G7 deal is flawed
The world is in desperate need of tax reform, but the G7 agreement signed by Rishi Sunak creates more problems than it solves. It will be almost universally hailed as a triumph: in reality it is, on balance, a flawed deal that could hamper Britain’s long-term ability to compete and would cartelise the global economy at a time when electorates, post-Brexit, want to take back control.
Returns from capital, which include profits and interest, are currently taxed very differently from business to business and industry to industry, with multinationals and smaller nationally-based businesses also treated unequally. Some big tech firms don’t pay much tax because they ensure they report lower “profits” or choose where to locate activity; companies in other sectors pay a lot more, with corporate and capital structures often making a big difference. These inequities need tackling.
But it must be done properly, without violating the sovereignty of nation states that choose to tax companies less than others. A proper solution, one that has long been advocated by flat-tax theorists, would be to merge all taxes on capital (including corporation tax on profits, taxes on dividends and interest and the rest) into a new, single levy on all cash flows as they leave corporate structures. Tax avoidance would be cut, everybody treated fairly and the volume of paperwork reduced. This too would require international agreement.
Instead, we have ended up with yet more accounting shenanigans as well as restrictions on national autonomy. There will be a global minimum rate of 15 per cent and US tech giants will have to allocate some of their profits to overseas jurisdictions, allowing others to grab more tax receipts. In the short term, this will help Mr Sunak’s depleted coffers, and many firms in other sectors will celebrate, but it also binds us into never really becoming a low-tax jurisdiction. And what will happen when the pressure builds to increase the minimum to 20 or 25 per cent? What was the point of Brexit again? It seems we left a European cartel to join a global one. Doesn’t that render Mr Sunak’s freeports much less effective? Clearly, Northern Ireland couldn’t now become a corporate tax-free zone to regenerate it, for example.
Janet Yellen, Joe Biden’s Treasury Secretary, gave the game away. She said that the deal would end “the race to the bottom” (in other words, prevent countries from attracting capital and push up tax rates). Yes, it is right that US tech giants pay the same tax as everybody else, but this doesn’t mean that every country in the world should adopt the Left’s high-tax agenda.