In the summer of 2016, Ireland’s Central Statistical Office reported something astonishing: the small country’s gross domestic product had grown 26 percent the year before (a figure that would later be revised upwards) . It would have been an incredible achievement if the growth had actually happened.
But it was not, as government officials acknowledged from the start. Rather, it was an illusion created by corporate tax games. At the time, I nicknamed it “pixie economy”, a currency that got stuck; luckily the Irish have a sense of humor on their own.
What really happened? Ireland is a tax haven, with a very low corporate income tax rate. This prompts multinational companies to set up Irish subsidiaries and then use creative accounting to ensure that a large portion of their reported worldwide profits go to those subsidiaries.
In 2015, a few large companies appear to have become even more aggressive in their profit shifting, which led to an increase in the value of output that they reported doing in Ireland – an increase that was nothing real.
To understand the great reform of corporate taxation proposed by the Biden administration, it is necessary to know that everything revolves around the sprites.
One way to think of the huge corporate tax cut Republicans imposed in 2017 is that its underlying premise was that leprechauns were real. In other words, the architects of the tax cut insisted that companies had moved their operations overseas to avoid US taxes, and that cutting those taxes would bring millions of jobs back to the country.
This does not happen. In fact, the tax cut had no visible effect on business investment, possibly because it tackled a false problem. American companies had not moved jobs overseas to avoid taxes; they had just avoided taxes.
The real impact – or indeed the lack of it – of income taxes on business decisions becomes evident if you look at where companies report their profits overseas.
If they really reacted to taxes by making big foreign investments that killed American jobs, one would expect a lot of their profits to come from big production centers like Germany or China. Instead, more than half of the profits that U.S. companies make on overseas investments come from small tax havens, including places like Bermuda and the Cayman Islands where they have no real business at all. business.
By the way, it’s not just an American problem. The International Monetary Fund estimates that around 40% of foreign direct investment in the world – mostly cross-border business investment, as opposed to “portfolio” purchases of stocks and bonds – are “shadow” investments, accounting fictions designed to avoid taxes. This is why, on paper, Luxembourg, with only 600,000 inhabitants, receives more foreign investment than the United States.
So the real problem with U.S. corporate tax policy isn’t the loss of jobs, it’s the loss of income – and Trump’s tax cut has made that problem worse.
Essentially, the Biden administration’s Made in America tax plan is an effort to recoup lost revenue both as a result of the profit shifting and as a result of the Trump tax cut, in order to help to finance large-scale public investments.
As the name of the plan suggests, administration experts – at this point it’s hard to find a tax expert who does not have joined Biden’s team – I believe there are aspects of the US tax code that created an incentive to move jobs overseas. But they see the problem as the consequence of the details of the tax code rather than the overall tax burden.
And while they believe tax reform can improve incentives to invest in America, the main focus of the plan – even things like proposing a 21% minimum tax rate on overseas profits. , stressed by Janet Yellen, the Secretary of the Treasury – isn’t about these incentives as much as it is about raising revenue from the corporate income tax, which falls mainly on the wealthy and foreigners, and lies at a historically low level as a percentage of GDP
What about warnings from business groups that increasing corporate taxes would have dire economic consequences? Well, they would say that, wouldn’t they? And if the tax increase had such a negative effect, why did the tax cut not produce visible positive results?
So the corporate tax plan seems like a very good idea. Partly that’s because President Biden, unlike his predecessor, hired people who know what they’re talking about. And it also marks a welcome break from the ideology that says the only way to help American workers is indirect action: cut taxes on corporations and the wealthy in the hope that they will deliver somehow. another a pot of gold at the end of the war. Rainbow.
What Biden’s team seems to have concluded, on the contrary, is that the way to create jobs is to create jobs, mostly through public investment, rather than hunting unicorns and leprechauns. To the (partial) extent that direct job creation must be financed by new taxes, the new taxes should be imposed on those who can afford to pay.
Refreshing, isn’t it?
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