One of the most striking findings from the International Monetary Fund’s (IMF) latest forecasts is that, far from leaving economic scars, most western countries will emerge from the pandemic no poorer than they were expected to be before Covid struck.
Contrary to what almost everyone assumed, the IMF thinks that come 2024, China’s economy will be about 1.6 per cent smaller than it thought before the virus hit. The US, by contrast, is expected to be 0.5 per cent bigger. This is a pretty extraordinary turnaround.
Some of this can be explained by vaccines but it is also down to something else: Bidenomics. The president is planning the most almighty fiscal stimulus in the modern era. Untold amounts will be spent on infrastructure, on care workers and parents.
It is tempting to see this as the end of one economic era, the “neoliberal” period which began with Reagan and Thatcher when the market was king, and the beginning of something new. But it might be better to think of it as a return to the past. The slow-swinging economic pendulum, from interventionism under Woodrow Wilson to laissez-faire under Herbert Hoover to interventionism under Franklin Roosevelt and so on, is just doing its thing all over again.
In many respects Bidenomics resembles economic policy from the period when Joe Biden was a child, the era of Truman and Eisenhower. That time was defined by a few key features: government spent more, at least on infrastructure and defence, it intervened more and it used its economic clout to create a rules-based order elsewhere in the world.
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And perhaps the most intriguing part of Biden’s plans is what it means for the rest of the world. For one way his treasury secretary Janet Yellen intends to pay for all this extra spending is higher business taxes. The US corporate tax rate, which Donald Trump cut from 35 per cent to 21 per cent, will go back up to 28 per cent. But those numbers only tell you so much, because most businesses end up paying far less by burrowing through loopholes and squirrelling away profits in low-tax countries around the world. The effective rate US multinationals ultimately pay is below 8 per cent.
How the US ended up with the world’s biggest companies and among the world’s smallest corporate tax revenues is partly due to the era we’ve been living in: one of footloose companies and footloose capital, where businesses and their accountants can shift activity to the cheapest tax jurisdiction with the click of a mouse.
It is easy to blame this on the companies but they, like everyone else, are simply following the incentives laid down by the system. That system, which levies corporate taxes on profits, made sense in an earlier era when you could easily tell where profits were generated. But what about in a world of tech giants and multinational brands? If a brand is the thing earning the money then why not locate that brand somewhere where tax rates are low? If it’s not clear where profits are generated then why not find some way of locating them in Bermuda or Luxembourg instead?
For all the complexity, there are two relatively simple paths out of this. The first involves changing the way we calculate what tax is owed. Why not calculate the taxes a company like Amazon owes on the basis of sales in a given country, rather than profits?
The second path is even more radical: you make it impossible for companies to shift their profits to a low-tax jurisdiction by forcing all low-tax jurisdictions to raise their rates to a given level. In other words, a global minimum level for corporate tax.
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Remarkably, the Biden administration seems to be heading down both of these paths at the same time, pushing for a global 21 per cent minimum tax rate while also seeking to change the basis on which those taxes are calculated. If they succeed, it would be one of the great achievements in modern economics. Corporate tax avoidance has been a bugbear of wealthy economies for generations but for as long as there were at least some nations which could dangle low-tax rates in front of businesses, it has been hard to stamp it out.
The question is whether Biden can succeed. For while some finance ministers will welcome this — Rishi Sunak’s decision to raise corporation tax to 25 per cent suddenly looks quite prescient — others will balk at it. Biden’s ancestral Ireland has long used its 12.5 per cent tax rate to draw in investment and income. Even if the president’s plans do go ahead it is possible other nations, or indeed Congress, might insert so many loopholes that they become ineffective.
What is perhaps most fascinating is not so much the tax proposals but what they signify. For most of the 20th century the US dominated geopolitics and used its economic might to encourage the world to march to its tune, often via multilateral organisations such as the United Nations, IMF or the G20, through which this tax reform may be pushed. Trump changed that tune, using bilateral trade deals and trade wars as his weapons. Biden’s tax plans are the clearest sign yet that he wants a return to an earlier era.
Except that a lot has changed in the meantime. The US is still the world’s biggest economy, depending on how you measure it. But only just. China may have its own ideas about global taxation. Other countries may take their chances and defy America. This may, in other words, represent one last throw of the dice for American multilateralism.