Cross-posted from Fools’ Gold.
We have our own particular reasons for disliking Brexit – the recent decision by the UK to leave the European Union.
In a pre-Brexit analysis we quoted Adam Posen, director of the Peterson Institute for International Economics, who articulated what is probably our biggest generic concern:
“If you’re anti-regulation fantasists to begin with, you start going down the path, ‘Oh we can become an even more offshore center. We can become the Cayman Islands writ large, or Panama writ large.’ And this frankly is the way I think this also spills over to the rest of the world, is that the UK decides, ‘Hey, regulatory arbitrage, letting AIG financial products run in London, actually destroyed the US financial system, but didn’t hurt us – made us a lot of money. Let us continue down this path. Let us be the ‘race to the bottom’ financial center. And I think this that’s where this going, because they’re not going to have any other option. It’s not good.”
Also see some more good arguments, also quoting Posen, and looking at a specific piece of banking regulation, here. And what goes for financial regulation, here, is also broadly applicable in other areas, notably corporate tax.
Now, following this piece of bad news, there is notice of a potentially appalling development within Britain, which would, if successful, magnify the problem.As if Britain wasn’t threatened enough by fragmentation from the possible departure of Scotland and Northern Ireland, each of which risk being new actors in the race to the bottom.
And it’s not the first time this has been raised. The larger a financial sector is, relative to its population, the greater the grip that financial sector will have on the political system. And, again, the same generic argument goes for corporate taxes.
The more autonomy London gets, the more powerful the City of London and the multinational tax lobby will become, relative to London’s population: and especially (if and when privileged access and “passporting rights” to European markets are no longer available) the ‘offshore’ part of the City that believes in a race to the bottom “competitive” approach to attracting the world’s hot money.
The pre-Brexit British leadership has overseen a relentless series of disastrous ‘competitive’ policies on finance and tax which has resulted in one handout after another to multinationals and shareholders, with precious little useful investment in return – as we have outlined in detail. Fiscal devolution would likely exacerbate these moves. The BBC notes:
“London mayor Sadiq Khan has called for the capital to be given more powers on how it spends the money it makes.”
Not only that, but via the Evening Standard:
“They could include control of stamp duty revenue, business taxes – which could be lowered and targeted – vehicle excise duty to help tackle air pollution and greater powers to borrow to invest in infrastructure.”
This looks like the thin end of a wedge on revenue-raising powers.
And there is something else, too.
Khan repeats a popular old trope among London-based political actors — about how all the wealth is created in London then showered munificently upon a grateful rest of the country. Leaving aside the fact that this economic model has been arguably the biggest cause of grievance underlying the Brexit vote, it is substantially untrue. Adam Leaver of Manchester Business School wrote an article for Tax Justice Focus entitled The Metropolitanisation of Gains, the Nationalisation of Losses:
“London does attract capital, but it does so because it is a kind of conversion machine, taking national and international assets, converting them into revenue streams from which well-placed individuals skim high pay. In other words: London attracts capital because it is also extractive.”
It’s a really important article: do read it.
“A more exciting move is that we will no longer have to comply with the EU’s Code of Conduct on Business Taxation. The Code was an attempt to stifle tax competition, by preventing EU countries from introducing advantageous tax regimes to attract foreign investment. Removing it gives the UK much more freedom to design its own tax system to make us a better place for both domestic and foreign investors, countering any negative Brexit effect on investment.”
Expect this chorus to grow louder.
Step back and ponder it all for a minute.
The the Brexit vote is increasingly seen as having been a response to inequality, and to unresponsive politics. But the fragmentation that Brexit implies – and would be implied by fiscal devolution for London — will exacerbate precisely those raw wounds that the vote has so powerfully exposed.