Introduction
Indecipherably, the United Kingdom has voted to leave the European Union, the trade bloc that connects the country to the other European nations for trade and free movement of people. Many citizens in and out of the United Kingdom have found it hard to comprehend why the country would want to undertake such a move. Such a decision would not be implemented within a short time since there will be various positive and unfavorable effects on the people living in the united kingdom and the other citizens of the United Kingdom living in the other countries within the European Union. The country is set to level the European Union on 29th March 2019 after having a transitory period lasting 21 months. The transition was expected to smoothen the operations in the country in the post-Brexit phase of the nation. The relationship between the UK and the European Union in the post-Brexit stage has also not been decided. Nevertheless, negotiations are going on between the two entities (Hunt & Wheeler, 2018).
Motivation
Brexit is set to have different effects on the tax competition both in the United Kingdom and in the broader European Union such as the capital mobility. The exit of the United Kingdom from the European Union is set to affect the movement of capital across the national boundaries. The restriction of the flow of money and technological ideas across the borders leads to the reduction in the capital tax competition. Also, the free movement of goods across the boundaries of the countries points to the efficiency of the trade in the involved countries. The Brexit idea will restrict the flow of goods and undesirably alter the international tax competition.
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Undoubtedly, the international tax competition has also had some effects on the free movement of factors of production to and from the United Kingdom. The competition has lowered the effectiveness of the elements. Brexit will serve to worsen the condition by restricting the free flow of the production factors. The significant impact of Brexit on the tax competition will be as follows. There may be the misappropriation of international capital owing to the separation of the United Kingdom from the other countries in the United Kingdom. The primary remedy to the problem of the misallocation of the money in the world is the formation of tax alliances. The tax alliances are expected to lower the tax competition amongst the United Kingdom and the other countries within and without the European Union.
International Capital Allocation
Capital allocation is a process that is subtler than it seems. Financial resources in a given country have to be apportioned to various sources to tap their potential profitability. The maximization of the profits leads to the increase in the efficiency of the exploitation of the available resources (Clausing, 2015). It is usually the responsibility of a particular government, such as that of the United Kingdom, to ensure that the funds are allotted strategically to boost their profitability in the long run. International capital allocation is even more difficult to achieve. The main reason for the difficulty is that different countries have different taxation levels, which have to be equalized so that the allocation of the resources becomes more manageable for the governments. The European Union works in a similar model. That is to say that Brexit will affect the European Union regarding differentiating the taxes in the united kingdom form that of the other members of the trading bloc(Clausing, 2015).
The European Union is one of the trade blocs in the world that has worked tirelessly towards ensuring that the rate of taxation is similar in every member state. The bloc has regulatory procedures that optimize the tax competition among the member states. The exit of the United Kingdom from the European Union, famously known as Brexit, is a significant move in the effecting of similar taxation systems. The United Kingdom, after ceasing to be a member of the EU, may have trouble with the allocation of capital from the other member states to provide resources for the stabilization of its economy (Auerbach & Devereux, 2015).
The Race to the Bottom
The idea of the United Kingdom breaking away from the European Union will come up with the urge to establish a tax competition since the country will have a different taxation level from those of the other countries. For example, if France decides to tax the working class at 30% while the United Kingdom decides to tax them at 20%, the workers in the lower tax bases may opt to work in the United Kingdom than in France. If the tax rate is equalized in both France and the United Kingdom, the lower tax bases will be spread evenly between the two nations. The equalization of the tax levels would work best only when the United Kingdom is still in the European Union. Therefore, it becomes difficult for the workers in higher tax countries to move to the lower one in the United Kingdom.
Both countries involved have to come up with strategies to control their taxation levels and maintain the tax competition in the international platform. The best approach to be applied to the taxation is the dominant strategy. The dominant strategy comprises of the strictly and the weakly dominant plan. The current procedure involves the Nash equilibrium. Under the Nash equilibrium, the different countries impose different tax rates that are considerably lower and favorable for the workers. The international tax competition reduces the efficiency of the capital tax rates. Brexit could only worsen the situation.
A Model of Tax Competition
Tax competition is prevalent in continental Europe. Every day, governments are being advised to lower their tax rates to favor the influx of the resources that spur growth in their countries. Notably, the governments are also doing all that is in their ability to discourage the efflux of the funds. The exit of the United Kingdom from the European Union will encourage tax competition in a great deal, as the country will seek to retain the production factors and avoid sharing them with the other countries. Models of tax competition have been developed. One of the models is the Zodrow-Mieszkowski-Wilson model. According to the model, the capital taxes are reducing every day as the capital becomes more mobile than before. That is mostly being observed in the United Kingdom and other countries in the European Union.
According to the Zodrow-Mieszkowski-Wilson theory, the increase in the mobility of the capital in the European Union is expected to bring about an increase in the level of taxation in the involved countries. Usually, the countries are supposed to tax the resources that come in the nations such as the acquired companies from other countries. Nevertheless, standardized tax competition among the countries will have a lowering effect on their taxation since all the nations are at the same level in the taxation of the available resources. Brexit will tamper with the standardization of the tax competition among the countries in the European Union versus the United Kingdom. That will increase the competition due to the distinct taxation levels.
Coordination of Tax Policies
Tax policies have to be coordinated in the involved countries such as those making up a trade bloc to enhance the tax allocation procedures as well as maintain the tax competition at a level that will be beneficial to the countries. Instantaneously, the countries making up the European Union, currently including the United Kingdom, have to form alliances in taxation to coordinate their tax policies. The coordinative procedures of the European Union to ensure the tax policies are common to all countries were evident in 1992 when the bloc came up with a single market for labor an capital among the member states. While the milestone has continually been extolled, the European unions have, in a significant way, failed to come up with a similar tax system for the countries (Keen & Konrad, 2013).
The lack of an adequate collective tax system has mostly encouraged competition among the member countries as far as taxation is concerned. Tax competition has been blamed for some problems associated with the efficiency of the exploitation of resources in the involved countries. The output of the local services is also generally affected by a surge in the tax competition levels. Locally, the officials may attempt to keep the level of taxation low enough to attract the investors to their countries. However, the efforts of the country officials are not observed to offer any direct advantages to the said businesses. Therefore, the local officials involved in taxation in the member countries have to work closely with those of the European Union to enhance the coordination of the taxes for better trade and output of investments in the involved countries (Keen & Konrad, 2013).
Further Issues
Tax competition is not entirely a negative force in the governments. Economists within the European Union have established that fair tax competition is indeed beneficial for the countries involved. Therefore, the avoidance of tax competition on entirety affects the governments that do so in a great deal. Analytically, such governments have been reported to draw in less revenue than those that embrace fair tax competition. Preferential tax regimes have received criticism from the economists and the economic analysts for distinctly taxing different tax bases. They have been accused of catalyzing the dropping of the rates of taxation to levels that negatively affect the revenues that the nations receive every year (Hillman, 2003).
References
Auerbach, A. J., & Devereux, M. P. (2015). Cash flow taxes in an international setting.
Clausing, K. (2015). Beyond territorial and worldwide systems of international taxation.
Hillman, A. L. (2003). Public finance and public policy: responsibilities and limitations of
Government . Cambridge University Press.
Hunt, A., & Wheeler, B. (2018, May 10). Brexit: All you need to know about the UK leaving the EU. BBC News . Retrieved from http://www.bbc.com/news/uk-politics-32810887
Keen, M., & Konrad, K. A. (2013). The theory of international tax competition and coordination.
In Handbook of public economics (Vol. 5, pp. 257-328). Elsevier.
