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When and how will taxes rise?

Many people expect tax increases to be announced in the 2020 Autumn Budget, with some rises applying with immediate effect, but former Chancellor Philip Hammond takes a longer view.

17th Sep 2020
Tax Writer Taxwriter Ltd
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Philip Hammond at a conference
DFID - UK Department for International Development

Phillip Hammond was speaking at the Avalara Inspire 2020 online conference about the role of tax in the Covid-19 recovery and Brexit challenges. He is no longer an MP, having stood down at the 2019 general election, but he will soon join the House of Lords to continue contributing to the public debate on tax and other issues.

Post Covid-19  

Hammond is broadly supportive of the UK government’s efforts to support the economy following the Covid-19 shutdown, but the current generous approach to funding can’t continue forever. At some point the extraordinary fiscal costs of 2020 will have to be recovered either through taxation or a reduction in public spending. 

As interest rates are currently very low, the cost of servicing public debt is also low, so in the short term Covid support costs will be covered by continued government borrowing. In good times the government does not want to be carrying a level of debt approximately equal to the country’s GDP. A reduction in debt will provide headroom for fiscal manoeuvres to cope with the next problem that comes along, like Covid or another financial crisis as happened in 2008.

Two stages of tax policy

Hammond sees the tax landscape developing in two stages, which can be distinguished as firstly as presentational and secondly as substance.

He suspects that in the short term the government is likely to impose additional taxes on up to three groups:

  • Corporations
  • Foreigners in the UK
  • Extremely wealthy individuals.

Hammond said these taxes will be imposed largely for demonstrational effect. The tax rises won’t raise large amounts of money as there are just not enough taxpayers in those categories to raise serious amounts of money.

Also, the people in those groups are not numerous enough to affect the political arithmetic (in other words they don’t have many votes). There will also be a large amount of continued borrowing to avoid tax rises or spending cuts that would affect the vast majority voters.

In the longer term, the only way to raise significant amounts of additional revenue is with broad-based taxes that do affect the majority of people (such as income tax, national insurance and VAT). But that will be a very painful and difficult political decision.

Delaying the pain

Hammond could not envisage the current government raising taxes that will affect the majority of the population, so it will push back the need to address the issue until beyond the next general election in 2024.

That delay is not necessarily a bad thing, as looking at the economic outlook Hammond said it would probably be unwise to impose significant tax increases before the recovery is well underway. That recovery could take at least two to three years, so 2021 would not be a good time to raise taxes. Then 2022/23 is getting close to the next general election.

Digital services tax

There has been real public anger over large digital-platform groups avoiding taxes in the countries where they operate. This became such a political pressure point across Europe that several governments have imposed digital services taxes (DST), in an attempt to tax those large online platforms.

The perceived tax avoidance has come about because the current international tax system was developed in the 1920s when trade meant physical trade in goods. Where the company has no physical presence in a country there is nothing for the local tax system to bite on. Those companies do pay taxes in the countries where they hold their headquarters – which is usually the USA. 

Philip Hammond was involved in the design of the UK digital services tax. This levy applies from 1 April 2020 to tax turnover (not profit) from online market places, social media services and search engines where the global digital revenue of the group is at least £500m and the turnover in the UK is at least £25m.

The DST was always intended to be an interim measure that would be withdrawn as soon as there is an international agreement on a global settlement of a similar tax. The G20 group of countries, supported by the Organisation for Economic Development (OECD), has been labouring to come up with an internationally agreed tax regime.

This is not an easy task as the USA doesn’t agree that American companies should be subject to a global DST as this would amount to a redistribution of tax revenue away from the US Treasury to other countries. The USA agreed to not take retaliatory action on countries which have imposed a DST; that is until the revenue starts to be physically collected from those taxes.

For the UK the first payments of DST will be due in October 2021, but for France, the DST will become payable in December 2020. The USA could, therefore, start imposing retaliatory measures on France, or on the whole of the EU, from December 2020 or January 2021.  

Interesting times ahead

Hammond had a final message for tax advisers everywhere when he said: “No one working in the tax field will be short of work any time soon.”

Replies (18)

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By johnjenkins
18th Sep 2020 10:22

I've never really agreed with spreadsheet Phil, however I'm pretty sure that huge taxes rises won't be a part of any budget until the next GE. If Boris gets in again then Government will claw back what they have lost. One thing we are forgetting is that from 1/1/21 we are on our own so for the next 4 years things could improve so much that there will not need to be a claw back.
As an aside have you noticed that all the big banks are not opening new Limited Company bank accounts.

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By dstickl
18th Sep 2020 11:08

Regarding your last sentence, who is, please?

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By johnjenkins
18th Sep 2020 12:19

As far as I know Starling and Metro are.

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By francereeny
18th Sep 2020 10:32

I recognise the writers' areas of expertise, but clearly macroeconomic policy is not one of them.
"but the current generous approach to funding can’t continue forever. At some point the extraordinary fiscal costs of 2020 will have to be recovered either through taxation or a reduction in public spending".
This is wrong.
I suggest the author examines this bias, and learns something about the finances of a sovereign govt (MMT, or the works of eg Steph Kelton); and with that the importance of sectoral balances.

For UK Govt to remove spending power from the economy at this time would be a massive economic and human disaster. There is no inflation threat, and with increasing unemployment it is the duty of the state to inject more spending into the economy, preferably in a way that benefits most citizens, especially the poorest, and those that have the greatest marginal propensity to spend.
The state financing position is just a balance sheet KPI that, sure we need to be aware of, but has little importance in terms of a properly functioning economy at this time. Private spending is likely to be curtailed for a long time, due to the combination of Covid and Brexit uncertainty.
We need to kickstart the fiscal multipliers, to generate a long-term better position, not hamstring the economy.
That said, clearly the package of taxation measures needs updating (eg the DST).

Apologies if the sentence quoted above was just a shortcut to talking about the DST, but I thought it worth flagging it.

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By Justin Bryant
18th Sep 2020 10:45

That's right! I thought I was the only one here who understood how modern money works (it's just electrons basically, so sovereign currency issuers cannot run out of money and tax is just a way to give those limitless electrons some value in the 1st place, otherwise they would become pretty worthless of course under basic supply/demand laws).

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By Rgab1947
18th Sep 2020 10:36

Not keen on tax on turnover. There would be consequences and once you open the door to a tax method politicians will abuse it.

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By AndrewV12
18th Sep 2020 10:50

Extract above
'Many people expect tax increases to be announced in the 2020 Autumn Budget'

The Government should bite the bullet and put taxes up ASAP, putting it off will only make it worse, and rolling out tax changes on the darkest and wettest of nights will not wash. I think we will understand why they are going up.

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By johnjenkins
18th Sep 2020 10:57

Tell that to the business that are suffering and those that will never make it. If you relay think that, then you obviously haven't got a clue as to how the current climate is affecting business or you've just got too much money.

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By AndrewV12
18th Sep 2020 11:06

Who mentioned business taxes, there are others (even though the government would not dare to raise Vat, it would make it higher than the basic rate of income tax and corporation tax).

Whether a business survives for fails in the current climate has got nothing to do tax rises more to do with consumer confidence, customer confidence, acquiring new stock, being paid (even if not on time), credit and lending, low interest rates, Government schemes and assistance, the list goes on and on .................

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By johnjenkins
18th Sep 2020 12:20

Just as I thought. You haven't got a clue.

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By AndrewV12
19th Sep 2020 10:28

Oh let me guess John, taxation was the cause of Covid 19.

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By johnjenkins
21st Sep 2020 10:12

Keep on guessing Andrew. Law of averages says you'll be right eventually.

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By NeilW
18th Sep 2020 11:23

"but the current generous approach to funding can’t continue forever. At some point the extraordinary fiscal costs of 2020 will have to be recovered either through taxation or a reduction in public spending. "

That is fundamentally incorrect at an elementary accounting level in Sterling and I'm surprised the myth continues to stand.

As a simple matter of mathematics when government spends it initiates a spending chain that causes taxation to happen as the money changes from hand to hand - like a stone skipping across a pond. It's a simple geometric progression and ensures that whatever the government spends it will get back precisely the same amount in taxation - to the penny *for any positive tax rate*.

The only issue is when. Because some people might save instead of spending, and that excess saving ends up buying the Gilt assets that are described as "government borrowing". Naturally when whoever ends up owning those Gilt assets decides to spend them that will restart the spending/taxation chain that will eliminate the Gilt.

When any politician starts talking like this, we should ask them how that works in balance sheet terms. Watching them trying to draw one up would be entertaining.

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Replying to NeilW:
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By Justin Bryant
21st Sep 2020 09:06

That all looks totally wrong to me. The Government could spend its borrowing on buying snow from Eskimos couldn't it and then your tax maths analysis (which looks wrong anyway) falls down. Also, how can you spend (in the convectional sense) gilts?

Regardless, you're fundamentally wrong if government spending permanently exceeds tax receipts.

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By richards1
18th Sep 2020 11:57

One tax that could be used is CGT on homes. It's crazy that a house can increase in value and not be taxed in some way.

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By johnjenkins
18th Sep 2020 12:23

Your home is your castle and should never ever be taxed. We might as well have a "wife tax" for "benefits in kind".

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By richards1
19th Sep 2020 10:30

Tell that to the thousands of divorced guys who have lost more than they ever paid the tax man

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By johnjenkins
21st Sep 2020 09:01

Gone through it myself and see it with clients.

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