Why Raising Corporate Tax Is Less Progressive Than You Think

There was a lot of excitement last weekend when it was announced that G7 finance ministers had reached agreement on a minimum global corporate tax rate. Until very recently, such reform seemed out of reach, but the Biden administration – which needed the revenue – presented a big deal to the rest of the G7. In short, the United States said “we will consent to you taxing some of the profits of American technology companies resulting from sales made in your jurisdiction if you agree to withdraw your digital sales taxes and support a tax rate global corporate minimum”. The rest of the G7 agreed.

For the most part, it was welcomed as a major breakthrough. At the very least, it makes it harder for U.S. tech companies to get away with paying no tax on their overseas profits and it ensures that there is no breakdown in the international tax system that could have resulted from countries unilaterally imposing their own taxes on technology. companies. But there’s also been a dawning realization that some tech companies, like Amazon, might not be affected and, if they are, that’s likely to translate to a lot more revenue for the US and not a lot more for UK tastes. . Expect a row when the Office for Budget Responsibility releases its forecast of the revenue implications of these reforms.

At this point, opinions expressed about the deal range from “seismic” and “historic” (according to Rishi Sunak) to “something to build on” and “missed opportunity”. For what it’s worth, as a former tax minister, I think that while the revenue likely to be generated in the UK will be disappointing (especially given the removal of digital sales tax), cooperation international community in this area is to be welcomed and it is highly unlikely that the United States would have agreed to anything that would have resulted in increased tax liability based on location of sale. This is a more ambitious outcome than we thought likely when this process began in 2013 (although at the time we would have viewed a minimum tax rate as an unacceptable assault on sovereignty, an assault on which this Brexiteer government seems remarkably lax).

Updating the functioning of the international corporate tax system is an important and laudable goal. It helps to remedy distortions of competition, restore public confidence in the tax system and can make a valuable contribution to the funding of public services (if not necessarily in the UK). There is, however, a widely held assumption underlying this debate, which is not entirely correct – namely that corporation tax as a whole is a tax on the rich and that raising the tax on societies is an efficient and well-targeted means of redistributing resources from the rich to the poor.

For starters, corporations don’t pay tax. Never. They just can’t because they don’t actually exist. They can be very good places to collect taxes (for both administrative and political reasons) but – to make an obvious but sometimes underestimated point – all taxes are paid by people in the end. The tax supposedly paid by corporations actually comes from shareholders (in lower dividends), employees (in lower wages), suppliers (in lower prices) or customers (in higher prices) or some combination of these, as pointed out by the Institute for Fiscal Studies outside.

Many assume that shareholders are the ones who actually pay corporation tax and that means corporation tax should be progressive as it is a tax on capital. It is true that the poorest have few stock portfolios, the richest will have some, but this is an imprecise progression. Shares of public companies, in particular, may be owned by billionaires or by defined-contribution pension plans, to which low-wage workers may have contributed. Taxing at the corporate level means that we do not distinguish between the two.

In any case, in an open economy where capital can cross borders, investments will go where they get the best return. This suggests that shareholders will choose not to pay higher corporate tax bills and invest elsewhere. Therefore, high levels of corporate tax translate into lower levels of investment which ultimately translate into lower levels of productivity and wages. Much of the academic research in this area suggests that it is the worker who bears the incidence of corporation tax.

Corporation tax is a politically shrewd way to generate revenue because it is so opaque. Those who really pay it don’t know they are doing it. If governments need more tax revenue (and most of them do right now), raising corporate tax rates is a tempting proposition because it’s a stealth way to raise money from of a large number of people. But if the question is how to extract more from the wealthiest (and, to be fair, that’s not the only question policymakers need to answer), corporate tax isn’t your priority. Compared to taxes on income, capital gains, property or wealth taxes and progressive consumption taxes, the corporation tax is, at best, a rudimentary instrument. Raising more revenue from corporation tax is not as progressive as it first appears.

[See also: What to expect from the 2021 G7 summit]