Assuming you’re not a tax evader, at first the answer seems deceptively simple. Workers pay income tax and NIC on their earnings. That much is clear. People may also pay capital gains tax on some gains they make. Do taxes always “do what they say on the can”? Sometimes but not always.
Consider inheritance tax. Despite the name, it’s not a tax on what you inherit, it’s a tax on some gifts and bequests. Furthermore, it’s not paid by the person who receives the gift or bequest. Instead, it’s generally paid by the lifetime donor or the executors of the deceased person. We’ll come back to that later.
Surely most taxes do what they say, don’t they? After all, the “sin taxes” - tobacco duty, alcohol duty and, depending on your environmental persuasion, fuel duty - are paid by the user at the point of sale. And companies pay corporation tax, don’t they? Well yes, and no. A moment’s reflection makes it clear that the greater the company’s corporation tax bill, the smaller the pool of post-tax profits available to pay dividends to shareholders. It could therefore be argued that all taxes are ultimately paid by individuals.
Looked at in this way, it’s easy to understand why many companies are under pressure to maximise the amount they pay as dividends to shareholders. These companies may try very hard to manage their tax bills in the same way they would manage any other business liability.
Returning to inheritance tax, the same applies: the tax paid by the executors directly reduces the amount available to the beneficiaries.
VAT illustrates the same principle: at every stage in the provision of VATable goods or services, the input tax incurred by a business in the supply chain is deducted from the output tax charge to the customer on the sale. But no matter how long or how short the supply chain is, it usually ends with a retail consumer who has to pay the full amount of VAT.
So where does all this leave us?
Clearly, there’s a lot of truth in the view that, directly or indirectly, most taxes end up being paid by individuals whether on their homes, through the workplace or pensions, on investments or simply as consumers.
In our tech-driven, globalised, coronavirus-infected and warming world, this has several important effects.
New taxes on tax avoiders may not work as expected
Transferring profits from high-tax to low-tax jurisdictions is normal practice for many global groups. The OECD (Organisation for Economic Cooperation and Development) calls this base-erosion and profit-shifting (BEPS) and is working hard to reach international agreement on tax measures to stop this. With no immediate prospect of success, countries such as the UK are introducing their own temporary taxes until global OECD measures come into force. While campaigners believed that the UK’s digital services tax would punish companies such as Amazon, the “consumer pays” principle has resulted in Amazon passing the levy on to its own marketplace traders, who must in turn decide whether to see their margins cut or pass the charge on to their own retail customers.
Taxes are used to create boundaries between international trading blocs
Sovereign nations are not closed systems. Goods and services cross international boundaries. Countries use complex tariffs, taxes and duties to protect their own businesses against unfair competition from businesses based in other countries with different regulatory and tax regimes and therefore perhaps lower post-tax production costs. As Brexit requires the UK to establish new trade agreements with its partners around the world, negotiators are doing deals with tax implications for UK consumers for years to come.
Tackling climate change brings its own tax challenges
The EU has made strenuous efforts to reduce carbon dioxide (CO2) emissions through a system of carbon allowances. These impose a cost on power stations and industry for each tonne of CO2 released into the atmosphere. As the permits take the form of tradeable securities, the cost can vary significantly – between €15 and €30 per tonne during 2020 alone. While the aim is to force energy and other sectors to invest in cleaner technology, EU businesses may be undercut by imports from countries which impose lower environmental standards on their manufacturers. In another example of taxes being used to create boundaries, the EU is considering imposing a carbon border tax to create a level playing field for businesses in member states.
Pulling these threads together, three conclusions emerge. First, most taxes are suffered – directly or indirectly – by individuals. Second, fundamental shifts in patterns of global taxation are unlikely to change that to any great degree. Third, while individuals may favour higher taxes on global corporations which are believed to indulge in unacceptable tax avoidance, those extra taxes are ultimately borne by consumers through higher prices.