The week of June 28, 2021: the global tax deal slouches on, inflation, infrastructure, and much, much more.
I clearly underestimated the extent to which American threats and the collective greed of a number of other large governments could combine so effectively to bring Biden’s plan for an international tax cartel perilously close to fruition.
More than 100 countries on Thursday issued a statement in support of international tax framework that includes a global minimum corporate tax, a top priority for the Biden administration.
The statement from 130 countries participating in the negotiations at the Organization for Economic Cooperation and the Development (OECD) and the Group of 20 (G-20) calls for a global minimum tax rate for corporations of at least 15 percent, the rate proposed by U.S. officials . . .
A wide array of countries signed onto the OECD statement, including China and India, which had been thought to have been potential obstacles . . .
Beijing, I suspect, will have taken the view that it is easier to sign something in order to dodge the potential reprisals (mirrored, reported the New York Times, in the new framework) that were a key, uh, selling point of the Biden plan and then, as is the case with China’s climate “commitments,” decide how seriously to take it later. (Spoiler: not very.)
The deal is not done yet.
The Hill:
The OECD statement said that a detailed implementation plan would be finalized in October. It could take some time after a plan is finalized for an agreement to be implemented, because countries will need to update their laws and possibly also tax treaties.
But, at the risk of adding another failed prediction to those that have gone before, my best guess is that, to use that word again, something will go through. That something will contain more loopholes than was first contemplated (plenty of carve-outs have been needed to get the deal this far, including the exclusion of various sectors, including regulated financial services, mining and oil and gas, from provisions designed to ensure that the largest multinationals pay more taxes in some of the countries in which they do business) and there may well be more to come. Some countries may yet still drop out, but unless U.S. lawmakers do what they should do — which is throw any deal out — Biden is going to get (much of) his way.
The Hill:
Secretary Janet Yellen has said that an agreement on a global minimum tax could help end a race for countries to lower their corporate tax rates and could ensure that American companies are competitive if the U.S. raises its corporate tax rate.
The idea that there has been a “race to the bottom” makes for good propaganda but is hopelessly out-of-date. To quote (once again) from the Tax Foundation on this topic:
Contrary to . . . claims about a “race to the bottom” on corporate tax rates, reductions in corporate rates have plateaued for more than a decade. When the U.S. cut the federal statutory corporate rate from 35 percent to 21 percent in 2017, it was not leading a race to the bottom but moving to the average. The U.S. combined (state and federal) tax rate on corporate income is now 25.77 percent. The average corporate rate among countries in the OECD (excluding the U.S.) is 23.4 percent.
What’s really driving this is the administration’s determination to (as The Hill relates) “ensure that American companies are competitive if the U.S. raises its corporate tax rate.” Whether the deal that emerges will “ensure” that the competitiveness of American companies remains intact after the (domestic) tax hikes to come is doubtful, but it may limit some of the damage and, as the saying goes, that’s good enough for government work.
In a report for the New York Times, Liz Alderman, Jim Tankersley, and Eshe Nelson:
If enacted, [the deal] would essentially stop countries from slashing their tax rates to lure businesses, a move that the United States and other high-tax jurisdictions say has deprived them of funding for crucial investments like infrastructure and education.
To repeat my earlier comment, we’ll see how well that works, but it’s good to see reporters for the Times admit that the U.S. is (as it is) a “high-tax jurisdiction.” Progress!
The Times reports that there have been a few holdouts:
Smaller nations that have long benefited from being tax havens are holding out for better terms, raising the prospect of a clash with bigger countries.
Conspicuously absent from the accord is Ireland, which has resisted a 15 percent minimum tax as it is reluctant to lose its status as a major tax haven in Europe. Its low corporate tax rate of 12.5 percent helped fuel the so-called Celtic Tiger economy for years, attracting Apple, Google, Pfizer and a who’s who of U.S. multinationals that have been able to avoid paying taxes in other jurisdictions and brought billions in tax income to Ireland’s coffers.
The Irish government has said that a deal would need to allow small countries to continue to compete with large ones to make up for the loss of any tax advantage. Finance Minister Paschal Donohoe said in a statement that Ireland would remain engaged in the negotiations and would seek a “comprehensive, sustainable and equitable agreement.”
Breezy Caribbean island tax havens also declined to sign on, including Barbados, Saint Vincent and the Grenadines. Hungary and Estonia, which are keen to preserve their ultralow tax regimes, joined the dissenters, as did Kenya, Nigeria, Peru and Sri Lanka.
Hungary does indeed have a low corporate tax rate (9 percent), but the Estonian case is not quite so straightforward. Despite that earlier, brief sign of progress, “ultralow,” at least so far as Estonia is concerned, says more about the bias of the New York Times than fiscal reality.
For [2020] the seventh year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax system. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.
It should be noted that Estonia’s territorial tax system is only applicable where EU/EEA and Swiss income is concerned, although separate tax treaties with other countries may limit double taxation: For those who want to get into more detail on Estonian tax (you know you do), whether corporate or individual, you can find it here. Among the highlights, no death or gift taxes, VAT at 20 percent, and, if you were worried about the fact a company pays no tax on retained earnings (a measure designed to encourage corporate investment), it’s worth noting that, if a shareholder sells stock in a company, the implicit value of those retained earnings will (or ought to) be reflected in the share price and, to the extent that the shareholder makes a profit on that sale, capital gains would be taxable (at 20 percent).
I am going into this detail about Estonia’s tax regime because it is significant that a small country that, for obvious historical reasons does not want to stand out too far from the western consensus, does not want to join the Biden cartel. Having designed a rational, reasonable, competitive tax system (that the U.S. would do well to follow — yes, under certain conditions that should include a VAT, or something like it), it is understandable that it doesn’t want to mess with any aspect of it in order to make it easier for Joe Biden to pursue his domestic political agenda.
After centuries of foreign occupation, Estonia also has a keen awareness of the importance of preserving its sovereignty. And, as no Americans should need reminding, particularly this weekend, control over taxation is a central part of any nation’s sovereignty.
The question of sovereignty came up in an article for CapX by the British euroskeptic politician, David Campbell-Bannerman, who, understandably enough, highlighted the inconsistency between the U.K. going through Brexit in order to “take back control” only to enter into a treaty that would limit the U.K’s ability to determine its own tax rates. Campbell-Bannerman’s ire was directed at “Pillar Two” of the proposed new arrangements, which fixes that minimum 15 percent corporate-tax rate for companies with revenues of more than €750 million in revenues. Among other concerns, he wondered how it was reconcilable with various aspects of Britain’s tax system.
The Government should be particularly wary of the potential for Pillar 2 to interfere with its own domestic policies. Will it hamstring the low tax rates promised for UK Freeports to compete with low-cost regimes? Will it restrain post-Brexit tax freedoms to encourage private sector investment? Will it harm innovation in pharma through the ‘patent box’ initiative, encouraged by lower corporation tax rates? Does it conflict with our new ‘Super Deduction’ which allows immediate deduction of 130% of expenditure on plant and machinery investments, as firms could be taxed elsewhere to meet the global minimum?
He also asked whether the measure was “anti-competitive; effectively creating a tax cartel.” Well yes.
That the Biden administration is pushing a measure that both denies the virtues of competition and undermines the sovereignty not only of other nations, but of the U.S. itself, is a sad reflection of where this country stands today.
Of course, a future administration could always set in motion the process of withdrawing from any finalized deal, but as I noted the other day:
It’s true that any treaty is almost certain to include an exit mechanism for a signatory that changes its mind, but that mechanism will be likely to be time-consuming and onerous, and unlikely to provide any protection against retaliation by those countries that remain committed to the treaty. Under such circumstances, it would have been better either not to have signed the treaty in the first place, or, even better still, to have blocked it.
The background to the agreement that has been reached so far is not only one of U.S. bullying (or neo-imperialism as it might have been more widely labeled had the Left not been broadly sympathetic to its aims). The deal also incorporates a trade-off, which can be found in its first “Pillar.”
“Pillar One” essentially applies to large multinationals, other than in the sectors mentioned above, and where “large” (for now) is defined as meaning companies with revenues above €20 billion and a profit margin in excess of 10 percent. As the Tax Foundation explains, for “those companies, a portion of their profits would be taxed in jurisdictions where they have sales; between 20 percent and 30 percent of profits above a 10 percent margin may be taxed.” Many of these companies will be American, which will effectively mean that the American taxpayer will helping to pay for the construction of a tax cartel designed to make it easier to sustain higher taxes in the U.S. Enticing? Not much.
The foundations of this pillar rest primarily on European resentment over the success of the U.S. tech giants, a success that (amazingly!) they had been unable to emulate. Adding injury to insult was the feeling that these companies were not paying enough tax on profits that, one way or another, were attributable to business in European countries, even if they had no or limited physical presence there. In retaliation, a growing number of countries began to introduce a “digital-service tax,” a tax on revenues rather than income, a tax that (amazingly!) fell heaviest on U.S. companies. An appropriate response from Washington would have been to introduce selective tariffs on exports from the countries concerned, and the U.S. was indeed proceeding down that route. Pillar One is designed to avoid such a confrontation. The new tax-sharing agreement will apply to more than just tech companies, and, in return, the digital-services taxes will be scrapped, but their spirit will live on in a proviso that, as the FT reports, “special rules will ensure Amazon is included in the new OECD framework even though the company’s profit margin falls below the threshold.” Oh.
And that seems like a suitably squalid note to conclude a summary of where this thoroughly squalid deal now stands.
The Capital Record
We released the latest of a series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 24th episode David takes a trip down memory lane and goes through the highlights of appearances since Capital Record launched, recapping the big takeaways thus far and what we are all wrestling with on the side of defending free enterprise.
And the Capital Matters week that was . . .
Inflation
The automobile, the great modern luxury, lives in an economic ecosystem of multiple miniature markets. There’s a close relationship between the new car market and the used car market, which includes the retail and wholesale sub-categories. All three interact with and influence each other to determine pricing patterns. Retail tends to follow new, and wholesale tends to follow retail.
Under the “used” umbrella, wholesale saw the most dramatic price increases in the last year. Total used vehicle sales were up 3 percent year-over-year in May, and wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) increased 4.65 percent month-over-month in May, according to Manheim Used Vehicle Value data.
While the price increases seem foreboding, economists and other experts told National Review that the underlying causes suggest inflation will be a fleeting, rather than long-term, challenge . . .
The Global Tax Deal
Joshua Rauh and Aharon Friedman:
The U.S. Treasury is effectively ganging up with international bureaucrats and like-minded foreign governments to bully countries into increasing their taxes to a minimum rate of at least 15 percent. The administration apparently believes this would prevent its planned tax increases from causing an exodus of American companies and jobs.
But this theory doesn’t even meet its own premises, which are conceptually flawed and will in the end hurt consumers and workers . . .
Just so we are clear: This agreement is entirely meaningless within the American framework of government, and it should be regarded as such. It is not a treaty. It is not a law. It is not a “commitment” that the United States has any obligation whatsoever to honor. In no way has the “U.S.” “backed the deal.” Under our Constitution, Congress sets the tax rates, and it may do so without reference to the president, the secretary of the Treasury, or the government of any other country. If, in years to come, a subsequent Congress decides that the corporate tax rate should be lower than 15 percent, it will be entirely within its authority to follow through on that decision without a second thought. If it does, we should not expect to be told that the U.S. is “breaking international law” or “disrespecting our foreign partners” or breaking a “de facto legal accord” or “retreating from an agreement.” It will not be.
As the head of the executive branch, Joe Biden has no power to bind the United States to anything in this area, nor to tie the hands of future American legislatures, and, whatever he may say aloud, he has not done so here. If, in years to come, other nations are disappointed by a change in American policy, it will not be the fault of the legislators who orchestrated that change, but of Joe Biden and his predecessor, both of whom have worked to make promises on behalf of their country that they have no right whatsoever to have made.
Antitrust
When it comes to government expansion, ask, and ye shall receive. Conservatives in Congress have been arguing for greater regulation of Big Tech companies, specifically asking that antitrust laws be enforced more aggressively. They may not be entirely happy with what they get. Lina Khan, a critic of Big Tech, assumed leadership of the Federal Trade Commission this month in what was widely considered a victory for antitrust legislation. Unfortunately, Khan is now using her bureaucratic position to aggressively move beyond the “consumer harm” standard to create sweeping economic change . . .
Powerful voices within the conservative movement have argued that large, multinational tech companies have become too powerful and too political. Billion-dollar corporations such as Google, Amazon, and Facebook are increasingly important aspects of our lives. States are getting involved in bringing antitrust lawsuits against major tech corporations. For that reason, the question of what to do with Silicon Valley is important to nearly every American.
Clare Morell is the lead analyst at the Ethics and Public Policy Center’s Big Tech Project. Before joining EPPC, she served as an adviser to then-attorney general William Barr, specifically working on the intersection between Big Tech and law enforcement. In an interview with National Review’s Sean-Michael Pigeon, Morell brings up the issue of antitrust, the real harms presented by tech companies, and the possibilities (and dangers) of bipartisanship on this issue . . .
The Ethics & Public Policy Center’s Big Tech Symposium was held a few days ago. Many of the distinguished writers and academics there called the meeting “timely,” for good reason. The debate over tech conglomerates and their potentially outsized influence on our political landscape has intensified dramatically in the past few years. The complexity of the issues discussed may have left one wondering whether there was enough clarity to move forward. If there is one point of agreement, though, it’s that we need the courts to crack down on Big Tech’s overreaches. That should be a cause for both hope and worry . . .
Infrastructure
There have been a lot of charges, counter-charges, and self-inflicted injuries from Thursday’s White House meeting on a bipartisan “infrastructure” deal, and the White House’s Saturday press release disclaiming Joe Biden’s remarks. Nobody who participated in the charade comes out of this mess looking particularly good, but the “who knew what and when” controversy obscures the fundamental reality that the proposed deal is not a compromise at all . . .
The House of Representatives will soon vote on the “Investing in a New Vision for the Environment and Surface Transportation in America (INVEST in America) Act” — a piece of legislation that would spend half a trillion dollars over five years on surface transportation. Despite the proclamation in its title, the bill is a bad investment for America. In addition to massively increasing public spending, it would also disproportionately privilege little-used transit programs compared with roads that people do use and hurt America’s successful freight rail industry. While surface-transportation funding needs to be renewed, the INVEST in America Act is not the proper way to do it . . .
Industrial Policy
Industrial policy looks great on paper. The government simply has to identify an industry that needs support, prop it up with subsidies, loans, tax breaks, or protect it from foreign competition with tariffs and other trade regulations, and we will be on our way to fixing many of our problems.
Some have learned from history, and simply want for more funding for R&D rather than a top-down central plan. Others have learned nothing. Either way, whatever form it takes, industrial-policy plans have to go through Congress, and then be implemented by various government agencies.
And that’s when things rarely go according to plan . . .
Currency Boards
The Banque du Liban is now trying to protect its remaining $15 billion in foreign reserves by stopping the subsidy scheme — an arrangement that is facilitated by Lebanon’s multiple-exchange-rate system — despite being under tremendous political pressure to allow it to continue. Even if a government is formed, nothing would stop Hezbollah and its allies from influencing the appointment of a new central-bank governor. This would only facilitate Hezbollah’s access to the reserves as well as to Lebanon’s $17 billion of gold reserves, and would do nothing to stop the collapse of the Lebanese pound and raging hyperinflation. Indeed, the continuous printing of Lebanese pounds would only further pauperize the population, weaken the LAF, and push Lebanon closer to a failed-state status. This, of course, would enhance Iran’s arc of influence in the eastern Mediterranean.
What can the U.S. and France do to avert such a catastrophe? They could use the threat of sanctions against powerful, corrupt individual politicians to urge the Lebanese Parliament to enact a new banking law that would neutralize the Banque du Liban and create a currency board, as proposed by the Johns Hopkins Lebanon Working Group. With a currency board, the Lebanese pound would be backed 100 percent by an anchor currency, such as the U.S. dollar, and be freely convertible into its anchor currency at an absolutely fixed rate of exchange. Currency boards have proven successful in other distressed countries, where they have stopped hyperinflations and established stability. Indeed, a currency board in Lebanon is just what the doctor ordered . . .
Unemployment
While a nationwide natural experiment in ending the provision of supplemental unemployment benefits may excite the academic class with no shortage of future research papers to pursue, the consequences for the American worker are real and immediate. Negative duration dependence — the decreasing likelihood of finding future employment as the amount of time an individual is jobless increases — and the lessons of the scarring effects of long-term unemployment in the aftermath of the Great Recession mean time is of the essence. Every month, and indeed every week, counts in ending the costly and damaging incentives that keep Americans from returning to the workforce. Meanwhile, businesses suffer financial losses as they contend with worker shortages. While the White House continues to blame childcare concerns as the principal cause of the worker shortage — despite the research to the contrary — millions of Americans face dimming prospects of future employment and economic self-sufficiency.
A new Colorado law has recently caught the attention of national media. As businesses create more remote jobs than ever before, the “Equal Pay for Equal Work Act” has persuaded many of them to exclude Colorado residents from those opportunities.
That’s certainly a blow for a state that has gone from the nation’s lowest unemployment rate to one of the highest in a few short years, but the national media are missing the real story on the ground in the Centennial State.
The new law is only one in a long list of recent policies wreaking havoc on Colorado’s economy under the leadership of the state’s Democratic governor, Jared Polis . . .
China
[Tesla] has been targeted by Chinese authorities in a campaign of retaliation for U.S. concerns about the handling of U.S. users’ data in the hands of Chinese companies such as TikTok. In April, Chinese authorities unveiled new rules under the country’s Data Security Law aimed in part at patching up a perceived data-security threat posed by the U.S. electric-vehicle manufacturer. Tesla later announced that it would open a data center in Shanghai to comply. China also banned the use of Tesla vehicles by Chinese-government officials and military personnel.
In response, Tesla has started to launch legal challenges against Chinese netizens it accuses of spreading false information about its brand. [Musk’s] complimentary comments about China’s accomplishments — which expand on a similarly fawning Chinese-television interview he gave in May — seem to make up one additional attempt at defending Tesla’s position in the country.
Morality and the Market
The passages of poetry presented below are taken from Taliessin Through Logres. It’s a long narrative poem set in King Arthur’s Camelot and written by the brilliant but little-known Charles Williams, an English writer of the last century who derives what small portion of fame he still has from his friendship with C. S. Lewis.
Admittedly, a long and often impenetrable work of modernist Arthurian poetry is not a place where most would look for insights into the nature of money and the market, but I have still yet to come across a more profound passage of writing about the moral dimensions of economic activity than the few stanzas from Taliessin Through Logres that are quoted below . . .
Finally, we produced the Capital Note, our “daily” (well, Tuesday–Friday, anyway). Topics covered included: Facebook beats regulators in court, House Republicans release a tech-regulation framework, commodities traders cash out, Ben Thompson explains the difficult of defining markets, home prices, Starlink, Arizona’s flatter taxes, antitrust, Robinhood files to go public, Bezos prepares to step down as Amazon CEO, a public-relations firm with ties to the Clinton family unravels, the dangerous illusion of cheap money, cutting dividends is not the answer, home prices and inflation, warning signs from the Skew index, and fungi play the markets.
Friday’s Capital Note will be the last, at least for a while. Capital Matters has grown more rapidly than we had anticipated — which is a good thing — and so, to free up more time both to manage our content and to allow Daniel and I to write more “standalone” material, the Capital Note will be retired for now. The Capital Letter will continue but will appear on a Friday rather than over the weekend.
To sign up for the Capital Letter, follow this link.
Jesus Christ is King
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