In the eyes of history, Janet Yellen is set to be seen as a truly transformational figure if her proposal for a global minimum multinational tax rate gains acceptance.
Economic history has a way of shifting in life cycles. The Bretton Woods era and the Marshall Plan set the stage for the post-Second World War economic order. The launch of the World Trade Organisation and the Brady Plan for debt shaped the post-Cold War Golden Era of globalisation.
Ms Yellen’s push for a baseline on corporate taxation comes as policymakers seek to lay the foundations for a post-Covid-19 and increasingly carbon-neutral economy.
While a global standard for corporate taxes may sound dry, it in fact represents a step change from capitalism as we know it. Taken in a context of rising progressive pressure for reparations for colonial economic exploitation, the move lays the groundwork for something quite dramatic.
The intellectual sands within the economic profession have rapidly shifted. Many think Ms Yellen’s idea is far too modest. Some propose new variations on transaction taxes, such as a levy on all share price values or on digital activity.
Resistance should be straightforward for Ms Yellen to overcome. The private economy is benefiting from the second mass mobilisation of resources to stabilise and recapitalise the economy in less than 11 years.
In her previous role as a leader of the Federal Reserve, Ms Yellen was instrumental in the quantitative easing programmes that brought recovery from the Great Financial crisis. Now that she has been appointed Secretary of the Treasury in the Biden administration, she has lost no time in proposing a dramatic tilt in the system.
With governments taking more money from corporations, the scope for fiscal spending to play a bigger role in the economy is bound to expand.
The new US government has proposed that its own corporate tax should rise to 28 per cent and that foreign income for those companies should be taxed. With a substantial pandemic-related stimulus package already in train and a $2.3 trillion infrastructure proposal on the table, the Biden administration needs to fund at least part of its new deal.
When the finance ministers of the International Monetary Fund and World Bank met recently, Washington proposed a global plan for uniform rates. The kicker is that countries would be able to apply the taxes if earnings in other states were taxed at a lower rate to make up the difference. That would effectively reduce incentives for US corporates to shift profits to low-tax nations that have prioritised development over government revenues.
Some developed countries have already responded to the pandemic by reversing the trend towards lowering corporation taxes, such as the UK. The 37 members of the Organisation for Economic Co-operation and Development are looking to seal a deal on a digital services tax and corporate taxes by the middle of this year.
International agreement is necessary because the existing cross-border taxation treaties only allow countries to impose taxes on businesses with a permanent presence in their borders. This allows plenty of booking of revenues or profits offshore, effectively eliminating the taxman.
European countries have been embroiled in a tariff war with the US over their attempts to impose Digital Sales Taxes on companies. Washington believes these discriminate against the mighty US presence in the sector.
Abandoning this approach would not have any great cost for the Europeans, as the digital taxes imposed so far have not raised much revenue for governments. In a report last week, the Centre for European Reform said “a deal broadly around the current US proposal is a realistic possibility and is in the EU’s interest”.
The direction of travel is moving to a burden-sharing ethos by taking from privately held wealth to the governments.
A study by Emmanuel Saez and Gabriel Zucman, who work at University of California in Berkeley, calls on companies to pay 0.2 per cent of stock market valuation in taxes. "As the G20 stock market capitalisation is around $90tn, the tax would raise approximately $180 billion each year," their report said. That is, of course, puny compared to the $2tn infrastructure proposal Mr Biden is pushing in the US alone.
Thomas Piketty, the leftist French economist, asks why not also look at making a historic set of payments between colonial exploiters and the developed countries. This healing gesture would chime with those who have protested outside institutions and businesses with ties to slavery and other global ills.
The godfather of "social tax justice" sees much greater challenges ahead. He sees the benefits of tax reforms accruing in developed countries and cutting out the developing nations. Using a case study of Haiti, Mr Piketty wants Paris to hand over 300 per cent of that country’s GDP, or $30bn. Such a sum is one per cent of French public debt but would make a massive difference to the stricken Caribbean country’s outlook.
He argues that inequality of wealth and poverty must be addressed on an international basis and within countries.
Government spending is a means of intervening against these trends. By internationalising the issue, Washington would give new respectability to a much greater rebalancing of the global wealth scales.
Damien McElroy is the London bureau chief at The National
