Watching Boris Johnson all but beg Amazon’s chief Jeff Bezos to pay more tax this week was a galling sight. Amazon is the perfect illustration of who benefitted from the COVID-19 pandemic: the company’s profit in the first three months of 2021 was a record $8.1bn – more than triple what it was in the same period last year.
But it’s not only US multinationals that have cashed in during the pandemic. This week Tax Justice UK published new research that identified UK-based companies whose profits have soared over the past 18 months.
The research found that the online retailer ASOS, the outsourcing company Serco and the mining giant Rio Tinto are among six UK-based companies across online retail, finance, outsourcing, real estate, mining and pharmaceuticals who made £16bn in excess global profits during the pandemic. Most of these companies increased their profits by more than 100% during the pandemic compared with previous years – in some cases significantly so. The profits of one company, the Scottish Mortgage Investment Trust, increased by 801%.
A debate is currently raging in the UK about how best to fund investment in social care and our COVID-ravaged public services. Legislation for a 1.25% increase to National Insurance was rushed through Parliament just last week.
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This is a decision that makes ordinary people’s taxes work more – not wealth, nor the excess profits that some companies have made in the last 18 months. Surely it is right that higher taxes on profitable companies should be on the agenda too?
Reform for fairness
Going forward, we need a tax system that supports a fair recovery and keeps pace with the economic changes that the pandemic has accelerated. Those hit hardest over the last 18 months should not be asked to pay more, but it is fair that those who have prospered contribute more to the economic recovery.
The Tax Justice UK report outlines a series of recommended reforms to our tax system. The first is the introduction of a one-off windfall tax on profits made during the pandemic. Windfall taxes are not new. In 1915, the government introduced an ‘excess profits duty’ to support the First World War effort. A similar tax was introduced just after the outbreak of the Second World War.
In 1981, the Thatcher-led Conservative government introduced a ‘special budget levy’ on UK clearing banks, which had made large profits during the previous decade’s recession due to high interest rates. The following year, the same government introduced a ‘special tax’ on North Sea oil and gas to capture more of the revenues from the late 1970s oil-price explosion, which raised £2.4bn. In 1997, the newly elected Labour government introduced a windfall tax on the privatised utilities, which produced an estimated one-off payment to the government of £5bn.
The six companies examined in the report made excess global profits of £16bn in 2020 compared with previous years. On this basis, a pandemic profit levy of 10% could raise up to £1.6bn from these companies alone, and a 50% levy could raise up to £8bn.
The report’s second recommendation is that the government increases the main rate of corporation tax to 25% immediately, and closes corporate tax breaks that don’t work. At just 19%, the UK’s rate of corporation tax is low by international and historical standards. In the spring budget, the chancellor announced that corporation tax would increase to 25%, but not until 2023. However, with national insurance set to rise from April 2022, is it fair to postpone tax rises on businesses?
Capital gains should be taxed at the same rate as employment income so that returns from wealth and income from work are taxed evenly
Increasing corporation tax immediately would mean that companies that are well placed to prosper from the structural shifts accelerated by the pandemic – such as mining and pharmaceutical companies – also contribute more to the public purse on an ongoing basis. Corporation tax is only paid on profits, so companies that have been significantly impacted by the pandemic will not be affected. According to estimates by the Resolution Foundation, increasing the rate of corporation tax to 25% would raise around £20bn a year.
The report’s final recommendation is to equalise the taxation of capital gains and income. The analysis showed that the company with the biggest increase in profits during the pandemic was the Scottish Mortgage Investment Trust (SMIT), which saw an £8bn increase in global profit, much of it stemming from soaring share prices.
Investment trusts such as SMIT are exempt from paying capital gains tax and corporation tax on the capital gains realised in their portfolio, but investors in the trust are liable for capital gains tax on profits when selling their investments. However, the maximum rate of capital gains tax paid on shares is 20% – far below the maximum income tax rate of 45% – even though it is mostly paid by wealthy asset owners.
There is a strong and growing consensus among economists and think tanks that this arrangement is inefficient and unfair. The report recommends that capital gains be taxed at the same rates as income from employment so that returns from wealth and income from work are taxed evenly, and so that a larger proportion of the substantial capital gains realised during and after the pandemic contribute to the economic recovery.
The pandemic is an opportunity to reset our tax system towards one that rebalances the burden towards wealth rather than work. Taxing those who have prospered during this crisis would signal that the government does actually care about fairness as we build back the economy.