Coalition still too complacent on tax
IT IS heating up here in Birmingham at the Conservative Party conference. George Osborne is about to launch a scathing attack on Ed Miliband for failing to grasp the importance of cutting the deficit; and a deal has been agreed to sweep away the plethora of incentive-destroying benefits, eventually replacing them with a single payout designed to ensure that work always pays more than welfare.
All good stuff. But the government remains too complacent on tax. I have learnt that around 25-50 hedge funds have already moved out to Switzerland, with up to 10 relocated to Jersey. Meetings regularly take place between Jersey and other, much larger financial institutions, including top UK-based asset managers.
Kinetic Partners estimates that around 1,000 hedge fund managers have already left the UK; it puts their average income at £1.5m-£2m per year. The loss to the exchequer has now reached a minimum of £500m and is probably much higher. Two individual moves alone will have cut the exchequer’s revenues by £200m.
Over time, the biggest problem will not be the jobs that actually relocate – it is the jobs that won’t be created in the UK, including support staff, retailers and others. We ought to be trying to attract companies and labour, not to repel them. The Kinetic report adds that the increasingly nasty political climate, constant banker-bashing and general anti-capitalist mood music is also beginning to drive people away. Nobody likes to be loathed.
The research, which comes barely a week after Wolseley became the latest high-profile firm to relocate for tax reasons to Switzerland (and to Jersey), makes for grim reading. Wolseley will save about £23m a year in reduced taxes. That is grim news for the Treasury as this could pay for 230 GPs or 1,000 nurses. The damage from the hedge fund exodus is substantially greater. Those who dislike the City should pay attention: you can’t claim to like jobs yet hate those who create or pay for them.
This quantification of the harm caused by Britain’s counter-productive return to the politics of envy is backed up by a separate study from the Institute of Directors. The UK’s corporation tax rate of 28 per cent means that 18 out of 31 OECD countries now have lower rates. Even the planned rate of 24 per cent will not put the UK in front of the pack. Skilled workers look for low marginal tax rates; this is especially true of those based in London, many of whom have already left one country in search of better work. The 40 per cent rate was just about tolerable, although it was becoming increasingly uncompetitive. The 50 per cent rate is too high, especially when accompanied by other measures such as the hike in capital gains tax, the assault on non-doms and higher national insurance contributions (which take the real top rate to 51.5 per cent, one of the highest in the world). The never-ending consultation on reforms to international taxation, including the destructive controlled foreign companies (CFCs) regime, may be going well but the process is too slow and insufficiently credible to stop the exodus.
Waging war on the “rich” is always fashionable in difficult times. But it is also the best way to kill jobs and lose tax receipts. The coalition needs to act: trimming spending is not enough – Britain also desperately needs a pro-growth tax policy.
allister.heath@cityam.com