Politicians have been doing what they like to do best for the past year, spending and borrowing. Not without reason: Covid has caused distress that any responsible government would feel called upon to relieve. Yes, some of the $5.3 trillion (£3.9 trillion) handed out went to the unneedy, including families who had not lost a day’s pay, and teachers who simply refused to teach. But speed was vital, so pinpointing the destination of every hundred billion had to give way to what Dr Martin Luther King once called “the fierce urgency of now”.
Now comes the hard part: finding what are known in Washington as “payfors” — known by ordinary people as “taxes” — to cover the $2.25 trillion cost of what President Biden chooses to call infrastructure. Start with this: his plan has less to do with repairing roads and bridges than with the Green New Deal he has signed up for and expanding the welfare state. Economists at the Lindsey Group reckon that at most 15 per cent of the $2.25 trillion will go to roads, bridges and other items that ordinary folk consider infrastructure.
“When I use a word,” Humpty Dumpty said, “it means just what I choose it to mean — neither more nor less.” The president’s critics argue that Humpty Dumpty’s words accurately describe a man who labels as “infrastructure spending” $400 billion for expanding access to long-term care, $213 billion for affordable housing, and $25 billion for historically black colleges. The president’s defenders dismiss these cavillers as failing to understand that such items are “social infrastructure” — a term that means anything Joe Biden and his team choose it to mean.
The Obama-Biden administration lowered the corporate tax rate from 35 per cent to 28 per cent, President Trump cut it further to 21 per cent, and Biden proposes to return it to 28 per cent — at the high end of the range of America’s competitors. He would also add a variety of taxes on companies with international operations, with the aim of increasing their incentive to bring jobs and taxable incomes home.
Biden faces two big problems: getting stuff built, and getting it paid for. The very greens to whom he is pandering will entangle his plans in litigation that will drag on for years, some for a decade. The Biden plan earmarks some $200 billion to bring power generated by renewables in remote locations to population centres. But there is no shortage of private-sector cash eager to fund the tripling of the mileage of high-voltage transmission lines that Princeton University experts estimate would be needed to get to net-zero emissions by 2050. Cash is available, permits aren’t.
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Some environmental groups go to court to oppose these unsightly lines, while landowners fight to prevent construction on their land of the massive towers these lines require. Others sue to prevent construction of the renewable sources on which the Green New Deal relies, arguing that solar and wind, respectively, fry and chop up birds.
Perhaps more important is that the combination of increases in tax rates and treatment of overseas earnings called for by Biden would leave US companies less profitable than foreign rivals, and so susceptible to takeover or inversions — moving HQs to friendlier tax climes.
Key Democrats in the House know this, and have decided that Biden’s tax plan is a non-starter. Democratic senator Joe Manchin knows it, and won’t vote for it, depriving the president of a Senate majority. Treasury secretary Janet Yellen knows it, which is why she is calling for an international agreement on minimum tax rates — a cartel by another name. It is, says the Netherlands’ finance minister, Hans Vijlbrief, aimed at eliminating “harmful tax competition between countries” — what Yellen calls “a global race to the bottom”.
Such competition is the enemy of cartels. The Opec cartel tries to keep oil prices high by curtailing output, Democrats in Congress are attempting to make it costly for states to compete for investment by lowering taxes, and now the Biden administration wants to stop countries competing for businesses by offering tax inducements. In all cases, the cartelists — be they Saudi princes, profligate state governors or big-government enthusiasts in Washington — are appropriating to themselves money that might otherwise have gone to consumers, workers and investors.
Several countries find one aspect of the Yellen proposal alluring: having the world’s largest companies pay taxes to each country based on their sales in that country. That would end the futile efforts of national tax collectors to keep pace with profit-shifting by big companies. But another aspect of the Yellen plan — its call for a global minimum tax rate — is unlikely to garner support from low-tax countries such as Ireland, which has used its 12.5 per cent corporate tax rate to out-compete other countries for foreign investment.
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Until now, Biden has been monarch of all he surveys. Now he must practise the art of the deal, including with Democrats who do not recognise his suzerainty. His second hundred days might prove more taxing than the first hundred.
Irwin Stelzer is a business adviser
