Expert View: London leads the world - let's not throw it away

Has Mr Brown noticed the link between success and low tax?
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The Independent Online

London is getting just about everything right. Society is open, business is a meritocracy and the culture diverse and liberal. The cluster effect is weaving its magic to spark innovation and creativity. The tax climate is benign for foreigners stopping to do business. Regulation is light, apposite and principle-based. Labour law is flexible.

We are a mix of everything New York, Tokyo, Paris and Frankfurt would like to be. We have become the world's international financial centre.

What is there still to learn? The US has proved remarkably adept at throwing away its lead. Its politicians failed to see that outdated domestic laws would drive business away. The euro- dollar market was created in London in the early 1960s because US legislators did not change the archaic laws that stopped banks from doing in New York what they found they could in Europe. Banks couldn't pay interest on overnight deposits in the US, but could in London and Paris. Once the market had moved from New York, no change in legislation would ever bring it back.

Financial history might have faded from memory, so the Yanks did it again in 2002 with the Sarbanes-Oxley Act, which imposed onerous obligations on directors of listed groups and instantly made the US stock exchanges unattractive for both American and international players. A stampede to London began. Wall Streeters are still trying to corral share listings for Nasdaq and the NYSE, but even if US politicians and regulators finally recognise that finance is a global competition, it might be too late to bring the game back to town.

Two areas that are still dominated by America are private equity and hedge funds. Both are largely unregulated in the US and tax there is benign for both industries. Carried interest (a performance-related fee for partners) is taxed at 15 per cent in the US and hedge fund managers are allowed to defer paying it by leaving their fees in the fund - in effect, reinvesting their profit without paying tax. Have the US politicians worked out that there might be a correlation between success on the international stage, low tax and light regulation? Has Prime Minister Brown?

Is there anything else that has helped London to leave rivals trailing in its wake? It can't be communications; they are taken for granted everywhere in the developed world. That said, it's handy everyone here speaks English. But we mean it when we say "welcome", and I'm not sure the same can be said for bien-venue and Willkommen.

Perhaps it's also that the odds are stacked against foreigners in New York, Paris and Frankfurt. US politicians pulling the plug last year on the Dubai ports deal, German politicians and trade unions stymying the private equity "locusts" and French restrictions on foreigners buying businesses - all exemplify a parochial approach that only undermines these centres.

Or it could be that the value of specialisation - the deep understanding of complexity and knowledge derived from personal contact - attracts people to where these things can be found. Information residing in machines can be accessed any-where, but real talent is human capital which is mobile and will gravitate to the hub. Talent will also go when it's time to be gone.

And the time to go is when London is no longer a compelling destination for foreigners. If the Government gets even one big thing wrong - like discriminatory taxes (the threats against private equity spring to mind), over-regulation or protectionism - there is a real risk the mobile talent will flee. If Gordon Brown thinks he can call the City's bluff on any of these, it will be cold comfort if the last person to go can say "we told you so" before turning off the lights.

Alasdair Douglas is senior partner and head of corporate tax at City Law firm Travers Smith alasdair.douglas@traverssmith.com

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