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.
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