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Biden’s corporate tax plan is simple, yet revolutionary. Will the UK sign up?

Arun Advani and Lucie Gadenne
·4-min read
<span>Photograph: Nicholas Kamm/AFP/Getty Images</span>
Photograph: Nicholas Kamm/AFP/Getty Images

The end of the high street has been declared many times. The Covid crisis has certainly hit hard, but even before the pandemic local shops were struggling as they tried to compete with the likes of Amazon and Starbucks, who pay minimal tax despite large sales. In that context, the US proposal to set a global minimum tax rate and allow some of its companies to be taxed based on where they make their sales is a step in the right direction.

Crises create economic hardship and the impetus for change. At the height of the second world war, the Beveridge report laid the foundations for the UK’s welfare state. As we battle against a new foe, the call on both sides of the Atlantic has been to “build back better” when the crisis is over.

But crises also often create the means to pay for change. What is less remembered from the second world war is that it saw the introduction of the “purchase tax” (the forerunner to modern VAT) and the PAYE system of paying income tax. That income tax was itself first introduced in the UK to pay for the Napoleonic wars. The development of new tax technologies, forged in the heat of crises, has been central to the functioning of modern states. The desperate need for revenue concentrates minds and helps overcome previous political opposition.

The tax reform for this crisis is the taxation of multinationals. Public anger about the low tax rates paid by some companies has been sharpened by the sense that some of them have been making bumper profits out of the pandemic. Those firms currently keep their tax bills low by “booking” their profits in low-tax countries. Sometimes it can be hard to determine where those profits should be booked. Do Google’s profits arise in the US, where it is headquartered; in the countries of residence of its users; the countries of the advertisers; or Bermuda, where it booked $23bn in profit in 2017? Until now the answer has largely been, wherever Google says they were made.

This practice has large costs. First and foremost, an estimated 15-20% of corporate tax revenues in Europe are lost each year to such profit-shifting (in the UK that’s equivalent to around 10% of annual spending on the NHS). Second, it gives unfair advantage to multinationals over firms that do not operate internationally and cannot do this. Global corporations can transfer profits to territories where the tax rate is low. Your local cafe does not have this option.

Related: How would a global minimum tax work and why is it needed?

Enter Janet Yellen, Joe Biden’s secretary of the Treasury, and the person in charge of making sure he finds a way to pay for his ambitious projects. Her plan is the following: ensure that all multinationals pay a minimum rate of tax on their profits – 21% – regardless of where they are booked. If they have some profits booked in a country that sets a lower rate, then they owe a “top up” of additional tax to the country where they are headquartered.

This plan, though simple, is revolutionary. It has the potential to substantially increase tax revenues. It stops the race to the bottom observed in recent decades, in which countries compete to attract multinationals by offering ever lower tax rates – bad news for tax havens such as Bermuda, good news for the rest of us. If countries want to compete to attract multinationals, it will have to be on quality of infrastructure or education of the workforce – things that citizens also value. US backing means this may actually happen.

There are still plenty of things to be agreed – expect the level of the minimum tax rate to be hotly contested – but this is an important first step and the UK needs to get on board quickly. The digital service tax may have been a good idea all the way back in early 2020, when the US president was unwilling to cooperate and the prospect of raising meagre revenues from Amazon felt sufficient. But international cooperation is needed for a fair and sustainable system to tax corporate profits. The US and the EU are leading the way, which means the UK risks having to abide by whatever rules they decide, unless it takes its seat at the table now. Once this is sorted, they may even get started on the other tax revolution the 21st century needs: taxing the similarly mobile wealth and income of super-rich individuals.

  • Arun Advani is assistant professor of economics at the University of Warwick. Lucie Gadenne is associate professor of economics at the University of Warwick