Tax Analysts Blog

Brexit: When the Gods Wish to Punish Us, They Answer Our Prayers

Posted on Jun 29, 2016

Reacting to the success of the Leave campaign in the United Kingdom’s referendum on continued membership in the European Union, the alarmist headline of a New York Times article foreshadowed a nation stepping into “uncharted territory.” Surely a country that has not been successfully invaded since 1066, that forged the concept and practice of parliamentary rule, and that as late as seven decades ago exercised sole dominion over a quarter of the world’s total land area and an equal proportion of its population would have left in its possession a few maps with which to chart its own sovereign course once again. The comparatively brief 23-year history of the Maastricht Treaty could not conceivably have rusted all of the United Kingdom’s institutions of self-governance into disrepair. Perhaps recognizing the absurdity of its headline, The New York Times changed “uncharted territory” in the online version of the article to a more restrained “uncertain chapter.”

Remaining far from deterred in its quest to characterize Brexit as an illegitimate policy objective, however, the Times followed up with an article calling attention to what it depicted as the campaign’s xenophobic motivations. Faulting Brexiteers for taking “their economic anxiety out on faceless foreigners” and of placing prejudice above economic facts, the article cited a study purporting to show that the recent historically high levels of immigration had been a net positive for the U.K. economy.

But colonization too had delivered economic gains. As history does not reveal its alternatives, it’s impossible to tell whether any of the former British colonies, especially in Africa, would have developed faster if left uncolonized. Still, there can be no denying that most, if not all, benefited from the “mother country’s” technological advances. While colonization’s efficiency impact is imponderable, its equity consequences are not. The benefits were captured almost exclusively by the foreign colonial masters and a select few locals. In an eerie parallel, the gains from open borders accrue disproportionately to “stateless” multinational corporations, which keep a lid on domestic wages by bringing in foreign workers, and the notorious “top 1 percent,” who can afford to hire the cheaper cooks, maids, and gardeners.

One goal animating the Leave campaign that was difficult, if not impossible, to disparage, however, was getting rid of the meddlesome Brussels bureaucracy. Brexiteers never tired of pointing out the many instances in which European Commission officials had blocked U.K. policies designed to further worthwhile social causes. These included stymieing the U.K. government’s efforts to eliminate the odious tampon tax and lower the VAT rates on energy-efficient building materials. 

But with the United Kingdom outside the EU, trade with EU member states would entail more, not fewer, bureaucratic controls. For example, as far as VAT is concerned, imports into the United Kingdom would constitute taxable events. The governing U.K. tax rate would apply and the VAT levied would be deductible as input VAT. Moreover, following Brexit, if the United Kingdom merely obtained World Trade Organization membership without any form of specific agreement with the EU, an import duty would be required on goods imported from EU member states to provide parity with imports from non-EU countries.

Even if the United Kingdom, like Norway, could negotiate membership of the European Economic Area with a free trade guarantee, the administrative burden on imports from EU member states would be significant. Though these imports would enter the United Kingdom without duties because of the free trade guarantee, the importer would have to provide declarations to prove to HM Revenue & Customs that the goods were manufactured in the EU, and not just routed through a member state to circumvent import duties levied on non-EU countries.

Similarly, in the area of direct taxation, while the departure of the United Kingdom will render moot its objections to the commission’s work in formulating a common consolidated corporate tax base and hasten progress toward it, U.K. companies with affiliates in EU member states will inevitably have to confront a coordination regime of sorts, specifying adjustments to and from the EU-wide metric.

As long as the EU remains a major trading partner of the United Kingdom, instead of eliminating bureaucratic layers, Brexit is likely to introduce yet one more, this one seeking to harmonize the pronouncements from Brussels with the officialese emanating from Whitehall. Bureaucracy is often satirized as a hydra-headed monster, regenerating multiple heads for each one that is chopped off. Brexiteers may be about to discover that as with all satire, there is more than a grain of truth to that representation.



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