Few believe paying tax is a “glorious privilege”, as US president Woodrow Wilson once claimed. But earning taxable profits is a rare distinction right now. In the aftermath of the pandemic it may invite higher bills.
True, it is far from certain that global corporate tax rates will rise in order to shore up public finances. Rates have been declining for decades, regardless of governments’ need for revenues. Corporate tax revenues average under 15 per cent of the total tax take in OECD countries. Raising them will not make much of a dent in deficits, particularly as the ability to offset losses against future tax bills will probably depress yields for years.
Will it be different this time round? A global minimum corporate tax rate is under discussion. That might reduce competitive pressures. So might Brussels’ latest efforts to crack down on low-tax member states, made more salient after Wednesday’s successful appeal by Apple and Ireland over a €13bn back-tax bill.
The UK has already shelved a planned 2 percentage point cut in the corporate tax rate. If Joe Biden is elected US president in November, he expects to raise $1.3tn over 10 years by a partial reversal of Donald Trump’s signature tax rate cut. A 7 percentage point rate rise to 28 per cent would reduce S&P 500 earnings by 3.7 per cent, thinks UBS. Its calculations, which take the tax breaks used by companies into account, suggest banks, transport and retail would be the most affected. Investors should be aware that companies may well be asked to pay more. Falling tax rates used to boost earnings per share growth. That trend could move into reverse.
Governments could go further and impose windfall taxes on companies making money from lockdowns. Parallels with wartime, when excess profits taxes were as high as 95 per cent in the US, have been made by tax policy experts.
Yet for all that politicians like to moralise about tax, governments still tend to prioritise growth-friendly measures. Either the magnitude of rate rises for business will be limited or it will be tempered with investment incentives.
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