully, so it has the necessary resources to combat tax avoidance and evasion. The fact that Starbucks paid just £8.6 million worth of tax on UK sales worth £3.1 billion is astonishing and completely unacceptable. If governments fail to act in closing tax avoidance schemes and loopholes, there is a strong possibility that future profits resulting from lower taxes will simply end up in the pockets of senior managers in a tax haven, far out of reach of the British government and certainly not going towards helping the 1 million people who now rely on emergency food hand-outs. It is time for Labour to Act.