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Thursday, 14 July 2016 17:53

EUROPE'S TAX PUNISHERS

Editorial, The Wall Street Journal, 13.07.2016   

 

HOW MUCH WILL THE EU HURT ITSELF TO DETER A BRITISH TAX CUT?    

 

What most frightens European leaders about Brexit? Perhaps it is that Britain might make a success of its departure from the European Union. Witness the furious backlash against proposals to improve Britain’s attractiveness to foreign investors.

 

Departing Chancellor George Osborne last week suggested slashing Britain’s corporate-tax rate, to below 15% from the current 20%. The U.K. already was the bane of high-taxing continentals, especially after Mr. Osborne introduced phased cuts to bring the corporate rate down to 17% by 2020. But his latest idea, which would bring Britain’s rate into the same league as Hong Kong and Singapore, and nearly down to Ireland’s 12.5%, has set off a new wave of neuralgia across the Channel.

 

German Finance Minister Wolfgang Schäuble almost immediately decried a tax-rate “race to the bottom” after Mr. Osborne’s announcement, suggesting any tax competition should be “fair,” whatever that means. The European Commission’s economic policy chief, Pierre Moscovici, warned against “exacerbated fiscal competition between ourselves.”

 

On Monday, French Finance Minister Michel Sapin did his best impression of a mob enforcer trying to present Britain with an offer London can’t refuse. “Whether you’re in the union or you’re out, we should all adopt a friendly attitude,” he said. France’s own version of a friendly attitude is to threaten to hold up negotiations on the so-called financial passport that would allow U.K. banks to trade freely in the EU. A British tax cut “will not change anything on the passport for instance. In fact, it’s not a good way to start a negotiation,” Mr. Sapin said. Got the point, chaps?

 

It’s bad enough that the first instinct in Europe has been to warn Britain off a pro-growth tax cut rather than following suit. French and German businesses could use the break, given they pay corporate rates of 33% and 29.65%, respectively.

 

Now this mania could extend to cutting off the rest of Europe’s access to the competitive financial services Britain provides. France hopes Brexit will create an opening for Paris to become Europe’s new financial hub, and revoking Britain’s financial passport would aid that effort. But some hub it would be for European companies and investors if EU leaders finally press ahead with the financial-transactions that tax Britain helped to block.

 

Maybe French and German leaders hope they can bully Britain into not cutting its corporate rate while they continue to enjoy access to Britain’s financial know-how. That’s a bluff Prime Minister Theresa May and her new chancellor, Philip Hammond, should be prepared to call. If the EU really is determined to enforce higher tax rates no matter the economic costs—for both sides—then it will confirm the wisdom of British voters who chose to leave.

 

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