Why Tory tax cut demands are deluded

What is most striking about calls for tax cuts from the Tory grassroots is how little their demands relate to the real world. Simon Nixon examines how globalisation has completely changed the terms of the debate.

There is something slightly surreal about the great Tory tax debate, which raged through the party conference last week and is due to flare up again next week with the likely publication of findings from the party's Tax Reform Commission.

This heavyweight team, chaired by Lord Forsyth, the former Scottish Secretary, is expected to call for £19bn in tax cuts.

If the reports are true, then expect another almighty row between David Cameron and right-wingers demanding he commit to immediate tax cuts. But missing from the clamour is any sense of how it relates to the real world. For all the talk about the "moral case for low taxation" and arguments about putting "economic stability first", there seems little recognition of the way that globalisation has changed the terms of the debate. A completely new approach is required.

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Why HMRC is getting tougher on late-filing

I got a sense of how the world's changing over the summer, when Her Majesty's Revenue and Customs tracked me down on holiday just two weeks after the July deadline for payments on account to ask why I had not paid up in full. The truth was that I quite fancied the low rates of interest on offer on arrears. But that wasn't going to wash. If I hadn't paid up there and then, I suspect I'd be writing this from Belmarsh. Still, it seemed a lot of effort for a pretty paltry sum. Either the whole country must have paid in full, leaving bored HMRC staff with time on their hands to hassle low-lives like me; or the Government is so short of cash that HMRC is under orders to chase up every debt at once, regardless of how piffling.

It's pretty clear which it is. Any accountant will tell you HMRC has massively upped the stakes on late-filing; investigations are becoming more frequent, loopholes are being closed and the benefit of the doubt is no longer given. One friend was harried even before the deadline. Of course, that's partly a reflection of the vast sums Gordon Brown is spending, with the Government now taking the highest share of GDP for two decades. What's more, the Government is £530bn in debt, equivalent to 42% of GDP. And despite Brown's promise to don a hair shirt and cut growth in spending from 2007, he plans to borrow £25bn a year for the next four years.

How globalisation has changed the taxation debate

But the wider problem is that the Government is finding it harder to rake in the tax it is owed. According to Colbert's famous maxim, the art of taxation is to pluck the goose in such a way as to produce the least hissing.

But in the era of globalisation, the problem is to pluck the goose in such a way as to stop the wretched bird flying away. Just this week, the Confederation of British Industry warned that many UK companies are considering moving their headquarters overseas to escape high

corporate-tax rates. Meanwhile, as firms expand globally, the opportunities to take advantage of lower foreign taxes increase. And every time a UK company is taken over by a foreign one, there is a cost to the Exchequer.

It's not just companies. Globalisation and technological changes have made it easier for capital and people to cross borders too. Hedge funds don't headquarter in Grand Cayman because the weather is good, but because they pay no tax there. The Government has had to introduce new tax rules for the property industry to stem the tide of rental income disappearing into Jersey-based unit trusts that don't pay tax in Britain. Domestic governments worry they are losing fortunes to online gaming firms that pay no tax, hence many countries want to outlaw the industry. And if you think this cuts both ways that London benefits from all the rich foreigners who come to work here think again. Thanks to its arcane non-domicile rules, London is a tax haven for the international super-rich even those who live here full time.

The question is not how much, but what to tax

This is the context against which the Conservative party debate about tax needs to be assessed. The grassroots may be clamouring for tax cuts, but so far Cameron has only promised extravagant spending increases, including tax breaks for married couples, building more prisons and roads, matching Government spending on the NHS and education, and introducing new Government help on childcare. Unless he has some drastic spending cuts up his sleeve, or is fortunate enough to inherit a booming economy, his real challenge will not be how much to tax, but what to tax.

What's clear is that business must be the priority for tax cuts. In 1997, the UK's corporate-tax rate at 33% was one of the lowest in Europe. Today, at 30%, it has been overtaken by a number of other countries, such as Ireland. If taxes on business aren't cut, firms will vote with their feet and revenues will fall anyway. Higher income taxes are also likely to be counter-productive since that will send the rich scurrying to their tax advisers.

So how will the Tories make up the shortfall? Brown got round this problem by introducing various "stealth" taxes on individuals that no one noticed at first, but that have now started to bite. Anyone who thinks Cameron's Tories will reverse these taxes, rather than add to them, is almost certainly deluding themselves.

Simon Nixon is executive editor of Breaking views.com

Simon Nixon

Simon is the chief leader writer and columnist at The Times and previous to that, he was at The Wall Street Journal for 9 years as the chief European commentator. Simon also wrote for Reuters Breakingviews as the Executive Editor earlier in his career. Simon covers personal finance topics such as property, the economy and other areas for example stockmarkets and funds.