Home / Columns / “Joe Biden has the power to impose his tax policy on the rest of the world”
Pierre Boyer
π Economy

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

by Pierre Boyer, Professor of Economics at École polytechnique – CREST (IP Paris)
“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?

    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.

    Carte des États-Unis d'Amérique

    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

    1https://​www​.econ​o​mist​.com/​u​n​i​t​e​d​-​s​t​a​t​e​s​/​2​0​2​1​/​0​4​/​1​0​/​a​m​e​r​i​c​a​-​i​n​c​-​i​s​-​o​n​-​t​h​e​-​h​o​o​k​-​f​o​r​-​j​o​e​-​b​i​d​e​n​s​-​s​p​l​u​r​g​e​-​o​n​-​i​n​f​r​a​s​t​r​u​cture
    2https://​tax​foun​da​tion​.org/​d​i​g​i​t​a​l​-​t​a​x​-​e​u​r​o​p​e​-​2020/
    3https://​www​.ccomptes​.fr/​f​r​/​p​u​b​l​i​c​a​t​i​o​n​s​/​a​d​a​p​t​e​r​-​l​a​-​f​i​s​c​a​l​i​t​e​-​d​e​s​-​e​n​t​r​e​p​r​i​s​e​s​-​u​n​e​-​e​c​o​n​o​m​i​e​-​m​o​n​d​i​a​l​e​-​n​u​m​e​risee
    4https://​www​.cae​-eco​.fr/​F​i​s​c​a​l​i​t​e​-​i​n​t​e​r​n​a​t​i​o​n​a​l​e​-​d​e​s​-​e​n​t​r​e​p​r​i​s​e​s​-​q​u​e​l​l​e​s​-​r​e​f​o​r​m​e​s​-​p​o​u​r​-​q​u​e​l​s​-​e​ffets
    5https://​www​.ipp​.eu/​p​u​b​l​i​c​a​t​i​o​n​/​m​a​r​s​2​0​1​9​-​h​e​t​e​r​o​g​e​n​e​i​t​e​-​d​e​s​-​t​a​u​x​-​d​i​m​p​o​s​i​t​i​o​n​-​i​m​p​l​i​c​i​t​e​s​-​d​e​s​-​p​r​o​f​i​t​s​-​e​n​-​f​r​a​n​c​e​-​c​o​n​s​t​a​t​s​-​e​t​-​f​a​c​t​e​u​r​s​-​e​x​p​l​i​c​atifs

    Contributors

    Pierre Boyer
    Pierre Boyer
    Professor of Economics at École polytechnique – CREST (IP Paris)

    Pierre Boyer is Research Fellow at the Centre for Economic Policy Research (CEPR), Deputy director of the Institut des Politiques Publiques (IPP), the Programme Director of the research group “Democracy and Institutions” at the IPP in Paris, and a Fellow at the CESifo. His research interests include public economics, political economy, European integration, and banking regulation. His research has been published in the American Economic Review, the Quarterly Journal of Economics, the American Economic Journal: Economic Policy, the Journal of Financial Intermediation and the Journal of Public Economics.