Biden’s tax reform: entering an era of economic multilateralism

Joe Biden presenting the American Rescue Plan

Weronika Czubek

Weronika Czubek is a first-year BSc Economics student at UCL. Driven by her interest in economic policy-making, she sees herself continuing with her academic path by pursuing a Masters in Economics or International Development.

14th June 2021

AFP via Getty

Not long after the 2021 Presidential Inauguration, the Biden administration unveiled an extensive fiscal stimulus package (also known as the American Rescue Plan), with a spending plan worth an astounding amount of $1.9 trillion in total. The initiative, deemed as bold and highly ambitious but not unachievable, aims at lifting the U.S. out of the depths of its devastating COVID-19 economic crisis by creating millions of new jobs, mitigating climate change, and propelling racial equity. Funding for the project is expected to be generated from a somewhat controversial rise in the rate of US corporate profit tax from 21% to 28%. This comes in reverse to the 2017 tax cuts implemented by the Trump administration, albeit the newly proposed rate will not reach its pre-tax cut level of 35%. The change, nevertheless, is of crucial importance to Biden’s infrastructure plan as it is predicted to generate an estimated $2 trillion of government revenue over the next 15 years.


The end of tax h(e)aven for Americans?


The picture-perfect vision of America thriving as a neoliberal economy with free-market trade, deregulation, and minimum government intervention is considered long gone. Years of advocacy for private entrepreneurship over collective action in the name of sustained economic growth have led us to the world as we know it – one characterized by economic volatility, deepening inequality, and a looming threat of climate crisis. 


Another failure of the system presents itself as the “race to the bottom”, whereby further tax decreases and laws promoting deregulation of the business environment (perhaps counterintuitively) perpetuate the prevailing problem of tax avoidance. By exploiting favourable tax regimes, stemming from discrepancies in inter-country tax laws, multinational companies – especially big tech – can easily move their digital assets across borders, thus benefiting from even higher after-tax profits. ActionAid International (an anti-poverty NGO) estimated that each year, the largest tech giants avoid paying $2.8bn tax in developing countries.  Rising public anger directed at tax avoidance fairly reflects the 20% upsurge in gross profit being shifted into tax havens that has been taking place over the past three decades.


This is where Biden’s reform comes into place. Firstly, it would force the aforementioned multinational enterprises (MNEs) to pay taxes based on where their revenues are earned, rather than their physical presence in a given country, thus disabling these companies from seeking tax loopholes and using them to their own advantage. Secondly, fostered by an agreement between Organisation for Economic Co-operation and Development (OECD) member states, the plan would establish a global minimum tax rate which further impedes large firms from benefiting from tax-free havens. Adopting a uniform tax policy is therefore essential and mostly unavoidable if countries seek to actively counteract the widespread tax avoidance practices.


Paving the way for multilateralism


135 OECD countries have been the recipients of Biden’s tax policy proposal, a starting point for multilateral negotiations regarding the establishment of a fairer, more stable international tax system that would benefit all parties. On one hand, the agreement would enable its signatories to gain higher profits, owing to multinationals that operate in their jurisdictions but provide little tax revenue due to a leaner tax policy than the one in their base country. Moreover, raising the global minimum tax floor would diminish the likelihood of the US being undercut by other countries, therefore enhancing the effectiveness of its corporate tax increase. 


The short end of the stick


Nonetheless, the negotiations may prove to be more challenging than expected, especially taking into consideration the interests of EU’s lower-tax members, such as Ireland, where the corporate tax rate stands at 12.5%. A corporation tax rate of 21% (almost double the Irish rate) proposed by the US president would take away the incentive of many American firms running their business operations in Ireland, thus lessening its current advantage. Should an agreement be reached, there is no doubt that certain countries would profit from the reform to a much greater extent than others. 


In addition, despite the lack of legislative power of US tech giants and major brands like Nike or Starbucks, their profound influence over the global market should not be underestimated. Biden will most certainly be faced with a backlash from major business leaders. An article from the Guardian reports that, in response to a survey, 98% of CEOs believe that the corporate tax raise will have a severe negative impact on their global competitive advantage, with approximately three-fourths of them expressing concerns about the hiring prospects of their new potential employees. 


Reshaping economic environment


The one question that requires urgent consideration – will the gains of Biden’s tax policy reforms outweigh the losses endured by the third parties – is already the subject of a heated debate among heads of state, economists and CEOs. Notwithstanding the inescapable losses to some (as is always the case with any shift in global economic power), few can successfully argue in defence of the present state of affairs, shaped by years of Trump’s unilateralism and the objective of economic expansion at any cost. Conversely, the corporate tax increase may just be the inevitable building block necessary for lessening public distrust of major global companies and financing Biden’s bold infrastructure plan. Furthermore, since the new tax plan could have a pronounced effect on the distribution of post-tax incomes,  the proposal carries an undeniable potential for creating a more level playing field for low-income earners in America.

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