Last week I was excited to share a stage in Edinburgh with two MSPs and Graeme Jones, Chief Executive of Scottish Financial Enterprise, as we discussed the implications of Brexit for the financial services industry.
The event organised by Brodies and The Sunday Times, had a wide-ranging discussion, covering everything from immigration to industry regulation to taxation. But one of the recurring themes that I sensed was a backdrop to most of the specific questions was competitiveness.
From an economic perspective, one area I was happy to have the opportunity to explore was the notion of tax competitiveness. Of course, there’s been much discussion of the need for competitive tax rates in recent months—not only in the UK, but in a number of other countries as well. Just a few days before this event, for example, President Trump mooted a proposal to cut the US corporate tax rate to 15% (from 35% currently).
One of the points I emphasised is that headline corporate tax rates do (naturally!) grab headlines—but they provide only a very rough, and incomplete, measure of international tax competitiveness since they don’t capture effective tax rates. (The US is in fact a good example of this, since the complexity of its tax code and exemption system mean that the average effective US corporate tax rate is far lower than 35%.) Moreover, tax rates are an important element of a country’s competitiveness—but only one element. Within the tax system, policy predictability is as important, if not even more important, than rates (excluding extreme cases of outlier rates that are exceedingly high).
Tax competitiveness is often (but not exclusively) examined through the lens of FDI. In that context, the OECD, for example, has emphasised that if the overall investment climate is weak, then an attractive tax regime is unlikely to be enough to compensate. This seems a very obvious point, but it does speak to the importance of ensuring that tax policy is well-aligned with wider economic policy so that the overall environment is broadly supportive of business and economic growth. This is because when considering potential investment opportunities, market opportunities are likely to be a bigger factor than marginal tax changes (again, excluding extreme scenarios—the merits or otherwise of investment in a 0% corporate tax environment, for example, is outside the scope of this discussion). This means that macro considerations—fundamental things like expected nominal and real GDP growth, expected income growth, and industry-specific growth prospects—are critical. Sometimes, thinking about the big-picture questions really requires going back to basics...