The erosion of our tax base

When I interviewed Douglas Carswell MP a few weeks ago, he said that one of the things that would most affect the future of government would be the shrinking of the tax base. Over the last few years, the huge rise in the volume of new labour coming in to the global market has pushed down real wages and cut the degree to which governments in the West can force populations to finance bloated states.

In the past that might not have been an insurmountable problem. Low wages tend to mean high corporate profits, so a falling tax take from labour should just mean a higher tax take from capital.

Unfortunately, that's not how it works anymore. As we see from the behaviour of the likes of Google, Starbucks and Amazon (see my colleague Tim Bennett's video on the topic), globalisation, alongside the fact that the value of big companies rests as much in intellectual property as anything else, has also allowed the big multinationals to shift profits around and between countries specifically to avoid paying corporation tax of any kind. And very successfully too. At the international level it appears to have become all but impossible to make traditional tax policy work.

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So what should governments do in the face of this seemingly fatal erosion of their tax bases and, eventually, by extension, their welfare states? Carswell's answer was that there is nothing to be done. We just have to cut our cloth to suit our new circumstances slashing the state until spending hits the level at which we know we can raise revenues.

Regular readers will know we are firm believers in the idea that the state must step back it isn't OK for 50% of GDP to be attributable to government spending.

But that doesn't mean we think capital should get away scot-free with pushing down pay and scarpering with the proceeds. And there are ways to get a contribution out of it. Tim Morgan of Tullett Prebon suggests imposing a General Anti-Avoidance Rule of some kind (a minimum payment of the type we impose on our non-doms perhaps).

Otherwise it might be time to take a look at one of our greatest tax take deductions the ability of companies to write off unlimited amounts of debt interest against profits and so cut their tax bill to zero.

Will any of this happen? Unlikely. As Morgan notes, given that this is a government that is "scared of pasty eaters, rich charity donors and caravan dwellers and might be about to back down on fuel duty again", it is hardly likely to also be a government that might take on the multinationals.

My guess, like Morgan's, is that they'll stick to covering the vast gap between spending and revenues with the printing press (see our cover story for much more on this:Is Britain on the road to disaster?). Shame.