Avoiding avoidance

The growing difficulty of raising taxes in an era of globalisation has been underlined in both Britain and Germany in recent days. Both governments need to reduce their escalating budget deficits. Gordon Brown's attempt to raise money stealthily by clamping down on tax avoidance brought a blunt warning from the CBI and top accounting firms that such a move could lead to less inward investment and an exodus of companies and managers to more favourable tax climates. In Germany, proposals by Angela Merkel and her Social Democrat coalition partners to impose a wealth tax and raise income tax for the better-off generated a similar response, while the second part of the Merkel package - a willingness to raise VAT by 4% - had retailers up in arms. This is justified, since increased VAT is not an obvious way to help an economy whose basic problem is that people will not spend. Even if the increase were to be implemented it would not necessarily lower interest rates because since the launch of the euro that has been the prerogative of the European Central Bank, not the Bundesbank. In these circumstances the option of taxing the rich - or in Britain's case of reducing tax avoidance - is a safer and fairer one for politicians.

But what if the threats to decamp are real? If globalisation really has made it easier for companies and individuals to relocate abroad, then moves to recoup small amounts of money could lead to the loss of much greater sums and lots of jobs, if businesses and employees migrate to lower tax climates. No one should underestimate how much Britain's attraction to overseas companies, especially financial groups, is related to our "liberalised" approach to such things as labour laws and foreign take-over bids. Being friendly to business is a key element of Labour's success in running the economy in a consensual way. It would be stupid to throw it way. But the flip side of this freedom is that corporations and managers should act as good citizens: and that means paying their proper share of taxes. It is not as if they are an oppressed species. As Incomes Data Services reported last week, the pay of top company directors rose by 18% last year, over six times higher than the rise in average weekly earnings of 2.8%. And 18% of, say, £500,000 is a lot more than 18% of average earnings of £22,400 a year. If it turns out there is a real problem about corporate migration, then it will have to be faced. But there must be a suspicion that industry is simply trying it on this time. The chancellor should prosecute his tax avoidance policy with all his well-known energy.