This idea of a digital tax to replace corporation tax is a bad one. Simply because corporation tax itself is a bad tax. The solution to our new economic woes is to stop trying to charge tax to corporations and go off and tax something else instead.
Start from the beginning. Corporation tax raises 2 to 3% of GDP:
That Norwegian number is because they count the oil money as corporation tax, not royalties on the oil.
2 to 3% of GDP is something that can be raised elsewhere, if we so wish it. There’s also the point that any one of us could find 2 to 3% of GDP that government should stop spending. HS2 would more than cover that for one year for example. The idea that government doesn’t currently spaff 2 to 3% of GDP is ridiculous.
Sadly, even the people on the good side of most arguments aren’t getting this one. Jeremy Warner for example:
Ok, so we all know the arguments. As with most taxes, the intention is fair enough. Digital services are supplanting physical products as a form of economic activity at a frightening speed, while e-tailers, search, gaming and social media are fast making shops and other physical premises redundant. Our high streets, factories and offices are in a state of ruinous decline, threatening not just the fabric of local economies, but large parts of the traditional tax base.
The leviathans of the new commercial landscape, meanwhile, stalk the land, ruthlessly exploiting our markets, hoovering up our data and destroying traditional sources of employment. At the same time, they conspire to pay as little corporation tax as possible by offshoring their profits – unfettered market access which is unmatched by any sense of obligation.
Consider the example – cited by the Harvard Business Review in a recent article – of a local newspaper that employs hundreds of workers in its office, printing, and distribution facilities. With the emergence of a news website that has no physical presence in that country, relies on freelancers, and locates its head office in a tax-friendly country like Ireland or Luxembourg, the newspaper fast becomes obsolete. Local advertisers shift en masse to the new internet company. Once secure forms of tax revenue disappear, forcing central and local government to cut spending even as the pressure grows for higher welfare for those the digital alternative has put out of work.
This wouldn’t matter much if the companies offering these new digital services were local in origin. Such firms would presumably create lots of new jobs and pay their taxes accordingly. The problem occurs because all such services tend to be global in reach; the first movers, the vast bulk of which are American, will enjoy powerful network effects and consequent economies of scale that make it hard for local competition to establish itself. Previously local markets get subsumed within unaccountable global ones.
The initial problem here is the thought that corporation tax is paid by the company. Sure, the cheque is sent in by them but the economic burden isn’t carried by them at all. It can’t be, all taxes make the wallet of a live human being lighter. Which human is the study of tax incidence. The split is somewhere between all labour in the country levying the corporate tax and the shareholders in the companies being taxed.
The importance of this being that corporation tax is not actually a tax upon corporations. That’s just a proxy for who is really paying the tax. We’ve been taxing the corporations because it has been convenient to do so. The argument now is that it’s difficult, thus inconvenient. OK, fine. The answer to that is to stop using the proxy, isn’t it? Go tax the shareholders and the workers directly.
Why not, for example, just abolish corporation tax altogether and raise dividend taxation to that of any other income stream? We get to tax the capital returns to the shareholders without having the problem of the corporate proxy being footloose and fancy free.
Sure, there are other economic problems with this idea. But it does get us out of this hole with corporation tax.
We only ever did it because it was a convenient place to tax the returns to capital. Now it’s not. So, let’s stop doing it.