The new problem that is thousands of years old

Companies can be a brass plate in Liechtenstein and operate offshore, but the people who own them have to have a home. And they can be tracked
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The Independent Online
"And it came to pass in those days that there went out a decree from Caesar Augustus that all the world should be taxed, and all went to be taxed, everyone into his own city. And Joseph also went up from Galilee out of the city of Nazareth into Judea unto the city of David which is called Bethlehem..." Luke, Chapter 2.

Had it not been for an effort by a supranational authority, concerned about the difficulties of collecting tax from economic migrants, Joseph and his pregnant wife would have been able to stay in Nazareth, and the story of the Nativity would have been rather different.

At the weekend, Mr Jurgen Stark, a finance ministry state secretary in Germany, said that Bonn was planning a campaign against "tax havens" in the EU, singling out the UK. It seems that British tax rates are one of the reasons why investment bankers, including many Germans, operate from London instead of Frankfurt.

Germany is not proposing that Germans resident in London should have to return to their native cities to be taxed, though it would be a sight easier to hop on a plane back to Frankfurt than to trek down from Nazareth to Bethlehem, half a day's car ride even today. But Germany's concern is similar to that of Caesar Augustus. If you have a common currency zone with high levels of labour mobility it is hard to avoid inefficiencies in the tax system. Two millennia ago the problem was tracking people; now it is the multiplicity of different tax regimes. We can, to some extent, fix the old problem; but because the world is less unified, we have a problem that they did not have to tackle, the lack of a common tax authority.

In the years ahead this is going to get worse. All high-tax countries are desperately concerned about economic migration. Germany is concerned about the loss of jobs to eastern Europe, partly a function of lower wages, but more one of less onerous social security and tax payments. I was in Sweden last week, and it was pointed out that all the high-profile Swedish sports stars lived outside the country. But at the moment we are only seeing a tiny change, for only a relatively small group of people are free to choose their location. As electronic communications develop, and as an increasing proportion of the world's labour force works on-screen, the proportion of workers who are free to locate anywhere will rise. We already have an element of tax competition within the EU, seeking to attract new business investment with grants and tax breaks. Are we moving to a world where tax competition extends to individuals and becomes a major way in which countries compete?

Some people have gone even further than this, and started to ponder whether the Internet creates a world where companies and people can locate themselves beyond the bounds of any national authority. Of course humans have to be physically located somewhere; companies can be a brass plate in Liechtenstein and have all their operations offshore, but the people who own them have to have a home. And they can be tracked. The advance of electronics, which brings us this freedom of location, also makes it easier for Caesar Augustus to find us.

But the combination of mobility and electronics is likely to cut away government revenues over the next generation - it is the principal force which seems likely to cause the downsizing of government. To many this may appear welcome, but there is the disturbing possibility that governments simply will not have the revenue necessary to perform their basic functions. This raises two obvious questions. What can governments do to protect revenue? And is there a bedrock of taxation which will not disappear, come what may?

On the first, the key element will be the degree of international co- operation that governments can develop. Within the EU there ought to be some room for holding tax rates within broad bands, but the scope will be more limited than people like Mr Stark would like. Quite aside from the obvious political difficulty of a country accepting a tax rate decided by voters in another, there is the practical difficulty that there are several places in western Europe which are not members of the EU: not just Switzerland and Norway, but also places like the Channel Islands.

In any case the chief competition for the EU countries will not increasingly be from within the EU, but from outside it. Economic power is inevitably shifting to East Asia. It is very hard to see a government in China being particularly sympathetic to charges from Europe that its taxation policies are unfair. Even if it were possible to co-ordinate EU taxation, that would not be enough. Indeed it might simply put the European time-zone at a disadvantage compared to the other two zones: America and East Asia.

So, while there may be grounds for some international co-operation on tax, it would be unwise to expect too much. An alternative way forward would be that adopted by the United States, which taxes its citizens wherever they live world-wide. In theory any country concerned about tax leakage because of its citizens moving abroad could think of doing that. But in practice it would be very difficult for other countries, if only because the attractions of being a citizen of almost any other country are weaker. In the case of Germany there would be the further complication that nationality is by blood - by ancestry - rather than by birth.

The best protection of government revenues, surely, comes on the other side, the spending side. Countries with very bad public services are unattractive places for either people or businesses to locate.

In any case there is surely a bedrock of taxation which will remain. This includes property taxes; a reasonable level of sales taxes; fuel and power taxation; some (maybe quite modest) level of income tax. Even on pessimistic assumptions, a country ought to be able to raise taxation equivalent to, say, 25 per cent of GDP, at least for another generation.

But as the demand for skilled people rises and as these people are free to move around more and more, the downward pressure on taxation will continue. Expect more concern about "unfair" taxation, and increasing efforts to make people pay tax in their cities of their lineage, even if future tax authorities will not force people to go back there to pay it.