Comment 10 June 2021 Why increasing corporation tax is less progressive than you think If the question is how do we extract more from the richest, corporation tax is not what you would prioritise. Alberto Pezzali - WPA Pool/Getty Images Chancellor Rishi Sunak at Lancaster House, London, on 5 June 2021 Sign UpGet the New Statesman's Morning Call email. Sign-up There was much excitement last weekend when it was announced that the G7 finance ministers had reached an agreement over a minimum global corporate tax rate. Until very recently, reform of this type looked out of reach but the Biden administration – in need of revenue – presented a grand bargain to the rest of the G7. In short, the US said “we will consent to you taxing some of the profits of US tech companies resulting from sales made in your jurisdiction if you agree to withdraw your digital sales taxes and support a worldwide minimum corporation tax rate”. The rest of the G7 consented. For the most part, it has been welcomed as an important breakthrough. At the very least, it makes it harder for US tech firms to get away with paying no tax on their overseas profits and it ensures that there is no breakdown in the international tax system which might have resulted from countries unilaterally imposing their own taxes on tech companies. But there has also been a dawning realisation that some tech companies, such as Amazon, might not be affected and, if they are, this will probably result in a lot more revenue for the US and not a lot more for the likes of the UK. Expect a row when the Office for Budget Responsibility publishes its forecasts for the revenue implications of these reforms. At this point, the opinions expressed about the deal run from “seismic” and “historic” (according to Rishi Sunak) through to “something on which to build” and on to “missed opportunity”. For what it is worth, as a former tax minister, my view is that although the revenue likely to be raised in the UK will be underwhelming (especially given that the Digital Sales Tax will be dropped), international cooperation in this area is to be welcomed and it is highly unlikely that the US would have consented to something that would have resulted in more tax being liable based on the place of sale. It is a more ambitious outcome than we thought likely when this process began in 2013 (although back then, we would have seen a minimum tax rate as an unacceptable infringement of sovereignty, one about which this Brexiteer government appears to be remarkably relaxed). Updating the operation of the international corporate tax system is an important and worthwhile objective. It helps address distortions in competition, restore public confidence in the tax system and may make a valuable contribution to funding public services (if not necessarily in the UK). There is one widely-held assumption, however, that underpins this debate which is not quite right – namely that corporation tax as a whole is a tax on the rich and that raising more in corporation tax is an effective and well-targeted means of redistributing resources from the rich to the poor. For a start, companies do not pay tax. Ever. They simply cannot because they do not actually exist. They can be very good places from which to collect tax (for both administrative and political reasons) but – to state an obvious but sometimes under-appreciated point – all taxes are paid by people in the end. The tax supposedly paid by companies is really coming from shareholders (in lower dividends), employees (in lower pay), suppliers (in lower prices) or customers (in higher prices) or some combination thereof, as the Institute for Fiscal Studies has pointed out. Many assume that it is shareholders that really pay for corporation tax and that this means that corporation tax must be progressive because it is a tax on capital. It is true that the very poorest are unlikely to have share portfolios, and the very richest will, but it is an imprecise form of progressivity. The shares in public companies, in particular, may be held by billionaires or by defined contributions pension schemes, to which low-paid workers may have contributed. Taxing at the company level means we do not distinguish between the two. In any event, in an open economy where capital can flow across borders, investment will go where it gets the best return. This suggests that shareholders will choose not to pay higher corporation tax bills and invest elsewhere. Consequently, high levels of corporation tax result in lower levels of investment which ultimately feeds through 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 clever way of raising revenue because it is so opaque. Those who are really paying it do not know that they are doing so. If governments need more tax revenue (and most of them do at the moment), increasing corporation tax rates is a tempting proposition because it is a stealthy way of raising money from lots of people. But if the question is how do we extract more from the richest (and, to be fair, that is not the only question that policymakers have to address), corporation tax is not what you would prioritise. Compared to income taxes, capital gains taxes, property or wealth taxes and progressive consumption taxes, corporation tax is, at best, a blunt instrument. Raising more revenue from corporation tax is not quite as progressive as it first appears. [See also: What to expect from the 2021 G7 summit] › The Bench by Meghan Markle: It is mind-boggling how bad this book is David Gauke is a former Conservative cabinet minister and was MP for South West Hertfordshire from 2005 to 2019. Subscribe To stay on top of global affairs and enjoy even more international coverage subscribe for just £1 per month!