EconFather Blog

Taxing times?

March 1, 2021 - 3 min read

As this week’s budget nears, Chancellor Sunak seems to be preparing the country for tax increases – if not now, in the near future: “It’s important we level with people about the challenges facing our public finances”.  The government has borrowed around £400bn in the past year to support individuals and the economy through Covid, and national debt has topped £2tn, breaking through 100% of GDP.

For all Rishi Sunak’s fiscal responsibility mood music, former Chancellor Philip Hamond has spoken of a populist government that may be reluctant to take the necessary steps to repair the public finances.  For now, those finances aren’t as worrying as the headline figures may suggest – Interest rates are low, reducing the cost of servicing the debt.  Yet, as economists discuss the possibility of a return to inflation in 2021 (pent up demand released after the pandemic, supply constraints from the pandemic and Brexit and rising commodity prices) interest rates may not stay low for ever.  Tax increases may threaten growth of GDP, which as Philip Hammond points out, is the most likely path to stable public finances – it’s not the level of the debt that matters so much as the proportion of the economy it represents.

If the Chancellor does announce tax increases this week, where will they fall? Gradual increases in corporation tax over the next few years are on the agenda, following the USA’s lead.  With an historically low rate of 19% at present, there may be room for this while still maintaining competitiveness in the global economy.  It’s thought that the Chancellor is less keen on a windfall tax focused on those sectors that have gained from the pandemic.  Supermarket profits have surged during the pandemic, as have those of online retailers.

Rather than a one-off windfall tax, an online retail sales tax of 2% has been floated and may have more appeal.  It would raise the costs of online retailers and so be seen as a step towards saving the High Street, in a context where Amazon recently announced an 84% increase in net profits.  This is a policy that could find some favour with the public, though they may not be so pleased if the tax is passed on as higher prices for online purchases.  Reductions in business rates for High Street stores may be more the order of the day, though this costs revenue rather than creating it.

There are many other issues with the internet sales tax idea.  The border between the High Street and the internet is blurred as many High Street stores also have an online presence and may be damaged by the new tax.  The tax status of “Click and Collect” would be interesting! Finally, the cost of enforcement and collection may be high, especially for internet retailers not based in the UK, violating one of Smith’s Canons of Taxation – a good tax is cheap to collect.

By the way did I tell you about my recent visit to the McVitie’s website to buy some Digestives? The first thing they asked was whether I would accept cookies! I was suitably bemused.