A tech tax will make things worse for workers

by Ben Ramanauskas, Policy Analyst at the TaxPayers' Alliance

The Consumer Electronics Show is well under way in Las Vegas. The Show will feature the latest gadgets that are set to be launched from technology firms. As these companies show off their latest wares which include everything from shape shifting TVs to driverless cars, there will, no doubt, be calls for new taxes to be placed on large technology firms.

Philip Hammond has already set out his plan to levy a tax on the world’s biggest technology companies. A two per cent tax on revenue made from users in the United Kingdom will be imposed on any technology firm with global revenue of over £500 million.

The likes of Apple, Amazon, and Facebook are easy targets for politicians and the press. Stories of massive profits and huge salaries for the top executives at these firms contribute to the feeling that big technology companies are not paying their “fair share”.

Many people have been appalled at some of the business practices of Amazon and how it treats its staff. Levying a tax on technology firms will only make things worse, but cutting taxes would actually make things better for employees. There are numerous examples of things improving for employees when taxes on businesses are cut. For example, the recent cuts to taxes on businesses in the United States has seen employees in US companies receiving bonuses and pay rises.

Apple responded to the tax cuts by giving its employees a bonus worth $2,500. Furthermore, AT&T and Comcast both gave $1,000 bonuses to their staff. Walmart and Wells Fargo both handed out bonuses to their employees and increased wages for the lowest paid staff. The investment bank, JP Morgan handed out bonuses, increased wages, and invested more in medical insurance for its employees on the lowest incomes.

Amazon also responded to the tax cuts by passing on the benefits to its employees. It has increased its minimum wage by four dollars an hour and has introduced a new bonus plan.

These tech firms have a track record of responding to the right tax incentives.Conversely, levies targeted at tech firms are unlikely to have the desired effect. In fact, they would be damaging for the economy and harmful to consumers and employees.

On April Fools’ Day 1965, the Finance Act was passed by Parliament. The Act introduced corporation tax to the UK, with firms paying a tax on their profits. Developed economies around the world have similar systems and, despite some issues, it worked well in an era where commerce was driven by machinery, buildings, and land. We now live in a globalised world in which intangible assets are far more important. The tax system has not kept up with these changes, and so corporation tax is an ineffective tool. As such, we should consider overhauling the entire system, rather than singling out technology firms.

If we do not sort out the root issues with the tax system, any new tax on technology companies will not work and will have a negative impact on the UK’s economy. Adding yet another tax will increase the size and complexity of the UK’s tax code. The tax burden in the UK is already at a 49-year high. It is also one of the longest in the world and is riddled with loopholes, . This will place a burden on companies who will have to comply with the new rules, making the UK a less attractive place to invest and to do business. A typical domestic firm in the UK expends the equivalent of 37 hours every year complying with corporation tax, out of a total of 110 hours devoted to compliance with all taxation. This burden is especially high for multinational firms.

As the UK prepares to leave the European Union, it is vitally important that it signals to the world that it is open for business. A tax on technology firms sends out the opposite message.

Taxes targeting tech would also be harmful for employees. Taxes which purport to be on corporations end up hitting the workers the hardest. Whether that tax is on a payroll, such as employers’ national insurance contributions, or corporation tax, it means lower wages for employees.

It would also be bad news for shoppers. The other way in which companies pass on the costs associated with high taxes is by increasing prices. Thanks to the free market and competition between different firms, the latest advances in technology are available to households in the UK. Many of these devices allow people and businesses to perform their tasks more efficiently and to a higher standard, they also contribute to the overall quality of life of their users. Any new tax on tech firms would mean that the prices of these goods would increase and potentially become unaffordable to many households. People in the UK are already struggling with the cost of living due to taxes and government regulations, any new tax would exacerbate this.

The important point here is that businesses don’t pay taxes, people do. The burden associated with any tax levied on a business is most likely to be borne by workers in the form of lower wages or by the public paying higher prices. Similarly, businesses don’t get tax cuts, people do.

To keep up with a changing world, the tax system needs to change. The tax code needs to be shorter and less complicated, with outdated and ineffective forms of taxation abolished. Introducing a specific tax on tech firms will be bad news for the economy, employees, and shoppers. Engaging with the tech sector, and giving them tax cuts, can bring huge benefits to the UK.