Biden’s global tax plan is not without its challenges

This is a guest post by Richard Murphy, a visiting professor of accounting at Sheffield University Management School and a long-standing member of the campaign group Tax Justice, arguing that Biden’s tax plan has its challenges but is still an unexpectedly robust attempt to curtail International corporate tax arbitrage.

President Biden’s new ‘Made in America Tax Plan’ represents a significant change in US thinking on corporation tax issues. As a result it opens up the possibility of significant new international tax reform. If delivered this plan could be as significant for the clamp down on tax abuse as Obama’s agreement to move against tax havens in 2009.

The US’s change of heart reflects three realities. The first is the declining US corporate tax take despite an increasing share of profits within US GDP. It is estimated that 20 per cent of the US tax burden has shifted from corporations to individuals since 1945. It is an unsustainable trend, and arguably one of the reasons for the decline in the economic wellbeing of the American middle class.

Second is the continuing use of tax havens by US corporations. Approximately 60 per cent of their income is now recorded in such places, and is therefore largely out of reach of the US Internal Revenue Service as a consequence.

Third, due to massive underinvestment in the IRS the rate of audit of US corporations has fallen by at least 50 per cent in the last decade. The chance that US tax cheats might get away with their deceptions has increased considerably.

Biden’s aim is threefold. He wants revenue. He wants to redress the imbalance in the tax take, effectively making the US tax system more progressive as a result. And, on the way, he wants to cut the current tax subsidies for corporate investment and replace them with direct subsidies for specific actions that his government thinks more appropriate. In essence, he wants to reclaim control of his tax base.

In doing so he will have been advised that is this is not possible unless you seek international cooperation to control the tax rate. It’s a simple fact that in open economies there is a trade off on this issue. Traditionally the US has abandoned the base, knowing full well that as a result its notional tax rate was meaningless, and its tax take largely beyond its control.

Country-by-country

But now Biden, like many OECD and EU countries, has realised that abandoning tax sovereignty over the tax rate might give him what he wants, which is control of his tax rate and yield. He can have what he wants, but only via international tax cooperation to beat the race to the bottom that has been willingly led by low and no tax jurisdictions, leading accountants and lawyers and their multinational corporate clients. This is what his tax plan suggests will happen.

As outlined the plan is simple. First, it applies only to the very largest companies. Second, a form of minimum tax in proportion to declared accounting profits will apply in the US, ending the game of corporate tax relief domestically. Third, that minimum rate will be extended internationally in cooperation with the OECD, which has been calling for it for some time. The US has suggested a 21 per cent minimum corporation tax rate to the OECD.

Importantly, it suggests it will apply this on a country-by-country basis, and not on an overall tax basis. There will be no offset of high tax rates paid in Japan on low ones in Bermuda any more. And, fourth, investment reforms are promised, but not detailed.

In the process it appears that Biden has gone a step beyond what was expected. This is because he’s specifically applying the minimum tax rate through an upgrading and doubling of the rate on a Trump initiative that sought to tax the profits that tech companies located in tax havens (the so-called GILTI scheme). In this way he is effectively targeting some of the most egregious tax abuse by well-known tech concerns that have caused many EU countries to consider the introduction of digital taxes. I am not sure many people saw that coming.

But will this work? Yes, if it changes the mood music, it surely will. And yes, if it also makes clear that locating profits in Ireland, Luxembourg, Jersey and Cayman simply will not work.

But no, it won’t work if anything less than a comprehensive measure of country-by-country profit and of tax paid is adopted. And no, it won’t work again, if it lets large numbers of mid-tier companies off the hook. The OECD is not going to be happy with that. Nor will the tax havens that this threatens give up without a fight, or the creation of new loopholes, if Biden gives them half a chance.

But the major change is behavioural. The signal to other governments is to stop the race to the bottom. The signal to companies and advisers is that the game is up. The message to the IRS is ‘go get them’. The message to other countries should be to replicate this.

If the outcome is to reinforce the message that tax will be paid, come what may, then this plan works, not just for Biden but the world. If that’s the case then the detail may not matter so much. The behavioural consequences will be the plan’s legacy.