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The Consequence of Tax on Foreign Investment

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Usually, when arguments are made against high tax in an economy the emphasis is on the domestic demand taken away by greater government asset seizure. The other common argument is the efficiency or the lack thereof of the government to utilise the funds they raised through the increase in taxation. My personal opinion is that neither of these arguments are the real consequence of higher taxation. This in my opinion is the impact on foreign investment.

The first argument in this area of the debate is the deterrent high tax creates for foreigners to live in the UK, which admittedly is a strong point to make. High taxes will deter some people, especially the wealthy from living in the UK or at least increase tax exemption strategies. This however is not my main concern. I am certain the consequences of high taxation in the UK will have far more reaching downsides in terms of foreign investment for businesses in particular.

If tax is higher for businesses it will firstly reduce the number of entities which can operate in a difficult and competitive environment and secondly reduce profits for the businesses that can succeed. This makes generating interest in the UK from foreign interests very difficult especially in the current environment. It is not just the impact of business taxes but personal taxes too. The higher the rate of tax on consumers the less demand there will be for new business products and services, creating a harder climate for businesses to survive in, in turn making the risk and value of investment less attractive to foreign parties.

There are many investment opportunities for foreign investors around the world and the market has become more competitive with the emergence of the BRIC economies. To draw interest in the UK from abroad there has to be some kind of incentive or at the very least no disincentive to invest here. The greater chance of success a business has the more attractive it becomes to foreign investors. Lower taxes will reduce operating costs, maximise profit margins and increase demand for products and services.

If too much tax is taken in the UK, whether it is to invest in the public sector or to pay the deficit down, it will isolate the UK from the foreign market and push investment away to other countries. At a time when foreign money is greatly needed high taxes are not something the UK can afford. Conversely a reduction in taxes may increase foreign interest and get the economy growing again and generate more income for the government as a result.