Biden’s war on tax havens will impact worldwide
America is going to war on tax havens. Joe Biden wants big corporations to pay more tax, not just at home in the US but around the world.
This week, his Secretary of the Treasury, Janet Yellen, called on the OECD to implement a minimum global corporate tax rate.
This is a remarkable shift in US policy which could end decades of international tax competition and make it easier for governments to raise tax revenue.
It also sends a powerful signal — if Biden’s big spending wasn’t enough — that the era of low-tax, supply-side, trickle-down economics is over.
I don’t know if it was ironic, symbolic or just poignant, but last week, as Yellen made that big call, Robert A. Mundell — the economist dubbed the father of Reaganomics — passed away.
Nobel Prize winning Mundell — according to The New York Times — provided the “intellectual grounding for lowering the top tax rates on the rich”.
His advocates “rallied under the banner of supply-side economics and won over many rightleaning politicians and policymakers in the United States, Britain and elsewhere while drawing the scorn of more progressive economists”.
Mundell’s work — realised in Reaganomics, Thatcherism and Rogernomics — has dominated fiscal policy settings for most of my lifetime.
It became centrist thinking, setting taxation parameters for governments on the left and right.
To see it swept away so dramatically is quite shocking.
Of course, the groundwork for that change has been bubbling away for some time.
The OECD has been attempting to rein in the tax status of giant tech companies for several years.
But with no US support, progress was limited to put it mildly. Now the US is not only on board, it’s driving the change.
“I’m not trying to punish anybody,” Biden said last week in defence of his tax plans.
“But damn it, maybe it’s because I come from a middle-class neighbourhood, I’m sick and tired of ordinary people being fleeced.”
This is some of strongest anticorporate language I’ve ever heard from a US President.
Biden has embraced the mantle of the new Franklin D. Roosevelt — champion of the people, purveyor of a New Deal.
He has seized the opportunity for big, bold transformative change and he is moving at pace.
Or, to look at it another way, he is proving to be as radical as his preelection critics feared.
His rhetoric plays to notions of equity.
Of course, the fact the US government is taking on eyewatering new mountains of debt and needs revenue fast is kind of relevant.
Biden wants to be able to raise corporate tax without being held hostage by US companies threatening to take their business, and jobs, abroad.
The US already has support for its tax plan from Germany, France and the International Monetary Fund.
The UK — where the Tory government is also planning corporate tax hikes — is sympathetic and likely to get on board.
Given the pandemic has put so many nations so much deeper in debt, this is all understandable.
Covid has famously accelerated the pace of technological change, super-charging tech company valuations.
Now it seems also to be accelerating the pace of political change.
What’s more surprising than the support of international governments is that these moves have not rattled Wall Street.
Shares carried on hitting record highs last week.
The plan has also garnered support from the likes of Amazon’s Jeff Bezos, the world’s richest man.
Big business in the US appears to be rolling with the liberal punches in a way it certainly did not do for Barack Obama after the GFC. There’s self-interest here, too. The tech giants are acutely aware that right now the Biden administration has the power and mandate to make life much worse than just a higher tax rate.
Biden recently raised eyebrows when he put Lina Khan — an outspoken anti-trust lawyer — on his Federal Trade Commission.
The US state literally has the power to break the tech giants up.
Biden isn’t shy of reminding corporate America that the real power still sits with Uncle Sam. All this change is exciting. And it’s hard to argue with addressing social inequality or that multi-nationals can’t afford to pay more to support infrastructure investment.
They’ve had a good run. Research by KPMG shows that since 1980 the average corporate tax rate in the G7 countries has fallen from 50 per cent per cent to 28 per cent.
But that doesn’t mean Robert Mundell should be forgotten or that we should not be wary of a return to the inefficient excesses of the 1970s.
While we can debate the extent to which wealth really trickled down, there are plenty of socialist experiments which prove that poverty does trickle up.
Over-taxing private enterprise still risks stifling growth.
And while the world’s richest 1 per cent are obvious and easy targets, it would be foolish not to acknowledge the massive wealth that corporate profits have created in the form of middle-class retirement savings over the past few decades.
Tax also plays a crucial role in incentivising and dis-incentivising behaviour.
We should, I hope, continue to encourage things like hard work and innovation, even as we reassess our attitudes to taxing wealth and corporate profit.
Maybe it’s because I come from a middleclass neighbourhood, I’m sick and tired of ordinary people being fleeced. US President Joe Biden