/ 27 May 2021

Khaya Sithole: Tax fails; a few get richer, more get poor

Graphic Tl Khaya Rich Twitter
(John McCann/M&G)

Once a year, the world gets a sobering snapshot of the great divide between the 1% of people who make up the super-rich and the rest of humanity. The publication of The Sunday Times Rich List, which is a guide to the wealthiest people in the United Kingdom, is the moment. This year, the report, published this past weekend, took on a greater sense of importance because of the glaring contradictions it showed. 

Over the past year, as the world navigated its way through a pandemic that decimated the high street in as much as it elevated online businesses and traditional footfall-reliant businesses collapsed, the contrasting fortunes in societies and businesses became more glaring. 

Businesses in the habit of selling goods and services requiring physical presence suddenly found themselves condemned to the sidelines as economic bystanders. 

Hotels and airlines — for so long the conduits that injected life into the intersectional value chains of travel, entertainment and business — died a slow death at the height of the pandemic. 

On the other side of the spectrum, those running businesses that became the new conduit for getting us through the pandemic — online services — prospered. 

In 2020, the list of pandemic winners included names such as Amazon, Zoom and Shopify, which became the places we all went to when we were not allowed to go anywhere. 

This year the number of pound billionaires in the UK rose from 147 to 171. Such an increase in the number of individuals with billionaire status — in just one country — reflects the ongoing tensions regarding wealth generation and wealth distribution around the world. 

In recent years, as machines and robots have displaced people in the world of work, accelerating unemployment and economic marginalisation, questions about tax systems and how they can be adapted have loomed large. 

For every robot that replaces two people in a production value chain, two taxpayers fall out of the system and — in the case of countries such as South Africa — two breadwinners fall off the economic bandwagon. The resultant gap in the tax coffers — of a state no longer able to extract employment-related taxes and the increased use of and reliance on public services by the newly unemployed — is of great consequence for policymakers. 

Recommendations relating to “taxing” the robots to compensate society for such losses have so far failed to yield any form of consensus. Companies that adopt automation stand a better chance of increasing their profitability because robots do not attract the usual labour-related costs, which include salaries and benefits such as pensions. 

In the world of the billionaires reflected in the Rich List, questions of the fairness of tax systems intersect with questions relating to the reasonableness of generating billion-pound fortunes. The idea of supertaxes on such fortunes remains an attractive proposition for politicians and policymakers. 

The obvious limitation with this thinking is that in the world of global trade and globalised fortunes, far too many loopholes exist in tax systems around the world. 

If the imposition of tax is seen as punitive by those that would have to pay them, the unintended consequence is that fortune-makers decide to park their fortunes elsewhere. Luckily for them — and tragically for society — some countries use low tax rates as an incentive to attract the wealthy, which creates a conduit for channelling the wealth away from the country where the economic activity takes place.

A few years ago, when the tax affairs of companies such as Facebook, Amazon and Google came to light and showed a surprisingly low tax contribution in the UK, there was an uproar about the unfairness of it all. The public pressure resulted in the mooted plan for a digital services tax aimed primarily at the business models of Amazon, Facebook and Google. 

This tax is to be levied at 2% on the income generated in the UK, regardless of the domicile of the transacting company. Such a tax will seek to compensate people for the practice of arbitrage, where companies house their operational headquarters in low-tax jurisdictions such as Ireland and Luxembourg and then generate the bulk of their income in other countries. 

Where location is not the driver of activity because the business is automated, governments have to be more creative in establishing a tax system that is responsive to the business models of today rather than the old-school approach to taxing citizens and businesses using location as the primary variable. 

The feasibility of applying and implementing the digital tax model is a delicate foray into the politics of trade. Under the Trump administration, defined by its obsession with American protectionism, the response was that any digital tax imposed on United States-founded companies would attract retaliatory tariffs and levies. 

This approach had little to do with the underlying problem — adequately compensating society for economic costs associated with business activity — and everything concerning the obsession with economic superiority favoured by the Trump administration. 

The approach of the Biden administration already indicates a departure from such a hard-line approach. One of President Joe Biden’s key commitments is to equalise global trade through a global minimum tax rate. The idea has gained traction. 

Such a rate, to apply in all jurisdictions where significant international trade happens, would target the foreign profits made by such companies. 

In other words, each company would have to distinguish between profits made in its “local” market and profits made elsewhere, and the global tax rate would apply on the foreign profits. 

This means countries may still set local corporate tax rates that are lower than the tax on foreign profits. Whether that serves as an incentive for companies to increase local activities remains to be seen. 

The immediate reaction expected from affected companies — and already confirmed by Amazon — is that the burden of equalisation will be passed on to the consumer. In response to the proposal, Amazon said its intention is to simply add the 2% charge to its fee structure for all companies using its platforms to generate business. 

Amazon itself — which also does the business its clients do — will be gaining an advantage as all other companies using its platform will pay the additional 2% charge, but Amazon itself will not levy the charge on products it sells on its own platform. 

This discrepancy in the administration of a levy seeking to achieve economic equalisation is the unintended consequence of policy shift. For a company that is as powerful as Amazon, any policy shift that increases its pre-existing advantage against smaller competitors appears to be an exercise in futility that achieves perverse outcomes.

This practice of passing on the burden to end-users is not unique to Amazon. In the world where the great divide between the wealthy and the rest has increased, the pursuit of equitable solutions must continue.

In the absence of a different way of achieving equality between the providers of capital and society at large; the income and wealth gaps will continue to widen. If such contradictions cannot be fixed at a time when the world is facing its most universal healthcare crisis in modern times, it may be time to accept that capitalism in its current form can never be fixed.