Joe Biden wants to shut down the world’s corporate tax havens.

‘It’s gonna be a big fucking deal. ” ‘

I asked Gabriel Zucman, the influential economist at the University of California at Berkeley, to brief the Biden Government’s plan to transform the way the world taxes large multinational corporations, which have so far flown a bit under the radar. compared to other parts of the country. agenda. The White House has promised to pay its $ 2 trillion US rescue plan by raising taxes on herons like Apple and Google, while ending the international “race to the bottom” – the decades-long spiral of beggar-u-neighbor competition . in which countries have put forward business investment by lowering their corporate rates lower and lower. The government’s strategy involves persuading other developed countries to adopt a global minimum tax for corporations, while reforming the United States’ own tax code to wipe out the benefits companies currently have to discuss their earnings in tax havens. .

In other words, the administration promises to fund a historically ambitious plan for infrastructure and economic modernization, in part by solving one of the most difficult problems created by global capitalism. As his use of everyone’s favorite Bidenism would suggest, Zucman is pretty obsessed with the whole idea. “Implementing an international agreement would undermine the development model of tax havens,” he wrote to me. A high global minimum tax could change the face of globalization. ‘

Zucman’s response is not exactly a surprise, as the administration is essentially singing its own tune on this issue. The 34-year-old is known for his work on inequality in wealth and his hard efforts to track down how businesses and rich people use tax havens to their advantage. Biden’s plan relies heavily on proposals promoted by Zucman in collaboration with fellow Berkeley Emmanuel Saez. and former UCLA economist Kimberly Clausing, a prominent legal figure on tax issues who is currently with the Treasury Department, where she is one of the key figures leading the government’s pressure. This is another example of how Bidenworld adopted staff and policies from the progressive frontier somewhat unexpectedly – and then sold them as a simple matter of fairness.

Now about that race to the bottom. Between 1985 and 2020, the average tax rate for companies in the largest economies dropped from 49 percent to about 23 percent as countries tried to encourage more investment at home and make themselves more attractive to large multinational corporations looking for lighter levies. Tax havens such as Bermuda, the Cayman Islands, Ireland, the Netherlands and Switzerland have led this downward rush by lowering their corporate tariffs to the bone or by offering massive incentives that allowed companies to lower their tax bills. By using creative accounting techniques with names such as ‘a double Irish with a Dutch sandwich’, businesses were able to book their profits in these jurisdictions, without necessarily doing very actual business, which often maintains a modest office footprint, or less. This situation was excellent for corporate shareholders, but less so for governments struggling to generate revenue.

When the Trump administration lowered the highest U.S. rate from 35 percent to 21 percent in 2017, it introduced some measures aimed at discouraging tax havens. They included a somewhat weak minimum tax on overseas profits, known as the GILTI, which was designed to eventually maximize about 13 percent, and was mostly aimed at profits from intellectual property. The results so far have not been impressive. In 2019, U.S. multinational corporations still recorded 61 percent of their profits after tax in the seven largest tax havens, according to an article by Clausing, which was essentially unchanged from the past year. She predicted that the number would drop a bit in the future as companies adapt to the new rules, but not dramatically.

The Biden approach is much more aggressive and uses America’s enormous economic swing to force global change.

Part of the effort is diplomacy. There have been ongoing discussions for years at the Organization for Economic Co-operation and Development – the club of developed countries – on the introduction of a global minimum tax on corporate profits. Officials were hoping to conclude the negotiations this year, and recently Finance Minister Janet Yellen called on the group to set a minimum rate of 21 percent. Previously, the talks focused on a much lower number, perhaps 12.5 per cent (not coincidentally, this is Ireland’s corporate rate). The Biden team is appealing to America’s counterparts to grow big in the deal.

If other countries hesitate, the White House has essentially indicated that it will use America’s own tax code to move them together. The plan proposed by the president will increase America’s tax rate on local corporate profits to 28 percent. At the same time, our companies will be required to pay at least a 21 percent rate on their overseas earnings if foreign and U.S. taxes are combined. So if a tech giant pays a 12.5 percent tax on its Irish profits, it will have to pay another 8.5 percent to the US. If he paid a 17 percent tax in Singapore, he would still owe 4 percent to Uncle Sam.

It is important that companies calculate the minimum tax on profits and pay for each country in which they do business. This country-by-country approach, co-sponsored by Clausing and Zucman, is intended to erase the incentive for U.S. multinational corporations to discuss any profits in tax havens, as they would earn at least 21 percent on money that earned anywhere in the world.

At the same time, the Biden plan will penalize companies based in ultra-low-tax countries by denying major deductions to their U.S. operations. (The provision got the acronym Marvelesque SHIELD). By promising to wage its own one-sided war against tax havens, the US hopes to enlist the help of other rich countries to take part in the effort to solve the collective action problem that has plunged the race to the bottom.

One reason to be optimistic about this plan is that the United States does not need every country in the world to cooperate with its idea of ​​doing a global minimum tax. As Zucman and Clausing noted, only ten countries are home to companies that generate about 80 percent of the profits from multinational corporations. If only a handful would follow the lead of the US, it would make a big difference.

But pulling it off can be politically challenging, both diplomatically and in Congress. It is not clear whether other rich countries will come on board with Yellen’s call to a minimum of 21 percent; European officials have generally said positive things about the Biden government’s position, but not much about the number itself. “It’s hard to see the OECD going along with what the US has proposed,” Alan Auerbach, a Berkeley tax economist known for his more moderate streak, told me. “I consider this the first step in negotiations with other countries.” And if Biden cannot get other countries to go along, some Congress could get nervous because they are harming U.S. businesses by comparing their global taxes with their foreign competitors. The Biden plan contains some strong provisions aimed at stopping corporate inversions, where companies use mergers to deport tax purposes abroad. But the old fears of deterring investment may return. Senate Democrats have tabled a corporate tax plan that includes some of Biden’s ideas, but is less stringent in some respects.

And the struggle will only get more intense. The Chamber of Commerce has already begun to feast on Biden’s plan – “This plan would make America less competitive, which would mean less economic growth in the US” – and corporate executives have begun to grumble to the press, but not always on record not. As one put it to Politico: “work will go if we do these things.”

That kind of logic, of course, is how we got the race to the bottom in the first place. The world seems in arrears for a new approach.