Three ways to make Biden's global tax rate work for Britain
Joe Biden wants to set the corporation tax rate for the world. Britain should accept this, says Matthew Lynn – and game the system.
Joe Biden may have campaigned as a sleepy grandfather, but in office he is turning into the most radical American president since Ronald Reagan, except from the other side of the political spectrum. Alongside a massive stimulus programme, a reversal of Donald Trump’s tax cuts, an industrial strategy designed to wean the country off fossil fuels and a massive infrastructure bonanza, his team now plans to rewrite global tax rules.
Led by Treasury secretary Janet Yellen, the US is proposing a minimum global corporate tax rate. The details are still to be agreed, but the idea is that companies will be taxed on their sales in each country at a standard minimum rate agreed internationally. Multinational companies will no longer be able to shift sales and profits from place to place to take advantage of lower rates.
Companies don’t pay tax, people do
We can debate whether that makes any sense. Companies don’t pay tax any more than your car pays fuel duty or the TV set coughs up for the cost of a licence. Taxes are always paid by people. It is simply a question of which people, and where. Nor is it clear why countries shouldn’t be allowed to “compete” on tax the same way they compete on everything else: maybe it is “unfair”, but only in the same way it is “unfair” that Bordeaux makes great wine, California great films, and Bavaria great cars. And countries that have been cutting corporate taxes have raised more revenue (in the UK, for example, the amount raised from companies rose from £41bn in 2013 to £57bn in 2019 even as the rate was cut).
Even so the Biden plan looks set to get substantial support. The EU will certainly back it, especially as the US is ready to throw in a deal to tax its digital giants at higher rates. So will many other countries given that they need to raise money to pay for the crippling cost of the Covid-19 crisis.
Britain’s chancellor has so far kept quiet on the issue. But sooner or later the UK will have to decide whether to back Biden’s plan or fight it. In truth, it probably doesn’t make much difference. It will happen, or not happen, regardless of what the British finance minister thinks. If the world is going to settle on a global corporation tax, the smart policy is to make that work to our advantage. But how? Here are three places we could start.
How to game the system
First, the global minimum should be a maximum for the UK. The proposed global rate of 21% is close to where we are already, and significantly less than the rate of 25% the chancellor is planning for 2023. If there is a global floor on tax rates, the UK should make sure it is right at the bottom of the table. Our economy is hardly competitive enough on skills or infrastructure to survive taxing companies significantly more than our closest neighbours.
Next, we should target the countries that will have to raise their rates: it is interesting, to put it mildly, that they happen to be very nearby. The neighbouring island to the west, for example, may be regretting an Irish-American president taking office given that the plan will force it to almost double the company rate that has been the foundation of its economic success for the last two decades. Lots of multinationals might decide they can live without the vibrant cafe culture of, er, Cork, without the low taxes, and could be tempted to the UK instead. Likewise, the Netherlands will almost certainly have to end the huge range of exemptions that have made it a key tax haven for corporations. Over a decade, Britain could attract a lot of those businesses.
Finally, we should offer lots of generous reliefs. Biden’s global tax is meant to be a minimum based on sales. We should draft in some smart accountants and lawyers to build a few exceptions. It will be hard for anyone to argue with those, especially if they are based on research and development, or converting to green energy, or on hitting targets for employee well-being and diversity. Add it all up, and our effective rate should be far lower than the headline one. Biden’s “Tax Americana” might even turn into a boost to our competitiveness.