Awkward Utopia

Interesting article in The Economist about Gordon Brown’s recent budget, which included some dubious tax policy:

First, the main corporation-tax rate, which has been held at 30% since 1999, will be lowered in 2008 to 28%. Second, and even more startling, the basic rate of personal-income tax will be cut at the same time from 22% to 20%.

Long experience suggested, however, that Mr Brown’s headline announcements are not always all that they seem. So it proved on closer inspection of the Treasury’s figures. Businesses will certainly gain from the drop in their tax rate, by £1.4 billion in 2008-09, rising to £2.2 billion in 2009-10. Stingier capital allowances, however, will raise the amount of profit subject to the tax, so the overall effect on companies will be neutral. Small firms are unhappy with other measures. Richard Lambert, director-general of the CBI, a business lobbying group, gave the proposals no more than a muted welcome.

Those who pay tax on personal income will also find that what Mr Brown has given with one hand he has taken away with the other. The gain to taxpayers from the cut in the basic rate will be £8.1 billion in 2008-09 and £9.6 billion in 2009-10. But most of that will be paid for by the abolition of the 10% starting rate of income tax, which will raise £7.3 billion for the exchequer in 2008-09 and £8.6 billion the following year. Mr Brown will also gain from changes he is making to national insurance, aligning the income levels subject to it with those in the income-tax system.

The measures will create personal tax losers as well as winners: according to the IFS, around one-fifth of families will be worse off as a result.

Overall, the article is yet another illustration of how Margaret Thatcher prepared Britain for the 21st century and beyond, but how even the mild-mannered Labor changes were enough to dampen Britain’s standing and put it on the road back to statism and staleness. But even more interesting to me is the corporate tax graphic on the left of the article, which shows how far Britain has slid due to its corporate tax rate creep. Once it was a leader and so had transformed itself from the “Sick Man” of Europe into a respected, dynamic, and appealing leader in Europe. Although it is still respected, it is less dynamic and appealing. Blair and Brown must bear the burden for this.

Notice how Ireland still leads the way in its corporate tax rates. Twenty years ago, Ireland was a dangerous place to live for several reasons. Blight spread like wildfire throughout its cities and epidemics of joblessness and restlessness similarly plagued the country. A degree of intrepidity in its fiscal policies, however, put a serious spring in its step. Now people flock to Dublin as do corporations. Now people learn English with Irish accents as opposed to British ones.

In order to transform its relatively stagnant economy, Germany considered a cut in its corporate rate as well:

Recently the cabinet agreed to cut the corporate-tax rate from 39% to below 30%, but SPD bigwigs and even a CSU minister promptly attacked the plan.

And so, the effort was sabotaged by the perilously hamstrung coalition government currently in place there. It is sad to waste the pragmatic talent of Angela Merkel on the Social Democrats. If there is a way to get a new election called and for the coalition to dissolve some time soon, then it should be done,  because the time for efficacious tax reform in England, Germany, America, and everywhere else, is, as always, now.