“Joe Biden has the power to impose his tax policy on the rest of the world”

The Biden admin­is­tra­tion plans to raise fed­er­al cor­por­ate tax from 21% to 28%. Com­bined with state taxes, this would bring the effect­ive rate to 32.4%, while the OECD aver­age is 22.9%. Why such a reform, and what impact will it have?

The meas­ure announced by Joe Biden goes against the dynam­ic in place since the 1980s. This increase in rates should serve to coun­ter­bal­ance the decline that took place under Trump’s man­date, and to free up funds to fin­ance infra­struc­ture¹. It is surely also inten­ded to earn favour from some Democrats.

I also think that the US is under pres­sure regard­ing the tax­a­tion of the GAFAM. Trump threatened to sur­tax export of products com­ing from coun­tries that had planned to intro­duce digit­al taxes to dis­suade them² – one which was France. Biden does not seem to want to fol­low this line: he is aware that the Amer­ic­an web giants must pay their taxes and seems open to negotiations.

How­ever, the con­sequences of this tax rate increase are dif­fi­cult to pre­dict. Everything depends on wheth­er the stat­utory rates (those announced in the legis­lat­ive text) will be the effect­ive rates (those actu­ally paid by com­pan­ies, after tax deduc­tions). There may also be a sig­ni­fic­ant lag between the announce­ment of this legis­la­tion and when it will ulti­mately be passed. The cur­rent admin­is­tra­tion does not have a large major­ity, and it will have to nego­ti­ate. Some will surely be disappointed!

The United States enjoys a lead­er­ship pos­i­tion on all tax reg­u­la­tion, and Joe Biden’s announce­ment sends a strong sig­nal, which will surely have con­sequences on the nego­ti­ations under­way at the OECD. On tax issues, we may see a response sim­il­ar to the “Brus­sels effect”, which leads com­pan­ies to com­ply with European reg­u­la­tions, which are often more demand­ing, and then to impose them every­where to avoid hav­ing to pro­duce products that are dif­fer­en­ti­ated accord­ing to geo­graph­ic­al zones. The new US tax stand­ard may thus become the default standard.

Sev­er­al coun­tries such as the United States, Ger­many and France want to stand­ard­ise cor­por­ate taxes for OECD coun­tries for reas­ons of com­pet­it­ive fair­ness. How will coun­tries like Ire­land (with a 12.5% rate) or Hun­gary (with a 9% rate) react?

The 2008 crisis has made these tax com­pet­i­tion prac­tices vis­ible, of which digit­al com­pan­ies are the major bene­fi­ciar­ies even if they are not the only ones³. In the ongo­ing OECD nego­ti­ations, Biden – and his Treas­ury Sec­ret­ary Janet Yel­let – are try­ing to change the terms of the debate by impos­ing a high­er rate than pre­vi­ously planned. But there seem to be sev­er­al ques­tions: Can a min­im­um rate be imposed? How do you avoid cap­tur­ing the tax base of oth­er countries?

The only real ques­tion is: to what extent is the United States will­ing to impose this min­im­um rate? 

Nev­er­the­less, the only real ques­tion is: to what extent is the United States will­ing to impose this min­im­um rate? Because if it wants to, its eco­nom­ic power can enable it to force oth­er states to adopt this meas­ure. The best example of this is the Swiss bank­ing secrecy, which every­one per­ceived as untouch­able, but which the Obama admin­is­tra­tion suc­ceeded in unlock­ing in 2010 by threat­en­ing Swiss banks with a sur­tax on their oper­a­tions on Amer­ic­an soil. It is very dif­fi­cult for com­pan­ies, and even more so for banks, to do without their activ­it­ies in the United States, and so they agreed to reveal the inform­a­tion on Amer­ic­an cit­izens hold­ing accounts in Switzer­land exceed­ing $50,000. Such a power grab could hap­pen again with the tax standards.

A tax agree­ment at the OECD would also aim to make tax havens dis­ap­pear. But why would Panama or the Bahamas change their rules?

There is the announce­ment, and then there is the way it is enforced. The intro­duc­tion of a min­im­um rate would only be worth­while if tax dump­ing could be elim­in­ated, and the Biden admin­is­tra­tion seems very aware of this problem.

This can be done by tax­ing the dif­fer­ence between the U.S. tax rate and what the com­pany pays in the tax haven. Since the rate is lower in the Bahamas, for example, the com­pany would simply have to pay the dif­fer­ence to the United States⁴. 

And if this mech­an­ism is imple­men­ted to the end, without list­ing coun­tries where it would not be applied, then it would become abso­lutely impossible for tax havens to con­tin­ue to com­pete on tax grounds.

Won’t this tax increase pen­al­ise the busi­ness invest­ment needed for eco­nom­ic recovery?

This var­ies greatly depend­ing on the type of meas­ures applied. This tax increase can be accom­pan­ied by tax cred­its which, for example, sup­port research and invest­ment. It is the set of eco­nom­ic policies put in place that will gov­ern the effect­ive rate (the rate actu­ally paid by companies). 

For French com­pan­ies, we tend to ima­gine that effect­ive tax rates are lower only for large com­pan­ies, but we have con­duc­ted a study at the Insti­tute of Pub­lic Policy⁵ that con­tra­dicts this idea. At all size levels, there are firms that pay very high, or lower, cor­por­ate taxes. This depends in par­tic­u­lar, but not only, on the sec­tors in which they oper­ate. So, this tax inequal­ity is every­where, and if the reform aims to cor­rect it and bring about a con­ver­gence of rates, it can be bene­fi­cial to the eco­nomy as a whole.

More broadly, the Biden admin­is­tra­tion is tak­ing with one hand and redis­trib­ut­ing with the oth­er (a $1.9 tril­lion bail­out and a $2.29 tril­lion jobs plan). Is this the return of a more man­aged eco­nomy and the retreat from the mar­ket solu­tions favoured since the early 1980s? 

The health crisis has encour­aged a sud­den return to inter­ven­tion­ism but does not seem to have redefined the role of the state in the eco­nomy. If 2008 is any guide, then state involve­ment in the eco­nomy was sig­ni­fic­ant, but mostly ad hoc. Very soon after recap­it­al­ising the banks, gov­ern­ments sold their assets. How­ever, the return to aus­ter­ity was far too hasty, and ex-post ana­lyses have shown that it was very costly.

The chal­lenge for gov­ern­ments today is to find the right moment to end their expan­sion­ary policies – to avoid over­heat­ing and bubbles, without pen­al­iz­ing the recov­ery. It is a ques­tion of trade-off, which is in any case as polit­ic­al as it is economic. 

Interview by Clément Boulle and Juliette Parmentier