Brexit: Will the Empire strike back with lower taxes?

John Kane-Berman says the rolling back of govt is a liberalising reform long overdue

If anyone needed more evidence that quitting the European Union (EU) was the right decision for the United Kingdom (UK), the German chancellor and her finance minister recently provided it.

According to The Economist, the finance minister, Wolfgang Schäuble, said last month that any attempt by the UK to turn itself into a tax haven after leaving the EU would "not be tolerated by the rest of the world". Pardon me? When the British leave the EU, their parliament will once again become sovereign. It will therefore be entitled to lower taxes, irrespective of what anyone in Berlin or Brussels might wish.

Earlier this month, the chancellor, Angela Merkel, was reported by The Independent in London to have "hit back" at what was described as a threat by the British prime minister, Theresa May, to slash taxes to undercut the EU if it blocks a Brexit deal. Ms Merkel said her country had no intention of joining a race to the bottom by following in the footsteps of Ms May and the American president, Donald Trump, who has also been promising to cut taxes. Well, if Ms Merkel does not want to follow suit, she does not have to.

The threats from Berlin follow earlier warnings by EU officials to the UK not to cut taxes. How far Ms May and Mr Trump will go remains to be seen. If the EU makes the British divorce difficult, as some of its officials threaten, the UK might have little choice but to hit back. Tax cuts would not only attract more investment, but also some of the best talent from Europe. It would be a pity if Ms May abandoned cuts in return for a "soft" Brexit deal.    

To what extent the new British and American leaders will actually shrink the state is not clear. Some of their pronouncements on economic issues are anything but liberal. But rolling back government is a liberalising reform long overdue.

The growth of the Leviathan state was one of the dominating trends of the last century. In the US, for example, government spending as a proportion of gross domestic product (GDP) a hundred years ago was 7.5%, a proportion which had risen to 41% a century later, according to the Cato Institute, a think-tank in Washington DC. Yet it is not taxes, but faster rates of growth, especially in India and China, that have helped to lift millions out of poverty.

In South Africa, government expenditure as a proportion of GDP has doubled from 16% in 1961 to its current level of around 33%. High taxes in this country are, of course, particularly galling because so much is wasted or stolen.

Back in 1995, Nigel Lawson, one of Margaret Thatcher's finance ministers, wrote as follows in his Memoirs of a Tory Radical: "Much writing on social choice and welfare economics implicitly assumes that all income belongs in the first instance to the state, and is then allocated by the state to individuals. Hence the Labour fury at the cuts in the higher tax rates in my 1988 budget.  

"The Tory belief should be the opposite one: that income or property belongs to the people who earn it or who have legitimately acquired it; and that a case has to be made for taxing it away."

Mr Lawson was exactly right. Although taxation is necessary in any society, it has got out of hand, because many governments take it for granted that they are entitled to keep on pushing up taxes. Even when they do not push them up enough to finance all their expenditure, they will have to do so in the future to reduce public debt. Better not incur debt in the first place: so cut both spending and taxes.

 * John Kane-Berman is a policy fellow at the IRR, a think-tank that promotes political and economic freedom. His memoirs, Between Two Fires: Holding the Liberal Centre in South African Politics, will be published by Jonathan Ball in March.