Bureaucrats in Brussels have cooked up a bitter pill for Britain to swallow in the negotiations over Brexit. But Britain really does hold all the cards – if it stirs a brew of its own. Plan B is the tax reform that would enable Britain to walk away from the EU and expand its home market by much more than it would lose if all trade with Europe ceased.
The UK exports a lot of goods to Europe, and Europe – taken as a whole – sells a smaller proportion of its production to the UK. But Europe also needs the UK for non-economic reasons. So the one card which Prime Minister Theresa May could play is this.
First, trade would not cease; it would merely have to jump a tariff wall. So be it. But UK producers could discover that their home market had expanded by more than what would be lost through the tariff barrier. This would result from tax reform – the financial strategy that the UK needs, anyway, to deal with domestic problems such as the housing crisis.
By launching the run-down of deadweight taxes – those imposed on people’s earned incomes – and replacing the revenue from the nation’s net income (rents), the home market would automatically enlarge itself by more than what would be lost in tariff-distorted trading with Europe.
A revenue neutral rebalancing of taxation would ultimately expand the UK market by about £500 bn. That is the scale of the gains from eliminating what economists call the “excess burden” imposed by regressive taxes like VAT.
Mrs May’s Aces
The choice for Mrs May is simple. If she is re-elected in June, she should immediately commission an enquiry into the Treasury’s tax policies. The Treasury is dishonest about the damage which it inflicts on the economy. An authoritative assessment of the losses would shake those who choose to live by what Nobel laureate Joseph Stiglitz calls “rent-seeking”. But tax reform would place three aces in the hands of Brexit negotiators.
Ace 1: the confidence to serve notice to Brussels that the walk-away-without-a-deal option is a reality.
Ace 2: Disarm Brussels by informing them that EU citizens in Britain will enjoy all the rights of UK citizens.
Ace 3: Warn the EU it will have to pay for the benefits received from the UK in terms of military defence, intelligence sharing, the financial services provided by the City of London, etc.
It would quickly dawn on the Brussels negotiators, and governments of the 27 EU nations, that they are in no position to bully Britain. Then: reach a respectful deal, one that was to the mutual advantage of all nations in Europe.
How Europe’s domestic problems could be resolved is spelt out in Beyond Brexit: The Blueprint. Those problems are deep-seated, but they would be solved if law-makers revised the way they raise the public’s revenue. VAT, for example, deprives Europe of at least €1 trillion in lost wealth and welfare. Europe’s economy would be enlarged to the point where the continent could find jobs for the refugees fleeing Syria, let alone its own young people, who are enduring outrageous levels of unemployment.
The UK would do Europe’s nations the biggest favour by developing and publicising Plan B. Britain need not be a hostage to the misfortunes of Europe.