FOR the last fortnight, Glasgow has soaked up the attention of the world as we contemplate our future. But only days before, G20 leaders rubber stamped a deal that will determine much of our destiny: a global minimum tax.
Rishi Sunak, who claimed to be squeamish about tax rises in his Budget, called these “seismic tax reforms… a huge prize for the British taxpayer, creating a fairer tax system fit for the 21st century.” This could not be further from the truth.
The new global tax cartel will be hugely damaging to the United Kingdom. It will not only entrench higher taxes but it also risks businesses leaving Britain and costing the Treasury up to £7bn in lost revenues, according to a new report by the Adam Smith Institute. It is also incompatible with key Government policies such as free ports and the super-deduction.
The reforms would change how many large companies are taxed by first creating a new tax on large, multinational companies and would impose a minimum tax of 15 per cent on all multinational companies with annual revenue of over €750m.
Despite spearheading these proposals, the OECD published a study that found corporate taxes are the most damaging major tax to investment and entrepreneurial activity. Indeed, the harm done to economic growth by corporation taxes is a rare issue on which many economists agree.
In developing the two reforms, the OECD has done the bidding of its main sponsor governments, which for years have complained about “harmful competition” from lower-tax jurisdictions. Driving the new tax agreement is a belief that competition has led to a “race to the bottom”.
In reality, tax competition has led to a race to the top, with less harmful forms of tax and more revenue.
Starting about forty years ago, companies in high tax countries realised they could reduce their tax bills by shifting profits to subsidiaries in lower tax countries. Some even changed countries.
High-tax countries responded in part by lowering corporation tax rates. Since 1980, average topline corporation tax rates in OECD countries have nearly halved.
The reductions have benefited all companies and, by incentivising more investment, have contributed to higher rates of innovation and economic growth, as well as rising incomes. Meanwhile, corporation tax revenue has remained stable (at around 3 per cent of GDP) since the 1980s while total government revenue has risen on average from about 30 per cent to about 34 per cent of GDP.
The UK has particularly benefited from lower corporate taxes. Britain reduced its main corporation tax rate from 28 per cent in 2010 to 19 per cent in 2017. In that time, even with a lower rate, corporation tax revenues increased (from under 2 per cent of GDP in 2010 to over 2.5 per cent in 2019). This was largely due to increases in business activity, including at subsidiaries of multinational companies. But under the minimum tax proposals we will be giving up the freedom to lower rates in the future.
Last year, Sunak halted the planned reductions in corporation tax. But he has also introduced the temporary super-deduction, which allows companies to deduct up to 130 per cent spending on plant and machinery. According to the Chancellor, this has already stimulated investment, and if anything, should be permanently extended with businesses able to claim the full subsidy.
But this would be incompatible with the global minimum tax. As would the Government’s flagship “free ports” policy because these policies aim to attract investment by allowing companies to, at times, pay less than the new minimum tax.
Instead, the UK is allowing the super-deduction to expire in 2023, raising the corporate tax rate, and implementing the global minimum tax. This will scare away investment, businesses and jobs.
If we are stuck with these proposals, the least we can do is make them better by bringing down the minimum tax rate, allowing for full expensing and exempting a wider array of financial companies.
The Chancellor risks looking like a fool if he stands up and claims to stand for low-taxation with policies that stray so far away from Britain’s national interest.