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    Matthew Lynn

    The G7 tax deal is an unworkable mess

    The G7 tax deal is an unworkable mess
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    Poverty will be abolished. Governments will be able to spend again. Inequality will be eradicated, our welfare systems secured and the power of the tech giants will finally be curbed. We will hear a lot of hype about today’s global tax deal. Given that the liberal-left have spent the last decade complaining that the main problem in the world is that Apple and Facebook don’t pay enough tax, a lot will be riding on the agreement reached by the finance ministers of the G7 today. There is just one small problem, however. The deal is an unworkable mess.

    Sure, the headlines are fine. There will be a global minimum corporate tax rate of 15 per cent designed to stop countries from unfairly competing with one another. Companies will be taxed more heavily in the countries where they make their main sales, rather than simply shifting revenues to whichever shady island happens to have the lowest tax rate that year. And, in fairness, a few multinationals may end up paying a little more, although of course corporation tax revenues were rising anyway, so we may not be able to measure the difference.

    But the details are a mess. First, the global minimum of 15 per cent is, er, less than any major developed country charges anyway, except for Ireland (which will be feeling a little nervous), while the offshore tax havens are not signing up to it. So that is irrelevant. Next, take a look at the global re-allocation of tax. At this point it is probably a good idea to take a deep breath. A multinational company has to have a 10 per cent profit margin and then 20 per cent of any profit above the 10 per cent threshold will be allocated to be taxed in the countries where they make sales, on some pro-rata basis that still needs to be figured out. Confused? Yup, me too.

    In fact, the tax breaks the cardinal rule of any form of levy, which is that any tax should be simple and hard to avoid. With this one, the accountants are going to have a field day. Margins might magically fall to 9.8 per cent – heck, we spent so much on R&D this year guys! – while the rows over where sales were made will take up years and may never be settled. 

    We have seen some poorly designed taxes over the decades. But this is among the very worst. It is debatable whether we want to tax companies more. Most of the evidence suggests that higher rates are simply passed on in the form of higher prices, lower wages, or lower dividends, most of which are paid to pensioners. In fact if we want to raise more tax from companies, we should just hit them with higher business rates, or National Insurance contributions: it isn’t especially fair, but those levies are impossible to avoid. 

    This ‘global tax’ will get some headlines and the accountants will be celebrating. But beyond that it won’t do any good – and certainly not what its cheerleaders expect.

    Written byMatthew Lynn

    Matthew Lynn is a financial columnist and author of ‘Bust: Greece, The Euro and The Sovereign Debt Crisis’ and ‘The Long Depression: The Slump of 2008 to 2031’

    Topics in this articleEconomicsPoliticsMoney