I Support Biden's Global Minimum Tax, But I'm Not, Like...ENGORGED Over It
Progressive principles and thirst for corporate taxes don't totally match
As a Democrat, I’m supposed to have a major hard-on for corporate taxes. I’m supposed to pump my fists when Elizabeth Warren rolls out her latest “Wall Street is bad!” talking point. I’m supposed to be really into the Panama Papers, and treat Gabriel Zucman like he’s the goddamned Dalai Lama, and pretend to be furious at Amazon while still buying stuff from them three to five times a day.
The truth is: I’m just not feeling it. I do support Biden’s effort to raise corporate taxes, including his effort to create a global minimum tax. Because, hey: revenue's gotta come from somewhere. Corporate taxes are popular, and they're not my least favorite tax. But this corporate tax push just doesn’t inflate my dingy, because I know there are more progressive and efficient ways to achieve the same ends.
Let me quickly run through Biden’s plan…
Trump lowered the corporate tax rate on domestic profits from 35 percent -- which was the highest nominal rate in the OECD1 -- to 21 percent. Biden wants to raise it to 28 percent, which would put us in the high-middle of the pack (of nominal rates -- our actual rate is much lower). That’s the easy part; the tricky part comes from profits earned abroad. Exactly how we tax companies’ foreign earnings is one of the few topics too boring even for this blog, but the current system is that we kinda tax foreign profits (and the word “kinda” is doing a ton of work here) at 10.5 percent. Biden wants to raise that to 21 percent and take some weight out of the “kinda”. The idea is to collect some money from companies who shift intellectual property to a P.O. Box in Ireland (corporate tax rate of 12.5 percent) and then tell the IRS: “Faith and Begorrah, m’lad -- we’re a mostly Irish company, doncha know?”
Obviously, that’s a tax dodge, but building a system to prevent it is tricky. The first complication comes from the fact that the U.S. is one of very few countries that taxes foreign profits. No other member of the G7 does it, and only six of 34 OECD countries do. This puts American companies at a disadvantage; if, for example, European-based Airbus can run a tax-dodge that U.S.-based Boeing can’t, then we’ve put Boeing at a competitive disadvantage. So, while we do want to collect that 21 percent because we want revenue, we also kind of don’t want to collect it because it would hurt an American company. Except that...we also kind of do want to collect it, because if we collect 28 percent at home and close to nothing abroad, that creates an incentive to shift profits overseas. You can see how this gets complicated quickly. And that’s without uncorking the volcano of complexity that I buried under the word “kinda” in the previous paragraph.
A global minimum tax would kinda (there's that word again!) solve the competitiveness problem. There would still be a gap between the domestic rate and the foreign rate, and there’s a crucial adjustment to how profits are taxed that I won’t punish you with, but the bottom line is that an effective global minimum rate would raise some revenue and reduce the incentive for American companies to move things abroad.
But creating a regime that works won’t be easy. Biden initially wanted countries to establish a rate of at least 21 percent to match his proposed rate on foreign profits, but we’ve already had to lower our ask to 15 percent. Low-tax countries like Ireland want to keep their taxes where they are, and, look, I’ve said it before and I’ll say it again: We gave up on anti-Irish prejudice in this country way too early.2 Yet again, we find ourselves under the thumb of the Green Menace. But it’s not just Ireland -- countries like Bulgaria, the Cayman Islands, and Barbados would also like to keep things the way they are. Of course, we’ll probably get most of what we want; after all, pretty much the entire point of 19th century U.S. foreign policy was to make sure we can kick around Barbados. So that hundred years of leverage-building is about to pay off. And oh what a proud moment in American diplomacy it will be: We’ll strong-arm a small island nation into changing a sovereign policy choice so that we can collect a small3 amount of tax revenue. We truly are the shining city on the hill.
A global minimum tax might work a bit for a while. But it will be hard to keep together; it’ll be like herding cats if cats had a financial incentive to be even bigger assholes. Countries will always think “we could attract investment by lowering taxes” -- that’s a major reason why corporate tax rates have been going down around the world for decades. It’s worth noting that we can't even solve this problem in our own country; cities and states constantly bid against each other to lure companies. And as far as the general ability of international agreements to compel behavior goes...look, we can’t even get Japan and Norway to stop killing whales. We’ve asked politely -- they won’t stop! They just love killing whales. They can’t possibly need the resources -- I think they just hate whales.
There’s definitely a better way to do this. Instead of playing a perpetual game of whack-a-mole that we’ll probably lose in the long run, we should replace corporate taxes with highly progressive taxes on all income, including capital gains, dividends, and pass-through income. It would be more progressive and more efficient. Because -- and I’m committing lefty blasphemy here -- corporate taxes are a real B-minus tax.
Who pays corporate taxes? I’m sure most people would say “someone else”. That’s why they’re popular. The idea of taxes landing on an abstract entity without a face -- or if it has a face it’s a punchable one like Elon Musk’s -- is appealing. Better yet: You can imagine the tax bill hitting a company you hate, like Verizon, or that parking garage that charged you for a full day because you lost your ticket even though the fucking guy saw you come in. To the extent that any flesh-and-blood person pays corporate taxes, it’s those fat-cat CEOs, or bond traders -- any type of person who would pop up in an ‘80s movie with slicked-back hair and a suit with suspenders. That’s the perception, anyway.
In reality, no-one really knows who pays corporate taxes. It’s one of the great philosophical debates in economics; stoners debate whether the Berenstain Bears are Jewish, economists debate who really pays corporate taxes. The stoners will probably reach a consensus first. The Congressional Budget Office and a few credible think tanks use the assumption that the corporate tax burden falls 80 percent on capital and shareholders and 20 percent on labor, but that’s just an estimate. It’s easy to find papers that calculate a much larger share for labor or consumers. And of course, some shareholders (not a ton) are middle-class. My personal views, in case you care, are that the CBO is probably close to right and that the Berenstain Bears are ethnically Jewish but non-practicing.
So, corporate taxes are only sorta progressive. They also cost money to prepare and are difficult to collect. They create competitive imbalance because some companies are more able to take advantage of the tax code than others; Best Buy can hire an army of accountants and lobbyists to shrink their tax bill to a miniscule size, but the little electronics shop on my street that, God love ‘em, still does VCR repair, cannot.
Corporate taxes are unwieldy and imprecise. Using corporate taxes to tax the rich is like using a grenade launcher to hunt rabbits. Will we kill that rabbit? Yes, almost certainly. Will some birds and chipmunks also get blown to bits? Without a doubt. How many birds and chipmunks will we send to bird and chipmunk hell? It’s hard to say, but we can’t completely rule out the possibility of a bird-and-chipmunk Jonestown.
Since that’s the case: Can I humbly suggest that we set a rabbit trap instead?
The “rabbit trap” in this metaphor is progressive income taxes. And my definition of “income”, includes capital gains, dividends, and pass-through income, i.e. the things that corporate profits become when they accrue to individuals. By targeting financial gain at the individual level instead of the corporate level, we can impose taxes on the people we’re trying to tax instead of -- back to the metaphor -- launching some grenades into the hedge and hoping for the best. A shift towards income taxes would negate the need for a global tax agreement that could be toppled at any time by the Irish-Bermudan-Bulgarian Axis of Evil. And income taxes are easier to collect because people are less mobile than corporations; Apple will move a patent to Bulgaria without batting an eye, but an income tax hike is not likely to make Tim Cook pack up and move to Plovdiv.
The changes I’m suggesting4 won’t happen any time soon for one simple reason: politics. Corporate taxes are popular partly because they’re a hidden cost. No person knows how much he or she “pays” in corporate taxes, so nobody really feels the bite. To his credit, Biden’s plan includes raising capital gains and dividend taxes for people who make more than $1 million. I’m a bit disappointed that he’s not proposing a “mark to market” tax -- last boring thing I’ll throw at you, I swear -- which is a system where capital gains are taxed annually instead of just once when you sell. A mark-to-market system wasn’t practical back when a stock was a piece of paper with a picture of an eagle and a bunch of illegible cursive. But of course, stocks these days aren’t paper. Stocks these days are abstract blips on Robinhood traded by half-stoned 20 year-olds who get investment tips from Reddit boards about Borderlands 3. We can tax those blips annually, and we should.
We’ll probably raise corporate taxes, and when we do, I’ll respond with a resounding: “K”. But that’s not really Biden’s fault; he’s limited by politics. It’s also not Biden’s fault that I’m in my 40s now and not easily excited -- if Christ returned to Earth and gave me a deep tissue massage, I’d probably call the experience “pretty good”. I just hope our tax system will evolve to be more predictable and precise so that we don’t have to pin our hopes on a fragile global system that might not survive the malevolent scheming of our eternal enemy: The Emerald Hun.
That’s the nominal rate, i.e. the rate before deductions and other considerations. The effective rate -- the amount companies actually pay -- is much lower. In 2018, when the nominal rate was 21 percent, the effective rate was 11.3 percent.
Kidding.
The White House estimates that reducing incentives to move assets abroad would net $533 billion in revenue over the next decade. That’s around one percent of expected revenue over that time. And that $533 billion comes from all efforts to reduce profit-shifting; the revenue gained by the global minimum tax, specifically, should be substantially lower.
I don’t want to act like I came up with this on my own -- here’s a paper from the Tax Policy Center that proposes basically what I’m suggesting.