What would Prime Minister Corbyn mean for financial centers?

The unlikely happened (as it so often does). Jeremy Corbyn, the 100-1 outsider and far-left candidate, won an election in September to become leader of the British Labour Party.

But what might this mean? Corbyn could be the next British Prime Minister, if the Conservative government makes a few big mistakes, but, other than a broad impression of an ageing and perhaps quaint leftist, people know very little about the man or his policies.

Despite having been a Member of Parliament for over 30 years, until the leadership contest he was little known except in the far-left fringes of socialism.

Media mentions of him before 2015 were sparse; his praise for the Marxist Venezuelan leader Hugo Chavez; articles by him in the communist-linked Morning Star newspaper; his divorce from his second wife because of a political disagreement over their son’s education; the occasional mention of his expenses in the local newspaper.

For someone who has been an MP since the early 80s, he had made surprisingly little impact on national life. His most reported activity as an MP seems to have been proposing a bizarre Parliamentary motion that claimed: “Humans represent the most obscene, perverted, cruel, uncivilised and lethal species ever to inhabit the planet and looks forward to the day when the inevitable asteroid slams into the earth and wipes them out”.

Only two other MPs supported it.

But however little known he was, he is now close to a position of power. How would he use that power and what effects will it have on the economy, finance, business and offshore finance centers?

 

britain-labourCorbyn on tax

Corbyn did set out his views on taxation in the leadership campaign, giving us a taste of how a future Labour government under his leadership might act. It isn’t encouraging for taxpayers, particularly entrepreneurs, investors and small business owners.

He thinks the U.K.’s current top rate of income tax, 45 percent, is not high enough, and says “I think we should keep the 50 pence rate” that we had under the last Labour government.

This is despite the Treasury and other experts believing that even a 50 percent rate would bring in little or no extra revenue – indeed will probably damage tax receipts as high-earners leave the U.K. and investment falls. Paul Johnson, director of the Institute for Fiscal Studies, says, “The best estimate we have is that raising the top rate of tax to 50% or above would raise very little.”

His predecessor, Robert Chote, now head of the U.K. government’s Office for Budget Responsibility, puts it more pithily, that a 50 percent rate is “wandering round the summit of the Laffer curve.”

Corbyn’s finance spokesman, Shadow Chancellor John McDonnell, would go further. In a 2012 proposal, “The Radical Alternative to Austerity,” he called for a 60 percent income tax rate. But then McDonnell was one of the two other signatures of that Parliamentary motion hoping the human race will be “wiped out” by an asteroid. If his economic policies wipe out the U.K. economy, at least he is being consistent.

As well as increasing income tax, Corbyn is also opposed to the forthcoming cut in corporation tax from 20 percent to 18 percent, describing the current government’s successful policy of a downward trend in corporation tax as being “never-ending corporate tax sweeteners for the super-rich and big business.”

It seems he intends not only to reverse next year’s cut, but also to push it back up above 20 percent, saying he “would increase it slightly to pay for student fees.”

He also opposes the Conservative government’s proposed increase in the inheritance tax threshold, even though it will only remove some of those who were sucked into inheritance tax by house price inflation in recent years. But that fits the rest of his tax plans; Corbyn wants more people to be paying higher rates of tax, which he euphemistically refers to as a policy to “ensure more people fall into that fortunate category.”

As more people are “fortunate” enough to pay higher rates of tax in the U.K., offshore finance centers will become a much more attractive place to hold wealth.

 

Ill-advised taxes

As well as increasing existing taxes, Corbyn has also supported new taxes, in particular some that are economically ill advised.

These include a wealth tax, proposed by Corbyn in a BBC interview. “Well a wealth tax on massive incomes that are made, sort of windfall tax,” he said, “is a prospect worth doing.”

This despite the fact that wealth taxes are firmly established as being one of the most economically damaging forms of taxes, destroying investment and therefore damaging growth and jobs – and so ultimately reducing overall tax revenues.

His economics spokesman, Shadow Chancellor John McDonnell, also supports a financial transactions tax, which is predicted to do more damage to the economy of the European Union than it collects in revenue.

Again, the more of this they bring in, the better the offshore alternative becomes. Assuming, of course, that a Corbyn government wouldn’t (or couldn’t) impose similar policies on U.K. territories.

 

Corbynomics

It is difficult to say which is more worrisome; Corbyn’s tax policies or his broader economics.

In a BBC interview during the leadership election campaign, he complained that the Labour Party under its previous leaders had “been too close to economic orthodoxy.”

If Corbyn thinks being “too close to economic orthodoxy” is a problem, he is really complaining that Labour had been “too close” to reality. And indeed his economic policies do seem to lack any reality. But that is not surprising from a politician who is happy to publicly support Marxism. “The philosophy around Marx is absolutely fascinating. Does it all apply now? Well obviously philosophy applies at all times,” he once said.

A main plank of Corbyn’s economic policy is “People’s Quantitative Easing,” effectively using the Bank of England to print money to fund government capital spending. This would be done by establishing a “National Investment Bank,” which would issue bonds that would be bought by the Bank of England. The National Investment Bank, controlled by politicians, would “drive investment and lending to reshape and rebuild the economy … invest in the new infrastructure we need and in the hi-tech and innovative industries of the future.”

Governments choosing which “innovative industries” to invest in? If that all sounds depressingly familiar, that’s because it is just the disastrous policies of the 1970s, repackaged in modern jargon. Philip Rush, an economist at Nomura, warns of “the inefficiency and under-investment that would likely result” and points out that “Mr Corbyn’s policies have been tried before, in the U.K. and elsewhere, with consistently negative results.”

 

Tax avoidance

Not surprisingly, Corbyn claims that businesses are not paying enough tax and that they should be squeezed until they do so. He said, “tax avoidance and evasion needs to be beared down on,” and, “You’re looking at £50 billion of uncollected tax. You’re looking at massive evasion of tax.”

The numbers he uses vary, but at times Corbyn has claimed that there is a lot more than 50 billion pounds a year of extra tax to collect. One of his advisers on tax, and occasional warm-up man to Corbyn’s political rallies, was Richard Murphy, previously at the Tax Justice Network and now funded by various public-sector unions to argue that government spending cuts would be unnecessary if tax collection were tougher.

Murphy claims that tax avoidance and other unpaid taxes in the U.K. amount to 120 billion pounds per year, a claim roundly rejected by the Treasury and most other commentators, but relied on by Corbyn in the economic manifesto to his leadership bid, “The Economy in 2020,” in which he says, “But whatever tax laws we pass, we won’t get a progressive tax system in reality unless we can enforce it and collect the tax we are owed.

“A detailed analysis last year produced by Richard Murphy suggests that the government is missing out on nearly £120 billion in tax revenues, per year.

“That’s enough to double the NHS budget; enough to give every man, woman and child in this country £2,000.”

Even if that figure were remotely true, most of it would be impossible to collect; even the Treasury accepts that their much lower figure is largely uncollectable, since it includes unpaid tax owed by bankrupt firms, tax on illegal activities such as drug dealing, and millions of cash-in-hand payments between individuals.

Murphy’s 120 billion pounds is simply pie in the sky. Professor Michael Devereux of Oxford University’s Centre for Business Taxation said, “It is wishful thinking to believe that anything like such sums could be collected … If Jeremy Corbyn wants to raise significantly more tax revenue, then he will have to raise taxes.”

But however unlikely it is that all this extra tax could be collected, Corbyn wants it and intends to get it.

“This is money taken from us all. And we can address this,” he said.

Any attempt to do so is going to involve much more intrusive Revenue action, putting an intolerable burden on businesses whilst probably collecting very little additional tax.

But that is not all; Corbyn also wants to crack down on what is sometimes called “corporate welfare,” tax breaks for businesses. Some of that may make sense, reducing governments’ attempts to distort companies’ investment decisions, but unfortunately Corbyn has got his figures for this from another unreliable source.

“Another option would be to strip out some of the huge tax reliefs and subsidies on offer to the corporate sector. These amount to £93 billion a year – money which would be better used in direct public investment,” Corbyn said.

You can only reach 93 billion pounds per year by counting almost all business deductions as “tax reliefs and subsidies,” including such basic things as capital allowances (the U.K.’s form of tax depreciation).

But whatever the practicalities are, the underlying message is clear. Corbyn wants more tax out of businesses – a lot more.

It seems that for Corbyn this is not just a financial matter but also a moral one.

“The big question is how to get some of the wealthiest individuals and biggest corporations to pay anything like their fair share. At a time when schools and hospitals are struggling for funds, it is grotesque that some of the richest individuals and most profitable businesses are dodging their responsibilities,” he said.

Tax is, in Corbyn’s world, something we should take joy in; as he said in his economic manifesto, “The Economy in 2020.” “Paying tax is not a burden. It is the subscription we pay to live in a civilised society.”

Whilst that may be true at a low level, to pay for the essential structure of society, government spending has gone far beyond those levels. Paying tax is, for most but a few pampered left-wing entertainers, indeed a burden, and the administration of our over-complex tax system is yet another burden.

 

Offshore finance centers

Given his views on tax, it will not surprise anyone that Corbyn is an opponent of offshore finance.

But he goes further than most politicians; rather than just calling for businesses to abide by the law (which they do anyway), during the leadership campaign Corbyn said that the U.K. should “shut down tax havens,” saying in a BBC interview: “Do we then chase down tax havens and tax evasion? Yes we do.”

He believes that companies are improperly escaping their tax liabilities: “If a company is operating in Britain … making, yes, good business, making a lot of money in Britain, they should pay tax on what they earn in Britain and not by some piece of sophistry move it to Switzerland, Liechtenstein or Luxembourg.”

I’m not quite sure what that means, and I suspect Corbyn isn’t either, but it looks like we can forget the OECD BEPS project; if Corbyn gains power he is going to tear up the whole basis of international tax and, it seems, tax businesses where their customers are based.

All this of course is part of Corbyn’s claim that austerity isn’t necessary, that he can painlessly increase tax revenues to cover the deficit, partly by increasing tax rates on high earners and companies, but: “also closing down the massive numbers of tax loopholes, tax havens and tax evasion by a lot of companies – companies that claim to be trading in Britain but in reality place their headquarters in Switzerland and pay Swiss corporation tax, for example.”

That’s an odd way to put it. I’d have thought he would say that they “claim to be in Switzerland but in reality are trading in Britain.” But then, as we saw above, reality doesn’t seem to mean much to Corbyn.

Sadly, it isn’t just Switzerland and the other mainland European finance centers whose money Corbyn wants to get his hands on. The Channel Islands and the British Overseas Territories are also firmly within his sights.

Quite what “shut down” or “chase down” may involve is uncertain, but he wants international action to do so. Since becoming leader Corbyn has dropped his former opposition to the European Union, but he wants it to adopt much more of his agenda: “The EU also knowingly, deliberately maintains a number of tax havens and tax evasion posts around the continent – Luxembourg, Monaco and a number of others,” he said. “Labour is clear that we should remain in the EU. But we too want to see reform. …. Europe is the only forum in which we can address key challenges for our country, like climate change, terrorism, tax havens.”

As if the European Union did not cause enough problems for international finance already, mostly due to its “Fortress Europe” mentality of putting restrictions on non-EU businesses.

Many European leaders are already all too keen to try to prop up their shaky government finances by grabbing what they foolishly imagine is a great pot of untaxed offshore cash; it seems any future Corbyn government will be encouraging them.

No word, though, on whether Corbyn understands that the agenda in Brussels would be a threat to the financial center in London, or whether he would care even if he understood.

But he seems determined. Questioned by the BBC that it might be difficult to collect all the tax he believes should be paid, Corbyn responded: “Do we have hard work ahead chasing down tax havens – yes we do. And we will.”

So a Corbyn election would be an opportunity and a threat. The worse the U.K. tax system becomes, the more attractive offshore finance centers become. But his policies undoubtedly threaten them as well.

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Richard Teather
Richard acts as a tax policy consultant, including advising the Jersey parliament on their recent tax reforms, is a Fellow of the Adam Smith Institute. and is an editor or member of the editorial board of various journals. His book, "The Benefits of Tax Competition", is published by the London-based Institute for Economic Affairs. His work has been the subject of a debate in the UK Parliament and quoted in government studies in the UK, EU and Australia, and hit the national press when the UK government tried to suppress its own civil servants favourable comments on it.Richard TeatherSenior Lecturer Tax LawBournemouth UniversityChristchurch House C206Poole, BH12 5BBUKT: 01202 961870E: rteather@bournemouth.ac.ukW: bournemouth.ac.uk   

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