For decades, multinational corporations have made a mockery of elected governments. By shifting their profits to low-tax jurisdictions such as the Cayman Islands, Singapore and Ireland, they have deprived treasuries of billions in revenue. In 2016 – the most recent year for which reliable data is available – the largest US multinationals, including Apple, Google and Microsoft, offshored $1.4trn in this manner (almost 2 per cent of global GDP).
Such financial chicanery encouraged a race to the bottom among countries which competed to offer ever-lower tax rates. In 1985 the average global corporation tax rate was 49 per cent, but it is now just 24 per cent. In the UK, corporation tax was cut from 28 per cent in 2010 to 19 per cent in 2017. Until recently, the assumption was that taxes would only fall, not rise. In 2016, while he was still chancellor, George Osborne declared his ambition to reduce corporation tax to below 15 per cent. As US president, Donald Trump cut his country’s headline rate from 35 per cent to 21 per cent. In a new era of globalisation, it was said, traditional tax policy was obsolete.
But nation-states have finally grasped a hidden truth: as a collective they still wield formidable power. The landmark agreement by G7 finance ministers on 5 June to introduce a minimum global corporate tax rate was proof of this. Governments have always had the means to impose such a policy; what was lacking was the political will. Joe Biden, a daringly interventionist US president, has supplied it.
The tax agreement is an imperfect one. A corporate rate of “at least 15 per cent” falls far short of Mr Biden’s initial target of 21 per cent (which the UK opposes). The agreement to tax 20 per cent of companies’ global profits above a margin of 10 per cent also creates a potential loophole. Amazon, whose profit margin was 6 per cent in 2020, would not fall under this rule. Countries would be left seeking to tax Amazon Web Services, its lucrative cloud-computing division, as a separate entity.
Yet until now, the mere concept of global taxation was treated as utopian, more suited to the pages of the French economist Thomas Piketty’s Capital (2013) than to a G7 communiqué. The Overton window – the term used to describe the range of politically acceptable policies – has shifted.
What accounts for this transformation? The vast debts accrued by governments during the Covid-19 pandemic (the UK’s national debt has risen to 98.5 per cent of GDP) have incentivised leaders to find new sources of revenue. Rishi Sunak, the Chancellor of the Exchequer, has pledged to increase the UK’s corporation tax rate from 19 per cent to 25 per cent by 2023 on such grounds. But the political shift also reflects an impatience with the piety and hypocrisy of the major tech firms, which speak of creating a better world while depriving governments of the tax revenue they need to help fund one. Though wealth is sometimes attributable to individual genius, it is often socially produced. As the economist Mariana Mazzucato charted in her book The Entrepreneurial State (2013), the 12 key technologies behind the iPhone, such as the touch-screen, the Global Positioning System and the internet itself, were all the product of state-funded research. A healthy, educated workforce depends upon the high-quality public services that only governments can provide.
Twice within the past 13 years – during the 2008 financial crisis and the Covid pandemic – states have been forced to intervene as guarantors of the economy. In a new age of environmental catastrophe, infectious disease and great-power conflict, they will have to do so again.
The world needs a tax system commensurate with these responsibilities. The age of fiscal impoverishment – when governments were reduced to begging corporations for token amounts – must end. Rather than treating tax as a burden to be reduced, companies must recognise it as due payment for the ultimate insurance system: the active state.
This article appears in the 09 Jun 2021 issue of the New Statesman, The Covid cover-up?