Squeezing Amazon for tax will do more harm than good

A popular online petition to force Amazon to pay more tax shows just how out of touch public opinion is with economic reality, says Matthew Lynn.

There's plenty not to like about Amazon. The website looks like it was thrown together by a colour blind toddler with a heavy cold. Land on Iron Maiden's page by accident and its computer will insist on emailing you about heavy metal CDs for years. Its van drivers turn up on your doorstep at increasingly bonkers times of day, often delivering the wrong stuff, while demanding directions to places you have never heard of. It's about as lovable as a cross between Tesco and the Post Office.

Even so, an online petition to force the company to pay higher taxes is taking things too far. Yet the campaign launched against the internet retailer is picking up massive public support even though in the long term its success will only mean higher prices and lower pensions for all of us.

Last year, a pair of independent booksellers launched the petition calling for Amazon to pay more UK corporation tax. It complained that most of its sales were routed via Luxembourg, so despite shipping close to £3bn worth of stuff to British customers last year, it paid virtually no corporation tax.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Last week the petition hit the headlines as it passed the 100,000 signature mark. It has picked up support from Labour politicians and a host of well-known authors. It will now be presented to No. 10 and is gaining momentum all the time. Along with many other multinational corporations, such as Starbucks, Google, and Ikea, Amazon faces ever-increasing pressure to chip in more to the British Treasury's bank account

It's easy to see why many retailers are fed up with their online competitors. The costs of operating a website are far lower than that of a high-street shop. There are fewer staff and no heating bills or shoplifters to worry about. It is no doubt frustrating to see a competitor getting away with paying virtually nothing in corporation tax, while a traditional shop has to pay vast sums in national insurance for staff and business rates on its premises as well as corporation tax in the unlikely event that it makes any profits after this.

What is hard to see is why so many ordinary people are supporting the petition when, in fact, it is arguing for higher prices and smaller pensions.

People believe there is a big pot of money sitting in corporate bank accounts that the government can somehow dip into. But it isn't so. While there are a few technology giants, such as Apple, that operate on extraordinarily high margins, and could probably pay more tax without noticing it, most are not in that position.

Take Amazon. It runs on average margins of 3.2%, according to an analysis of its latest results by Jefferies & Co. That was better than most analysts expected its medium-term margins are more like 2.5%. It makes money because it sells a lot of stuff, but it piles things high and sells them cheap, so it does not make a lot on any particular item.

Most corporations targeted by tax campaigners are in the same position. Starbucks makes global margins of about 11% hardly exceptionally high for a global food chain. Ikea's margins are 10% on global sales of €25bn as any one of its customers will suspect, it is hard to make a lot of money by selling things that cheaply.

The reason that companies like Amazon are making life hard for small shops is not because they are paying less corporation tax. Take a £5 book or CD. If Amazon's profit is 16p on selling that, even if it went from paying nothing to 25% corporation tax, it would only add a quarter of that total profit to the price, or about 4p.

The reason it is doing well is not because it dodges tax. It is that is has a better business model. Amazon has a vastly bigger range of stock, at lower prices, and you can buy things from your home computer or on your smart phone, 24 hours a day.

But if companies like Amazon were forced to pay more tax, it would have damaging consequences consequences that most people signing these petitions haven't considered. Where would the money come from? The margins are already very slim. The extra tax could only come from higher prices and lower dividends.

Higher prices would hit hard-pressed consumers. Is that really what these people want? Most families are already struggling with lower living standards. Wages are under pressure and prices for most things are rising. The ability of new technology to drive prices lower is one of the few things keeping living standards at a tolerable level. It hardly seems sensible to stop that.

Lower dividends would hit pension funds. If more tax is paid, there will be less for shareholders. Again, Apple aside, very few companies just rack up cash in the bank. What they don't need for the business, they pay out to shareholders. And most of their shareholders will be pension funds owned by the people signing these petitions.

The campaign against Amazon is simply depressing and the surest indication of how out of touch with economic reality mainstream opinion has become. Until people realise that companies need to be allowed to make money to grow and flourish it will be very hard for the economy to stage a serious recovery.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.