Taxes will rise – especially for technology majors

Government spending plans coupled with the hole in public finances following the Covid-19 pandemic indicate taxes are likely to rise. The US is likely to lead the charge in taxing the major tech groups.

| 5 min read

Governments are expanding their spending programmes to boost their economies and to finance a green revolution. The US and the Europeans are all implementing a policy of ‘Build Back Better’, seeking to promote green growth to overcome the lost output of the pandemic months.

These countries think they can, for the time being, rely on central banks creating plenty of money and on investors lending at near zero interest rates to see them through their deficit-led commitments. They currently need to reassure markets that they mean and can do this, as markets seek to push the interest rate on government borrowings higher. If this goes too far it will damage the recovery. They are also thinking about the longer term – when they may need to raise more revenue to meet their spending priorities.

We may be embarking on a period of higher taxes and tax experimentation. In the US, President Biden was elected on a prospectus of raising conventional corporation tax to pay for some of his programme. He has also hinted at special and new taxes on the digital business world and on fossil fuel businesses before they waste away.

The EU is keen to find new sources of tax revenue, wanting to boost its own resources or taxable capacity by finding environmental and trade taxes that the EU itself can levy directly – without a further tax demand on the member states. The EU currently relies heavily on its share of VAT and on custom duties, the so-called “own resources”.

First-mover disadvantage

Each individual country is nervous about imposing new taxes on trade or business turnover or profits for fear of triggering the movement of footloose multinationals from their territory to another more benign tax regime for material parts of their activity. The various world economic summits have for some time been discussing options for some common agreed standards or minima for various trade, turnover and profit taxes.

The need is becoming more urgent, both because the spending ambitions have stepped up and because business itself is now lobbying for tax reform as different large companies and sectors jostle each other to try to shift some of the tax burden. Last autumn’s OECD meeting confirmed work on both a minimum level of business tax to be paid, and on a better system for defining where turnover and profits should be declared to ensure the fair payment of tax.

The tax debates include the issue of whether there can be a shift in taxing retail, to reduce taxes on staff and property which hits traditional retail with shops, to tax online more, maybe with a special internet sales tax. The longer governments leave it, the more complex this becomes. The surviving traditional retailers are migrating more of their activity to online and stand now to be hit by that part of any change to tax rules. Some countries have now gone ahead with a Digital Services Tax before any global agreement, targeting online advertising and in some cases social media platforms and online marketplaces.

Carbon is taxing too

There is the issue of how to increase taxes on carbon dioxide output. Several jurisdictions are looking at the possibility of a carbon border tax. This should make it more difficult for a country to pose as “green” whilst importing the goods that burn the oil and gas.

It would also help reinforce common moves today to onshore more activity and import less. Any such tax would be easier to impose if others were also doing so and if it had the blessing of the World Trade Organisation, which might otherwise see it as a tariff by another name.

Various green taxes are being discussed, with a view to developing the market in carbon and establishing a higher carbon price. Governments wish to use these arranged market forces to drive out fossil fuel intensive activity more quickly. The EU is looking at a carbon tax to replace or to augment its Emissions Trading System.

Taxing the US majors of the digital age remains a difficult question for the rest of the democratic world. The Republic of Ireland has opted for the low corporation tax approach, despite the criticisms and attempted interventions of the EU. It has been successful in attracting some large US multinational corporations which have at one and the same time given Ireland one of the highest GDP per capita figures in the world – and a lot of corporate tax revenue despite the low 12.5% rate because the tax base is so expanded. All the time there are advanced countries prepared to go for low tax rates there are constraints on what other countries can do by way of raising taxes.

The wish to reach a global agreement on higher and fairer taxes is quite strong, but for any individual country there may still be more advantages in offering tax breaks and favours to large footloose corporations that bring jobs and success as well as tax revenue. Given the trend and pressures analysts need to factor in higher effective company tax rates for future years. The move to higher taxes is likely to be led by the US and reinforced by the wishes of many governments to find ways of taxing the new economy more and to tax fossil fuel activities in additional ways.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Taxes will rise – especially for technology majors

Read this next

Schroder Global Energy Transition - New addition

See more Insights

More insights

Do countries have too much debt?
By Charles Stanley
03 Dec 2021 | 6 min read
Why markets have fallen
By Charles Stanley
01 Dec 2021 | 4 min read
New Covid-19 variant hits travel and markets
By Garry White
26 Nov 2021 | 7 min read
Pandemic savings to boost Black Friday, but what then?
By Charles Stanley
26 Nov 2021 | 5 min read