After Juncker-May, Britain as a tax haven is more credible

A lot of people are talking about the account in the Frankfurter Allgemeine Zeitung about the recent dinner between European Commission President Jean-Claude Juncker and British Prime Minister Theresa May. The British are described by EU officials as “delusional” and Juncker is described as ringing Angela Merkel the morning after, prompting Merkel to warn the British about their unrealistic expectations.

Right now, everyone is parsing what this means for the negotiation and for the British general election. My immediate thought, however, was about Britain as a tax haven. Let me outline why.

Think back to January, two months before Article 50 for Brexit was triggered. Chancellor of the Exchequer Philip Hammond said in very pointed terms in an interview with German newspaper ‘Die Welt’ that the UK would do whatever it takes to deal with the economic fallout from Brexit.

Philip Hammond threatening to turn Britain into a tax haven if it doesn’t get single market access. pic.twitter.com/A58HL8hraI

— Edward Harrison (@edwardnh) January 15, 2017

Most people understood this to be a threat to lower British corporate taxes to attract business, making Britain a de facto tax haven off off the continent, and threatening other countries within the EU benefitting from their tax regimes like Ireland, the Netherlands and Luxembourg, where Juncker was instrumental in changing the tax regime to attract EU business.

Here’s the crucial part of that exchange:

Welt am Sonntag: The impression on the European continent is also that your government sees the future business model of the U.K. as being the tax haven of Europe. The government wants to introduce the lowest corporate tax rate among all industrialized countries.

Hammond: We are now objectively a European-style economy. We are on the U.S. end of the European spectrum, but we do have an open-market economy with a social model that is recognizably the European social model that is recognizably in the mainstream of European norms, not U.S. norms. And most of us who had voted Remain would like the U.K. to remain a recognizably European-style economy with European-style taxation systems, European-style regulation systems etcetera. I personally hope we will be able to remain in the mainstream of European economic and social thinking. But if we are forced to be something different, then we will have to become something different.

Welt am Sonntag: We don’t understand: Who or what would force you?

Hammond: Economic circumstances. If we have no access to the European market, if we are closed off, if Britain were to leave the European Union without an agreement on market access, then we could suffer from economic damage at least in the short-term. In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness. And you can be sure we will do whatever we have to do. The British people are not going to lie down and say, too bad, we’ve been wounded. We will change our model, and we will come back, and we will be competitively engaged.

I covered this at the time (see here and here). But, thinking about this in retrospect, remember that Theresa May told Robert Peston at the weekend that she still believes no deal with the EU is better than a bad deal.

.@theresa_may reiterates her belief that ‘no deal’ on Brexit is better than ‘a bad deal’ #Peston pic.twitter.com/hI4e6gssWp

— Peston on Sunday (@pestononsunday) April 30, 2017

And since May says she is willing to walk away from the EU without a deal, the question – in the wake of the Juncker meeting – is what’s the UK’s best alternative to a negotiated agreement. The answer is clearly to make the UK a low tax country.

Theresa May and Philip Hammond both have made clear they may not be able to keep all of David Cameron’s tax promises. And a personal income tax rise would have a negative impact on spending in Britain. If the Conservative Party are to generate growth and win re-election in 2022, they would have to find that growth somewhere else. And the most obvious place is lowering in corporate taxes.

Why this matters. The UK has competition on the race to the bottom on corporate taxes. US President Donald Trump is talking about a 15% corporate tax in the US. And his Treasury Secretary Steve Mnuchin is trying to line-up support for a tax overhaul by the end of the year that includes this feature. Because the Republican mantra is geared toward business investment and low taxes and regulation to promote that investment, I believe this is the item on Trump’s tax wish list most likely to be featured in any successful tax overhaul.

The UK government, therefore, is very likely to play up lower corporate taxes as a negotiating tactic. In fact, if the UK were to offer some sort of tax amnesty – i.e.. zero corporate tax for a period of time after Brexit for some set of companies that remain in Britain after the break with the EU, this could entice companies to stay, especially if the pound weakens and makes UK workers lower cost.

Ireland, the Netherlands, and Luxembourg should feel most threatened by this. Outside of the EU, Switzerland would also feel threatened, as their media has shown there is concern over US corporate tax plans.