Tuesday, 23 February 2016

Tax competition and racing to the bottom

There was a letter from the First Minister in the Western Mail on Saturday, talking about how devolving Air Passenger Duty would make a huge difference.  That part was nonsense, of course.  Devolving APD in itself makes no difference whatsoever; what might make a difference is changing the level of taxation.  Devolving the power might or might not lead to change in tax rates – that actually depends on taxation policy rather than directly on where that policy is decided.
But there was one line in the letter which particularly drew my attention, and that was where the First Minister said, with clear approval of the principle, “The UK government has already accepted the case that it is appropriate for there to be some tax competition following the devolution of tax powers.” 
Perhaps one should never expect consistency from politicians, but I seem to remember that that wasn’t always his position.  Let’s consider his views on the devolution of Corporation Tax, when he said “When it comes to corporation tax I am sceptical on this and if we have it devolved to Northern Ireland, Scotland, England and Wales, I think there is a genuine risk of a race to the bottom with everyone reducing corporation tax; that would be great for business, but hopeless for the public purse.”
So, devolution of taxes that he wants to cut would lead to healthy tax competition; devolution of taxes that he doesn’t want to cut would lead to a race to the bottom.  There is nothing wrong with taking a political view as to which taxes should be cut, held the same, or increased – that’s an entirely legitimate way of enabling people to compare and contrast political parties and programmes.  It is not, however, a sound or principled basis for deciding where taxation powers should reside. 
‘Tax competition’ and ‘race to the bottom’ are just two different ways of describing the same thing.

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