New Tax Paradigm In The Digital Age

Charles Enoch

Much of the western world is experiencing a social crisis. Basic public services—in the UK, for instance, the National Health Service—are set at unsustainably low levels of funding. Unemployment, already high amongst the young, is set to rise rapidly as workers may be replaced by machines powered with artificial intelligence (AI).

These trends, and many more, can be attributed to the general failure to obtain public resources that are in line with present-day needs, constraints, and technological realities.

Access to public resources has gone through paradigm shifts over the centuries, broadening from taxes on particular outputs to import duties, as collection capacities and needs evolved. Increased data availability facilitated the introduction and expansion of the personal income tax.

Over time there was increased focus on progressivity in the tax system, particularly when this was associated with the concept of equal sacrifice in time of war. Moreover, there were unprecedented levels of national debt at the end of successive wars. Income tax was the major revenue generator. It was highly efficient to collect, and western countries were heavily dependent on the revenue it generated.

Meanwhile, sales taxes too had become important, broadened from easily identifiable necessities to cover much of consumption, often with a wide variety of rates to achieve social ends.

Progressive taxation on the wane

Tax systems reached peak progressivity around the end of WW2. Marginal income tax rates of 90% on high earners were considered desirable for society to meet its needs. The higher share of taxes in GDP was also associated with the rise of the social state, i.e. a government safety net for those unable to support themselves, (unemployment and disability benefits, pensions, health) that became regarded as hallmarks of a civilized society.

By the 1970s, tax rates on the rich were falling: J.K. Galbraith had already written of “private affluence and public squalor”. Societies seemed less willing to pay for social goods even though much richer than earlier. Resistance to higher taxes became politically attractive, even though many opponents benefitted from the services that taxes enabled the public sector to provide.

Meanwhile, the “footloose phase of capitalism” has led to a race to the bottom in terms of tax rates, in particular in corporate tax rates (Trump’s budget of 2017) and tax holidays.

Nevertheless, when financial sector exuberance led to the global financial crisis (GFC) in 2008, there was in the short term a consensus to rely on the public sector for bail outs and fiscal stimulus to avoid catastrophe. (“The public pays for the losses, the private takes the gains”.)

The GFC led to a debt overhang equivalent to that generated earlier through wars, but without similar social cohesion. The perpetrators went unpunished.

Public loss

So, there is further public squalor as the state withdraws from the provision of public services. There is increasing inequality—both pre-tax/expenditure redistribution and post-redistribution. But the dots are not joined up, and there remains little political appetite for tax rises. “Populists” are led down alternative, much darker, routes.

There seems a fatalistic belief that the situation will deteriorate further: AI and robotization are a threat to jobs; there will be declining employment, jobs only for the super-educated, particularly those who can program the machines until the machines can program themselves. Plans are afoot to accommodate and institutionalize this through subsistence-level universal credit schemes.

This might be acceptable if society enjoyed a satisfactory level of goods and services—but this is clearly not the case. Amongst the key areas one can identify: carers, nurses, education, eco-construction, housing.

The tax structure in the western world is no longer fit for purpose; it has not kept up with changes in society; it is not compatible with societal aspirations. It leads to continued cuts in the essential social fabric on the grounds that “we cannot afford it” – particularly as levels of debt in most countries are high.

A new tax paradigm

• Just as the introduction of the income tax heralded a new paradigm in tax structure, so we need a new paradigm for the present age, where immense wealth is generated by a handful of mega-online companies and their owners, each of whom owns and earns more than many nation states, and where it is proving extraordinarily hard to break up the natural monopolies that most of them enjoy. The returns to the owners of the big digital corporates are, in line with their self-monopolizing, massively higher than those that accrued to owners even in the gilded age or other periods of peak inequality.

Possible measures to create a tax system for the present age:

• Use competition authorities to safeguard against any subsidies to online corporates (the competition between US cities to attract the new Amazon HQ is a case in point).
• Establish tax neutrality between online and high-street activities, by ensuring that a customer pays the same sales tax on a product, whether it is bought online or in a store. Added to this should be the rates/property taxes that the online corporate avoids through not being in the local jurisdiction.
• Work to eliminate tax haven loopholes, both through international bodies such as the OECD, and through putting taxation on a place-of-sale rather than a headquarters basis.
• Restore progressivity to the personal income tax system, towards levels of the 1950s – in particular for anyone earning over, say $500 million in a year, a rate of 90%; above $50 million 80%. This too can be done more easily if there is international cooperation, but countries could link taxable income to the jurisdiction where that income is generated.
• Ensure progressivity in corporate taxation so that those corporates earning more than $1 billion pay at least 80% on earnings above that level. Again, measures need to be taken to prevent companies avoiding such taxes by heading offshore: sourcing tax by sales, and careful watching of transfer pricing and of pricing of centrally-charged services, would be necessary accompaniments.

In conclusion, increasing unemployment and reduced public services are not inevitable. They result from deference to the mega corporations of the digital age, which in turn results in maintaining a tax system no longer fit for purpose, and thus to a public sector increasingly starved of resources. Some remedial measures are easy to introduce; others, such as achieving sound levels of taxation on the digital plutocrats, may be less so. The rewards, however, are enormous, and the costs of failure potentially catastrophic.