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Business Comment

David Prosser's Outlook: Time for Darling to fight back on tax

Alistair Darling is on a full-scale charm offensive. Fresh from an appearance last night at the CBI's annual dinner, the Chancellor will today meet the board of the Association of British Insurers. His message to both audiences is that ongoing policy reviews, particularly of the charges made on the foreign profits of multinationals, are not intended to widen the tax net or to generate additional revenue for the Treasury.

It's not a story business finds entirely believable. As we know, some companies are so anxious about the Treasury's plans for multinationals, they've disappeared offshore before the fine print has even been unveiled. Such suspicion is understandable given the business tax initiatives previously announced by the Chancellor on non-doms, capital gains and life insurance policies (the issue about which many ABI members are particularly vexed). But Mr Darling deserves a fair hearing. Like every one of his predecessors at the Treasury, he must tread a fine line between protecting tax revenues and ensuring business is not overburdened by complexity or the size of their bills.

Martin Broughton, the CBI's president, told Mr Darling last night that he did not want to see knee-jerk tax initiatives. In fact, this is actually what many businesses have been asking for when it comes to the taxation of multi-nationals. The Treasury has spent the best part of two years working out how to bring the UK's taxation of controlled foreign companies into line with European Union law – hardly a knee-jerk response to the loss of a test case on tax in the European Court of Justice – and still has not issued final proposals. Yet some multinationals now think the Chancellor can be bounced into making a decision that favours them by threatening to move offshore.

Mr Darling must not allow himself to be blackmailed. Having set up an august committee of business bigwigs to review Britain's corporate tax system, he can justifiably argue he is listening to companies' concerns. But the Chancellor also has to be aware of the concerns of other taxpayers, who reasonably resent much higher marginal rates of income tax than hugely profitable large businesses.

In any case, there's a question mark over how concerned we should be about the loss of Shire, WPP, United Business Media et al to foreign parts. In fact, the government of Ireland, the location of choice for many of these companies, is not as cock-a-hoop as one might expect about winning their favour.

That's because, in most cases, these companies' relocation is an administrative exercise that won't result in the transfer of any significant number of jobs. And the loss of corporation tax to the UK is marginal, since most will not make substantial savings.

Free market economics makes the case for the trickle-down effect. Leaving wealth-makers unburdened by unpleasantness such as tax and regulation enables them to create more wealth for the rest of us. There's some merit to this argument, but, in applying this principle over the past 30 years, successive governments have also engendered ever greater income inequality. Living standards have risen across the board, but the gap between rich and poor has also widened.

There comes a point when this inequality becomes politically (not to mention morally) unacceptable. The Dutch government, for example, feels this point has now been reached and plans to introduce tax policies that effectively cap executive pay. Maybe British companies should consider themselves lucky.

All that said, the Chancellor has another problem – the world has changed since the days in which governments could set out tax regulation and simply expect businesses to get out their cheque books. In a global economy, every country has to compete to be the home of businesses and industries that generate jobs and tax receipts. If you don't offer large corporates the sort of taxation and regulatory environments in which they feel comfortable, there's very little to stop them going to a country that does.

The best way to meet this challenge would be to make Britain's workforce indispensable to large multinationals. If larger companies felt they couldn't find the level of skills and productivity on offer from British staff anywhere else, they would feel compelled to stay in this country almost whatever it cost.

And herein lies a failure of government policy much larger than its vacillation on tax issues: more than a decade since Labour was elected on a policy of education, education, education, Britain's employers have never been more dissatisfied with the skills of school-leavers and graduates.