The U.K. Tech Tax and the Tax on Clouds

Philip Hammond, the British Chancellor of the Exchequer, recently kicked over something of a red ant hill by suggesting the adoption of a new U.K. “tech tax” beginning in 2020. Before joining in the cascade of criticism, we should first acknowledge the enormity of the problem the Chancellor and other finance ministers around the world face today. And then criticize, for there is much to criticize.

But first, the problem: The complexities of global commerce and the introduction of products for which taxes like corporate income were not originally envisioned are simply outstripping the abilities of tax code and tax administrator alike. The initial problem lies not with the businesses or the business, but with a tax code designed for an earlier age; thus the OECD Base Erosion and Profit Shifting initiative and the U.S. 2017 tax reform’s Global Intangible Low-Tax Income (GILTI) provision.

Nations attempting to operate a business tax system have little choice but to respond to the changing economic environment as they are responsible for tax collections, both ensuring the tax system is applied fairly, whatever that may mean in the moment, and collects sufficient revenues, a much clearer test. However the need to respond should align with the need to respond sensibly.

Chancellor Hammond has effectively cried uncle with respect to corporate income tax, which is a tax on net income, so he would instead apply a tax on certain gross receipts associated with the tech industry.

Stripped of the fancy language, he’s proposing a discriminatory sales tax. As if that weren’t bad enough, he is almost sure to find in attempting to implement the tax that he will have to make a multitude of arbitrary distinctions as to what is and is not subject to tax. And when he is done, he is almost sure to have found the base on which he sought to levy tax has vanished like a cloud.

Hammond in a sense is compelled to such folly due to mistakes made and ignored for decades. Consider this. Imagine at the next meeting of the G20 finance ministers, the resulting communique included the simple statement: We acknowledge and insist that businesses only collect tax on behalf of other agents, whether owners, workers, or customers, and that all the hundreds of billions of dollars and euros of tax businesses annually collect and remit do not mean they paid tax in any meaningful way.

All finance ministers, and indeed every student of public finance knows this statement to be true. One might as well attempt to tax a water droplet as a corporation. Yet ministers persist in such nonsensical notions as trying to ensure corporations “pay their fair share.” Entities which by fundamental economics cannot pay tax even if this was their greatest desire are somehow supposed to be made to pay their fair share. No wonder the likes of Chancellor Hammond are boxed in. They have misled the public on this fundamental point for decades.

Nor is it just a matter of intentional misinformation. Though businesses don’t pay tax, they do collect tax. Finance ministers and politicians delight in the fact that nobody knows who actually pays business income tax, certainly not those who do in fact see their earnings redirected from their pockets to the government’s coffers. Business tax is inherently and perfectly non-transparent. This makes for a lovely fiscal instrument for political leaders who want to fleece the goose with a minimum of squawking.

After many years of study, a consensus now exists regarding the incidence of corporate tax – about one third is paid by workers (labor) and two-thirds paid by the owners (capital). Why not abandon business tax for the folly it is, and simply increase payroll and personal capital income tax in these proportions?

The answer, it would seem, is fairly obvious: The voting public would never tolerate the perceived higher tax burdens even as the tax burden overall remained unchanged. Hence the business tax remains, its burdens neatly hidden from view, while Chancellor Hammond struggles and likely ultimately fails to tax clouds.

About the authors

J.D. Foster

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.