Desire to 'compete' is wrong

The calls are coming thick and fast in the wake of drugmaker Shire’s decision to become tax resident in Ireland. But the language of markets does not work well in this area.

The need to be competitive is often cited, for instance, in calling for subsidies. Only recently did we witness a bizarre debate about providing special tax rates to compete with the Canadians to attract computer games companies.

I find the whole thing very odd. The principle of free markets has it that countries should produce goods according to their ‘comparative advantage’ in doing so. Those which are comparatively better at making sugar, for instance, should make sugar and trade with countries comparatively better at making other things. That way, we are all better off.

But, increasingly, it seems these comparative advantages come from lower tax rates, rather than the intrinsic abilities of the individual economies and there is a whole army of lobbyists to promote and protect vested (tax) interests.

Likewise, is it really a good thing for the UK to try and ‘compete’ with Germany on tax?

Will a car company decide that it cannot sell cars in the UK, but that it can in Germany, because the corporation tax rate is lower there than it is here? No.

Fine, it may engage in some kind of financial engineering to mean the UK profits are booked in Germany rather than here, but the goal must not be to encourage this finagling with a race to the bottom on tax rates.

The aim must be to encourage real intrinsic economic activity.
Let others ‘compete’ for the scraps that tax accountants cannot plan away.

Alex Hawkes is news editor of Accountancy Age