Saturday, 4 June 2016

The Labour case for Brexit

You would be hard pressed to deduce this from the current political mood music but, like the Conservatives, the Labour Party has always had a pretty ambivalent attitude to the EU. That much is at least self evident if one looks back at the history of the party and how it split over the 1975 EEC referendum. The main difference though between the two parties is that the things Labour likes about the EU (the Social Chapter, protection of human rights etc.) tend to be the things the Tories hate, and vice versa. What is therefore surprising is that there is not the same debate about the EU in the Labour Party this time around as there was in 1975. My view is that there should be because the potential threats posed to our democracy and to the viability and effectiveness of any future Labour government by the EU (at least in its current form and with its current direction of travel) are now much greater than they have ever been.

These threats I believe are two-fold. The first is economic, the second democratic. The economic threat comes from the increasingly unviable state of national finances and taxation frameworks and the negative impact on both of these posed by the single market. For a government to function effectively it needs to be able to borrow what it needs when it needs, and it needs to be able to tax who and what it needs in a similar vein. This is because taxation is not just a means of raising revenue to fund services: it is also a macroeconomic tool that should be used in conjunction with borrowing to correct imbalances within the economy and thereby promote economic stability. Yet even outside the euro this will become increasingly hard as the EU becomes more integrated and the single market becomes all-powerful and all-consuming.

This is because at the heart of the new EU is the single market. The single market is everything. The single market is sacrosanct. Nothing will be allowed to interfere with the single market. That means all government policies will be tested against this question: do they distort the single market? If so then they will be deemed to be illegal. We have already seen the start of this trend with the decision of the European Court of Justice (ECJ) to vote against minimum pricing of alcohol in Scotland. Next it will be differences in excise duty that come under the spotlight, then VAT. After that it will be corporation tax on companies, and possibly even income tax. But you don't need the single market or the ECJ to bring about harmonisation of tax rates: that will happen automatically if we continue to allow the freedom of movement of people.

The freedom of movement of people or workers is one of the four pillars of the single market, the other three being the freedom of movement of capital, goods and services. Implicit in these is a fifth freedom, the freedom of movement of jobs. Most criticism of the first of these, the freedom of movement of people, has concentrated on its effect of immigration. However, there is a secondary impact. If you allow people to move country then you effectively allow them to choose which taxation regime they wish to work under. In other words they are able to exercise consumer choice to choose their tax rate by selecting a country of residence with as low a tax rate as possible.

We have already seen the effect of this when President Hollande raised the top rate of income tax in France to 75%. Many of the wealthy moved to London or across the border into Belgium, Luxembourg, Germany or Switzerland, and then commuted back to France for their work if they needed to. Of course if your income tax was dictated by your nationality and not your country of residence (as is the case for US citizens) such movements would not be financially beneficial, but of course EU rules and the single market prevent this.

The impact of all this will be two-fold. Firstly it will undermine democracy because it will effectively allow some voters to circumvent the democratic outcome of national elections. If you don't like the result then you can just move somewhere else. If your fellow countrymen vote for a socialist government with better public services and higher taxes on the wealthy, then the wealthy can just move to a country with lower taxes. The rich get to have their cake and eat it.

The second impact is a direct consequence of the first. If the voters can move from country to country in search of the best tax deal, then countries will be forced to compete for income. This competition will force them to outbid each other in terms of tax cuts. The net result will be an inevitable race to the bottom in terms of tax rates. As a consequence the tax gap that governments currently suffer from will widen, revenues will fall, spending will decline, and services will worsen, whether these are in social security, healthcare or education.

The one great virtue of the EU in the eyes of Labour voters and trades unionists has always been the Social Chapter of the Maastricht Treaty. This encapsulated the core ideal that the EU should be for the benefit of workers, and not the owners of capital, by setting common standards for working rights and conditions that multinational corporations in particular operating in the EU would have to abide by. The rationale was that individual member states were too small and powerless to implement these standards unilaterally because multinationals could effectively force nations to compete against each other for the jobs those multinationals could provide. The irony now is that it is competition within the single market that is the great threat, not to wages but to government finances. Once you allow freedom of movement of labour then you undermine the fiscal sovereignty of individual states. Eventually they become financially non-viable with only the EU itself being able to levy income tax across the EU and across national borders. The result will be a push towards introducing a federal income tax and a federal budget with more loss of sovereignty and democracy at national level.

The result of all this is that it will become virtually impossible to elect a left wing government because a left wing government by definition is one that will always want to intervene in the market, either to prevent economic crisis or to stabilise an economy that is already in crisis, or to reduce the impact of inequality. All these interventions will necessarily result in a distortion of the market, and even though the market is imperfect and may be in crisis, this will be deemed to be against the rules of the single market. So while you may still be able to vote for a left wing government, that government will not be allowed to implement anything that resembles a socialist platform. It will be like voting for a Labour local council but finding that they still have to implement the same austerity-driven cuts as would have happened under a Tory administration. And of course the Greeks have already discovered this. They elected Syriza (twice) and still ended up with their economy being run by Dr. Strangelove in Berlin.

To put this into perspective imagine some of the policies that a future Labour government might wish to implement to raise extra taxes and tackle wealth inequality: the mansion tax; a citizen's income, support of key industries (e.g. steel) in times of external shocks; taxes and controls on intellectual property. All of these could be at risk from EU rules and regulation. The citizen's income (or basic universal income) in particular is one idea that is gaining support across the continent. The Swiss are currently voting in a referendum on this issue, but one concern is that the freedom of movement of people would make it unworkable whereas if eligibility were based on nationality then immigration would have little or no negative impact. But under EU rules countries are not allowed to "discriminate" on grounds of nationality.

The worrying thing is that the current Labour hierarchy seem oblivious to most of these potential pitfalls of EU membership. Moreover, by hitching his wagon (and by association most of the Labour Party) to the Remain campaign, Jeremy Corbyn has made a massive tactical miscalculation. If the electorate votes to leave them he will have made Labour unelectable for a generation as no-one will trust the party in government to keep the UK out of the EU. After all who is going to vote for a pro-EU party and prime minister if the country is negotiating to leave the EU? At least if a significant number of senior Labour figures (other than the commendable Frank Field and Gisela Stewart) had signed up to the Leave campaign then there would be sufficient alternative leadership candidates, or cabinet members who could be entrusted to lead future negotiations. And even if the public votes to stay in the EU the Labour party will likely lose significant votes to UKIP in future elections as a result. It is an outcome Frank Field has warned about but no-one seems to be listening.


  1. Tax exile has always been possible for wealthy people, with the last great peak happening under the 98% marginal rates of income tax under the Butskellite regimes of CON/LAB in the 60s & 70s. Look at Top of the Pops from that era: almost no British rockband appeared in the studio, only through pre-shot video clips. unconvinced that the Single Market changes the tax calculation much, although you need to know other languages to use that mobility, unlike the US example in the 60s. Some tax competition between states is desirable as it reflects differences between social contracts. Such competition punishes ideological extremes.

  2. Tax exile has always been possible for wealthy people, with the last great peak incentivised by the 98% marginal rates of income tax under the Butskellite govts of CON/LAB in the 60s & 70s. Look at Top of the Pops from the 70s: almost no British rockbands appeared in the studio, only through pre-shot video clips. I'm unconvinced that the Single Market changes the tax calculation much, although you need to know other languages to use that mobility, unlike the US example in the 60s. Some tax competition between states is desirable as it reflects differences between social contracts.

    1. It wasn't just Top of the Pops. Bands would often record their albums abroad because then the sales were classed as overseas income and were thereby exempt from UK tax.

      You are probably right that the Single Market doesn't change the tax calculation much for most people, although that is not necessarily true with regard to France's 75% top rate introduced by President Hollande. However, tax calculations may change in the future given the current direction of travel of the EU.

      My real concern, though, is that EU rules prevent member state governments from tackling tax avoidance, both by companies and individuals. In my opinion, tax avoidance by individuals can only be addressed if governments are able to tax their citizens wherever they reside in the world, just as the US does. We also need to change the rules on the taxation of royalties from intellectual property. These should be taxed at source. And companies should be taxed using the CCCTB method as I have outlined in an earlier post. None of this would be possible if we remain in the EU.

      As for punishing ideological extremes, I would suggest people can do that already by emigrating and permanently changing their nationality. Making it easy for people to move tax jurisdiction temporarily, just because they don't like the policies of the current government, would result in the death of democracy.