The calls for tax hikes is ramping up. Last December the Wealth Tax Commission recommended a ‘one-off’ 5 per cent levy on the assets of Britain’s wealthy to pay for the growing costs of Covid-19. In January Oxfam followed suit, using its yearly inequality report to call for big taxes on wealth and high incomes. Now, it’s the International Monetary Fund’s turn, recommending not only a temporary income tax hike for high earners, but also a windfall tax — that is, a tax on ‘excess profits’ — on businesses that faired well and profited during the pandemic.
The concept of wealth taxes on individuals is bad enough. Over the past few decades, the majority of European countries that implemented them have gone on to repeal them, as they found them an inefficient and ineffective way of raising revenue. For little gain, they come with a significant burden, including the erosion of a country’s own tax base and pressure to justify double-taxation.
Windfall taxes on businesses aren’t any better. Instead of targeting people's personal incomes and assets, it targets people through companies. The concept of ‘excess profits’ is odd to begin with. Yes, shareholders benefit from a company’s success — but so do the many employers and countless consumers that also depend on the business. It’s been estimated that up to half of the ‘corporate tax burden’ falls on employees: coming out of their wages and being diverted to the state instead. The IMF’s proposed threshold for when the windfall tax kicks in — when profits are in ‘excess of the minimum return required by investors’ — is perhaps the worst cut-off point from the perspective of workers.
Similar to arguments against wealth taxes on individuals, there is an incentives point to be made here too — what message do we send to companies who helped us through lockdowns that the response to their success is a bigger financial burden? If the businesses that adapted to extremely difficult circumstances know that in future this leads to a profits raid, they will inevitably lose some incentive to perform so well again. The IMF singles out ‘pharmaceutical and highly digitalized businesses’ as examples of companies that might pay a windfall tax: as if we’d want to punish the companies that brought us vaccines, remote working platforms and lockdown entertainment.
The IMF advocates new methods of raising taxes for several reasons: its latest fiscal monitor focuses on tackling inequalities that it estimates have been exacerbated by the pandemic. But it focuses on countries’ finances too, putting emphasis on increasing debt levels among wealthy countries. The IMF projects the UK’s ratio of debt to GDP will exceed 100 per cent in two years’ time, coming in at over 103 per cent by 2026.
These projections are slightly more generous than the UK's Office for Budget Responsibility’s forecasts, estimating a ratio of 104 per cent in 2026. Increasing levels of debt indeed have the attention of the Treasury. Rishi Sunak’s Budget in March was designed to make sure the UK can continue to service its debt, even if the extremely favourable borrowing conditions change. This resulted in the biggest tax-raising Budget in 50 years, with big corporations set to pay more from 2023.
In this sense, the IMF is not alone in its drive to tackle un-costed spending and ballooning debt. But not all taxes and methods are created equal. Sunak’s plan to hike corporation tax will be heavily scrutinised: when the headline rate was cut in the 2010s, revenue actually went up. (The Chancellor hopes the introduction of a super-deduction that allows businesses to reclaim investment expenses — with a subsidy on top — will balance this out.) Many have questioned the merits of raising taxes at all in the midst of a pandemic.
But time doesn’t need to tell us about a windfall tax. The writing is already on the wall — economies under strain don’t need to flirt with tax policies that undermine long-term prosperity.