Sarah Ingham: Tech, tax – and out of this world wealth

12 Jun

Sarah Ingham is a writer and a Conservative Party member.

It’s been a good week for Chancellor of the Exchequer and a so-so seven days for the richest man on the planet, Jeff Bezos.

The agreement between G7 Finance Ministers to introduce a global minimum tax rate of 15 per cent on businesses was hailed as historic by Rishi Sunak. This should lead to “the largest multinational tech giants paying their fair share of tax in the UK”.

“About time too!” cries Britain, nodding in approval at this “seismic tax reform” – ©No 11 Downing Street.

The full consequences of the tech revolution we have been living through for the past two decades or so are, as yet, unknown. Dot dot dot com. The most tangible IRL effect can be seen in the nation’s high streets which have been hollowed out by the switch to online shopping and services such as banking.

In 2006 – tech world’s pre-iPhone Pleistocene epoch – online sales accounted for 2.8 per cent of total retail sales in Britain, according to the Office for National Statistics. By June 2019, this had risen to 18.3 per cent. In January this year, a whopping 36.3 per cent of all retail sales were online. Lockdown, the government’s chosen response to Covid-19, accelerated an existing trend.

In March, USDAW highlighted that many retailers and their employees were at ‘breaking point’, with 180,000 jobs lost and 16,000 store closures in 2020. Famous names went into administration, including Laura Ashley and Jaeger. While Debenhams and the Arcadia Group, which includes Topshop, live to fight another day as brands, the rescue package for both did not include the bricks-and-mortar stores, resulting in 25,000 job losses, 80 per cent of them women employees.

Months before the Covid virus decimated the travel industry, Thomas Cook collapsed, stranding 150,000 holidaymakers abroad. Founded in 1841, the travel agency toppled under the weight of old-fashioned debt as much as innovations in the sector. The firm’s slogan ‘Don’t just book it, Thomas Cook it’ became as redundant as its 560 town centre stores, because millions of us chose to cut out the middleman and book a trip ourselves. A few clicks on a smart device secured us a budget airline ticket to fly us to our Airbnb.

How concerned have we been about the advance of e-commerce? Online shopping can be seen a quicker, easier, twenty-first century version of mail order catalogues, which have been a huge social benefit ever since the mid nineteenth century.

‘Don’t Be Evil’ has now been removed from Google’s code of conduct. Turning Britain’s social fabric inside-out is not exactly evil, but has been far from an unalloyed public benefit. It is, however, too easy to blame the tech giants, rather than examining our own code of conduct as individual consumers: ‘Alexa, save my local bookshop.’ Communities are not built or sustained by us sitting on our backsides watching a movie on Netflix while we tuck into a Deliveroo.

‘As public finances are ever more strained due to Covid-19, the public’s tolerance for tax avoidance by multinational companies is nil,” declares the Organisation for Economic Cooperation and Development, in its Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors. Really? Tax evasion is illegal and tests public tolerance. Tax avoidance is about exploiting the loopholes caused by an unnecessarily complex taxation system overseen by finance ministers and central bank governors.

The OECD worked on the proposals to rewrite the global tax rules which are being advanced by Sunak and his G7 colleagues. In the days since the announcement confusion has arisen, not least about whether any changes will be agreed by the G20 and if Britain is seeking to get financial services excluded from the reforms.

Alexa, is the UK’s Digital Services Tax going to be scrapped in exchange for the global tech tax? Effective from April 2020, HMRC predicted it would raise £515 million by 2024/25. It seems that tech firms might actually pay less into the UK’s coffers if the reforms were adopted and digital sales tax abolished.

The tech titans themselves seemed none-too-bothered by this possible new assault on their finances. Apart from Netflix, the other four FAANGs – Facebook, Amazon, Apple and Google – have seen their share prices rise in the past week.

Just as possible changes to the international tax system have come onto the agenda, details of US billionaires’ tax returns have mysteriously found their way into the public domain. Tada!

Warren Buffett is among the Croesus-rich outed by investigative journalists at ProPublica as paying little or nothing in the way of income tax. Perhaps the OECD’s Tax Inspectors Without Borders team can explain to breathless hacks the difference between income and capital.

Amazon’s founder, Jeff Bezos, whose personal wealth has ping-ponged around the $200 billion mark since last August, apparently paid no income tax during 2007 and 2011, while Tesla’s Elon Musk, vying with Bezos for pole position in the global wealth stakes, paid none in 2018. Neither has done anything illegal. The public was probably far less tolerant of Amazon withholding tips to its delivery drivers, for which it was fined $62 million in February.

Perhaps their stratospheric wealth explains Bezos and Musk’s fascination with space exploration. It would be easy to write off the attitude of both as ‘only little earthlings pay taxes’, but the current taxation system, bound up as it is with national sovereignty, allows them to get away with it. If we had the money, and the money to afford the accountants, we’d probably all be into ‘tax planning’, which is fancy pants for haggling with HMRC.

Time for flat taxes, Chancellor. And, BTW, voters have a tolerance for keeping their own money rather than handing it over in taxes – even to you.

Ryan Bourne: A message for Johnson and Sunak on tax rises. Not now. And not these.

2 Sep

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

How’s this for a false dichotomy? Last Saturday, Prospect asked: “Post-Covid, are taxes hikes essential to fund the future? Or should we abandon “deficit fetishism” and spend our way to prosperity?” [i.e. through borrowing]. I shouldn’t need to tell ConservativeHome readers that “spend to grow” and “spend to grow”—the only difference being how to finance it—are not an exhaustive set of fiscal policy options post-pandemic.

But that tweet, sadly, reflects conventional wisdom. You should take the pre-Budget briefing in the Sunday papers about Treasury desires for £20-30 billion in tax hikes through capital gains tax, corporation tax, fuel duty, an online sales tax and restrictions on pensions tax relief with a pinch of salt. Before every recent budget such stories have emerged, perhaps due to kite-flying or overexcited journalistic coverage of illustrative exercises in how one could raise revenues. One suspects the briefings may even be a political ploy—raising fears in the Tory base before Number Ten saves the day.

Yet there’s undoubtedly an unnerving regularity to them. Alongside a steady drumbeat from “One Nation” Tories and such organisations as the Resolution Foundation, the idea that large tax hikes will be desirable and necessary is taking hold, with Covid-19 apparently making this agenda more urgent.

We are told, as the kitchen sink of argumentation is thrown, that the pandemic itself proves the false economy of a “hollowed out” state after a decade of austerity. Or that the “levelling up” and the “inevitable” higher spending we will now want on health, welfare benefits, and higher public sector pay means tax hikes are needed. Or that the crisis necessitates urgent repair to the public finances, and that there’s simply nowhere left to cut spending.

None of these arguments, however, stand the test of reason. Countries that have dealt with the Coronavirus better include those (South Korea, Taiwan, Australia) with much lower tax-to-GDP ratios than the UK and much lower health spending too. Many with higher tax-to-GDP ratios (France, Belgium, Italy) have seen similarly shocking death tolls to us.

At best, any failure to deliver resources where needed reflects bad state priorities, not an impoverished public realm. Indeed, the story of a hollowed-out state at a time of the highest tax burden since the early 1980s, coupled with this international evidence, suggests ascribing blame to austerity for poor performance is both ahistorical and parochial.

The wisdom or otherwise of  the “levelling up” agenda, and how best to pay for it, is largely unrelated to the pandemic too. Actually, to the extent that Covid-19 affects the desirability of infrastructure and public service spending in the regions, it throws substantial doubt on the benefits of projects such as HS2 and other city and town revival plans.

Who knows what lasting impact the crisis will have on remote working, the location of activity, and favoured transport modes? One Nationers arguing that the virus proves the need to level up would have us believe that the pandemic’s effects are significant enough for a tax revolution, but insignificant enough to alter the desirability of any of their proposed spending. One might almost suggest motivated reasoning here.

In macroeconomic terms, the case for significant tax rises now is weaker still. The point of bridging support through furlough was to shelter businesses and workers from this unexpected shock. To pass the bill to the private sector now as it struggles back to life would strangle the recovery. And for what? Borrowing costs are low, and we have no idea yet whether and how much this crisis will leave a permanent budget hole once emergency spending stops and private sector activity revives. In fact, even borrowing to date has not been as high as initially feared.

Of course, the extra debt to deal with the crisis has to be paid somehow, eventually. But, as I argued here before, unusual shocks such as pandemics and wars primarily result in step-level debt-to-GDP increases rather than ongoing budget holes, because you stop spending on the immediate threat afterwards.

The implication is that modest consolidation over decades is optimal to account for the extra incurred debt, rather than adopting large tax increases to compensate over a Parliament. Economists call it “tax smoothing”—debt provides a safety valve to allow us to only modestly change spending or taxation over long periods to maintain incentives. Of course, if the Government thinks that, for political reasons, it must expand welfare benefits or health spending permanently, this would be a normative choice: there is nothing inevitable about sharp tax hikes.

Even if you think permanent scarring will occur, those taxes suggested to raise revenue seem bizarre choices today. The Government presumably wants us to be Covid-cautious still. Two ways of reducing risks would be to drive more rather than use public transport and to shop more online.

Aside from all the other downsides of raising fuel duty and introducing an online sales tax, to use the tax system to incentivise worsening virus transmission right now by making driving and online shopping more expensive seems bizarre.

Raising top capital gains tax rates to 40 or 45 per cent would simply be self-defeating from a revenue-raising perspective. Capital Gains Tax on many investments represents a double tax. The justification for having it at all is to deter people hiding income as capital gains.

But there’s a revenue-maximizing balance between this effect and deterring people from selling assets. The Coalition government introduced a top 28 per cent CGT rate precisely because HMRC research suggested this raised most revenue. Though it was then lowered to 20 per cent under George Osborne, raising it to 40 per cent plus would reduce revenue relative to a lower rate. We’d get less investment and entrepreneurship when we need it most too.

And then there’s the mooted corporation tax rise from 19 back to 24 per cent. Taxes on mobile capital will deter foreign investment just as Brexit is set to happen, as well as reducing the after-tax return on new domestic projects. Who will bear the costs? Not just “the wealthy,” as commonly asserted, but workers too: evidence suggests that they bear between 30 and 70 percent of the burden of taxes on corporations.

Not only is the tax rise call premature then, but the specific proposals don’t conform to the pandemic’s needs or Boris’s Johnson’s ambitions to create a high-wage economy. Covid-19 may permanently scar the public finances, sure. But as yet its full effects are unknown and there’s little cost to pausing to see. Anything else at this stage is using the crisis as a pretext for raising funds for hobby horses.

If the Prime Minister truly objects to this rationale as reported and understands the threat to the nascent recovery of sharp tax rises today, he should take this message to his Chancellor: on tax rises, not now and not these.

Ryan Bourne: “Levelling the playing field” is no argument for an online sales tax

5 Aug

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

Some time soon, we’ll see more automation in the fast food sector. Burger-making machines are real. Franchises such as McDonald’s have rolled out self-ordering touchscreens. It’s not difficult to imagine a world in which fast-food worker numbers collapse. In the longer-term, when the technologies become widely affordable to businesses, cost reductions from these sorts of labour-saving investments will benefit consumers through lower prices.

Not every competitor chippie, kebab shop, or burger outlet will make the transition, of course. Some will struggle under what will then become the higher cost, labour-intensive model, finding their niche in the market. Others may simply go out of business – unable to compete on price and without the ability to invest in the machinery.

Would this be a problem? Or is it simply an example of capitalism’s creative destruction? 

Imagine if the struggling companies and their employees demanded Parliament pass a “burger automation tax” under the premise of “levelling the playing field” with those companies that took the plunge. Think how dangerous supporters of consumer-led capitalism would consider it for popular price-reducing innovations to be held up as a problem. Consider how bemused we’d be if the savings in labour costs were dubbed “unfair competition,” simply because not every company realised them.

Well, we are seeing an analogous argument capture policymaking today. And, bizarrely, free-marketeers within the Conservative party are not really speaking out against the muddled thinking.

The UK government is kite-flying about an online sales tax of two per cent, or taxing online deliveries to consumers. One of the many justifications given for even considering these Luddite measures is to “level the playing field” between online retailers and the High Street, given the latter face business rates.

Here’s the problem: there already is a level playing field. Just as all businesses face the same minimum wage laws, they also face the same overall tax regime. This includes business rates – which is a tax on the rental value of commercial property, not sales.

Faced with those policy realities, businesses are free to decide how to operate and structure. Innovative online sellers such as Amazon have simply adopted business models that repudiate the need for a high fixed‐cost physical presence in expensive inner‐city areas.

Operating from out-of-town warehouses is a cost-saving business decision akin to the potential automation in fast food. To then suggest that online retailers not needing to rent high-value property is some distortion of competition that requires a corrective tax, as the Treasury reportedly believes, is just bizarre.

It’s this business decision that partially explains why online sellers can provide low prices for consumers, enhancing their welfare. The idea that adopting this model is some underhand advantage is as daft as saying that Amazon’s packaging costs are a disadvantage for it, requiring a “packaging-equivalent tax” on High Street stores’ sales.

To echo the 19th century classical liberal economist Frédéric Bastiat, the bricks-and-mortar retailers using this level playing field argument are akin to candlemakers petitioning the Government about the sun flooding the market with cheap light.

Now if the Government thinks that the current business rates regime is an inappropriate tax on rental values or has distortionary impacts on commercial property use (I agree, but think the impact overblown) then, by all means, they should change the law faced by all. If councils are worried about car parking charges’ impact on high street retailers, then they are within their rights to adjust them.

But let’s not talk as if it’s unfair competition when firms, faced with a tax regime, innovate to reduce costs to provide a service in a way that consumers prefer. For make no mistake, it is customers that will ultimately bear the costs of any new sales or delivery tax in the form of higher prices, especially those whose use of delivery is less responsive to price, such as in rural areas.

Of course, increasingly traditional retailers are themselves re-orienting to online, especially during Covid-19. Any cuts to business rates (to the extent they are passed through by landlords) might allow for some consumer price reductions to “compete” better with online firms for sales. But if these same traditional retailers then face a new tax on their growing online sales anyway, the Government will have given with one hand and taken with another. 

And which companies will suffer disproportionately from the new administrative burden of having to deal with an online sales tax, do you think? Will it be Amazon? Or is it more likely to be smaller companies navigating the online market for the first time?

This whole debate highlights a broader gripe I’ve had with Conservative policy thinking for some time. Conservatives used to understand the case for consumer-led markets, as extolled by Jeff Bezos in a US Congressional hearing last week. They trusted customers to make choices in their own best interests. Our revealed preferences were thought to represent us trying to maximise our wellbeing under the circumstances we face.

But increasingly MPs seem to think they know better. Sure, customers might be flocking to online retail, especially during a deadly pandemic. But what they really want, we are told, is a thriving High Street. Who you gonna believe: MPs or your lying eyes?

The idea that any business providing the same product must face the same tax and regulatory cost base to truly compete on a “level playing field” is easily dismissed. Wind and nuclear power both produce electricity. But if someone told you we needed a tax on wind power to make up for the safety costs of nuclear, you’d think they were utterly mad. So what do we think is different about retail, after we’ve decided that it’s appropriate to tax commercial property consumption?

Now perhaps the Government’s real aim is not to “levelling the playing field.” Some say a tax on online deliveries would reduce congestion – a daft argument given a van delivering to 30-40 places would cause far less traffic congestion than everyone going to stores. Some say that the Government simply needs the revenue – in which case £2 billion is a relative drop in the ocean. Our communitarian friends, with their stale 1950s vision of High Street’s somehow engendering “community,” want to pull any lever to try to preserve the town centres of yesteryear.

Yet those arguments are self-evidently absurd or futile in the face of ongoing trends. The “level playing field” line is more dangerous precisely because it sounds as if it’s pro-competition. If Conservatives really believe, however, that the role of Government is to correct for businesses finding ways to reduce their fixed costs, as if this were some unfair advantage, then they are further through the economic looking glass than I’d realised.