It’s crazy that Sunak is planning a tax raid on wealth creators. We need them to rebuild Britain
Taxing wealth-creators now will lose our brightest and best to foreign rivals Matthew Lynn
An increase in capital gains tax? A rise in corporation tax? An online sales tax targeting the titans of the internet? We haven’t yet quite reached the stage of imposing windfall taxes on any business that managed to just about break even during lockdown, or a home delivery levy to help out the high street, but heck it is only the beginning of September and there is still plenty of time before the next Budget.
As the Treasury scratches around for ways to fill the massive hole blown in the public finances by Covid-19, it is clearly targeting companies and entrepreneurs as the most likely sources of extra money.
But hold on. That is crazy. In truth, there is never a good time to tax wealth creation. But this is an especially bad moment. Why? Because if we are to have any hope of creating the jobs we will need to get out of this crisis, we are going to need a huge burst of entrepreneurial energy. Because companies have just had a six-month lesson in working remotely and are more likely to flee tax rises than ever before. And because the online economy is the one sector we need to grow, so it hardly make sense to punish it. We will find out in the next year whether we have to raise taxes – but if we do, it would be madness to put the entire burden on business.
Outside of war time, Treasury officials have never seen so much red ink. One of the strictest lockdowns in the developed world also created one of the deepest recessions. The UK’s 20pc collapse in output in the second quarter of the year trashed tax revenues, while vast spending on furlough schemes, bailouts and loans – not to mention the half-price pizza deal that sadly ended yesterday – has pushed the country deep into the red.
The deficit is expected to hit £300bn this year, the highest in real terms since the end of the Second World War, and our total debts have now crept past 100pc of GDP. If we get a rapid V-shaped recovery, we can pay that off gradually over a couple of generations. So long as interest rates remain close to zero, it could be just about manageable. If not, taxes will have to rise. There is nothing wrong with the Treasury starting to explore its options. Right now, however, it is looking in all the wrong places.
Its main targets appear to be corporation tax, with a possible rise to 24pc; capital gains tax, which could be levelled with income tax (implying a rise to 40pc or 45pc); and a plan for an online sales tax to help level the playing field between the booming
‘There is nothing wrong with the Treasury starting to explore its options but it is looking in the wrong places’
virtual economy and a struggling physical one. One way or another, business is going to be made to pay.
The trouble is, this is precisely the wrong time for a raid on wealth creation. Here’s why. First, we will need to create tens of thousands of new companies, and millions of new jobs, to have any hope of getting the economy back to where we were in 2019 – never mind growing it again.
Furloughs and cheap loans have postponed a lot of the pain, but a terrifying number of companies are not going to come back from this crisis. We have already seen retail and restaurant chains start to close branches, or else slip into administration, but as the support schemes start to wind down that will get a lot worse.
We could be looking at two, three, and perhaps even five million unemployed.
We will need lots and lots of start-ups to have any hope of creating jobs on that scale – and we will only do that if we reward entrepreneurs instead of punishing them.
Next, the shift to working from home has made it easier than ever to move your business somewhere with lower taxes. Through lockdown, lots of company owners were probably wondering why they needed an office in the first place, with all the expense of rent, rates and free coffee. The business seems to operate OK without one.
If we put up corporation tax, the same people are going to be wondering why they need to base themselves in the UK at all. At 24pc, compared with the current 19pc, which is one of the rumoured Treasury proposals, Britain would have thrown away its tax advantages.
Remember this as well. People react to change. Faced with a big rise in tax bills, and after a six month lesson in running virtually, plenty of businesses might decide that Ireland (12.5pc company taxes), or Hungary (9pc) or the Bahamas (0pc) were just as good a base. Higher corporate taxes will simply drive an exodus, especially in the high-output, work-from-anywhere economy. It could easily turn into a spectacular own goal.
Finally, surely we want to move business online as fast as possible? You can just about make a case for taxing Facebook and Apple a little more. But one of the most significant developments during the crisis has been this. Lots and lots of small companies have found innovative ways of shifting online. That improves productivity and growth, and, hardly incidentally, helps us control the virus.
Why would we want to punish them for that? It makes no sense at all – and, even worse, it will send out a signal that the UK is one of the most techhostile countries in the world. In reality, if we raise taxes on business we will only make the recession even worse.
It remains to be seen whether we have to make tough decisions on tax. We might be able to trim spending, borrow more, and somehow engineer a fast enough recovery to avoid it. That remains to be seen. But if action must be taken, we shouldn’t be going after wealth creators. They might seem an easy target, but we will need their energy and ideas more than ever in the tough few years ahead.
Rishi Sunak, the Chancellor, is wrong to consider hikes in corporation and capital gains taxes