The erosion of our tax base

One of the greatest problems facing future British governments is our shrinking tax base, says Merryn Somerset Webb. But what can we do about it?

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.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

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.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.