“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? 

Copié !

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