THE BLOG

A Taxing Problem for the UK

15/04/2015 10:04 BST | Updated 14/06/2015 10:59 BST

The Corporation Tax (Northern Ireland) Act 2015, whereby the Government devolves to the province the power to set its own headline Corporation Tax rate, became law last month. This bold and unprecedented move is intended to allow the Province to compete with the Irish Republic's headline rate of 12.5 per cent, and follows the agreement that Scotland should set its own for income tax. Taken together these measures represent another nail in the coffin of the fiscal union that is at the core of the United Kingdom.

A decision by Stormont to take advantage of its new rate-setting power is not straightforward. Any reduction in the Corporation Tax take must, under EU law, be offset by a reduction in the Province's block grant from Westminster. The hope must be that any reduction will stimulate additional economic activity in Northern Ireland and, in line with Laffer Curve theory, that the tax take will rise.

Similar powers have not so far been offered to Scotland, though given the likely political dynamic after the forthcoming election it can only be a matter of time. Then Wales? And where does that leave England?

The OECD and the European Union have both set their faces against "harmful tax competition." But with only the powers of persuasion, and in the case of the EU the State Aid provisions, at their disposal these organisations can do little but watch from the side-lines. Member states, including the UK, may pay lip service to EU and OECD exhortations but in practice continue the race to the bottom, whether through favourable headline rates or special reductions to corporation tax.

Given the state of the European economies, where with the exception of the UK any sort of growth is hard to find, Ulster's success is bound to be at least partly at the expense of its Republic of Ireland neighbour. This might be down to reduced inward investment or "capital flight" - but with multinationals beginning to question if Dublin is any longer the "place to be" will reduced Corporation Tax in the North once more tip the Republic into recession?

Surely if Brussels has any real part to play in this debate it must be in persuading its members that harmonising their tax systems to a much greater degree than at present is to their mutual long term benefit.