Hoping for Higher Taxes
A clever colleague likes to say he is good at math up until it stops using numbers. That’s my view of tax policy: I understand rates and the revenues but get lost in the political agendas and legal structures. Indexing marginal rates—OK. “Double Irish with a Dutch sandwich”—not so much.
As markets struggle to assess what sustainable growth and interest rates will look like after COVID, an important part of the puzzle lies in the law and politics reshaping the global corporate tax regime. With the breakthrough agreement by G20 finance ministers in Venice this weekend, the tax rates themselves may be less important than the level of cooperation taking shape.
Even if corporate tax bills end up slightly higher, investors should be rooting for the effort to succeed, because any step toward clarity and predictability will more than outweigh any incremental erosion to earnings. In fact, few developments would undercut post-pandemic growth rates more than having the world’s largest and most dynamic firms caught in the crossfire of governments competing over taxing rights and a brewing populist sentiment to soak Big Business.
“Few developments would undercut post-pandemic growth rates more than having the world’s largest and most dynamic firms caught in the crossfire of governments competing over taxing rights and a brewing populist sentiment to soak Big Business.”
On the numbers alone, the deal at hand doesn’t look like much.
The idea is that countries will agree to tax profits at no less than 15% in order to avoid what Treasury Secretary Janet Yellen has called a “race to the bottom” as jurisdictions compete to look superficially attractive for investment. At the same time, some the world’s largest firms—notably the tech giants that can cross borders without a trace—will pay taxes in countries where they derive profits, even if technology itself has allowed them to transact across borders without leaving prints.
There are already urgent calls for carve-outs even with these modest changes. The United Kingdom is pressing to exclude the largest banks, especially those in its jurisdiction. Europe’s low-tax jurisdictions like Ireland, Estonia, and Hungary threaten to scuttle EU participation unless they get concessions. Meanwhile, the shipping industry argues for an exemption given taxes it already pays on tonnage. There will surely be additional waivers as more than 130 jurisdictions enact these reforms into law.
But that’s actually the good news: at least 130 countries representing more than 90% of the world’s economic output have signed on in principle after years of thankless prodding by the Organization for Economic Cooperation and Development.
The agreement represents a rare moment of global political alignment on how governments collect taxes, one of the most important determinants of economic growth:
- Populist politicians everywhere see a winner in anything that extracts more money from rich multinationals.
- Populist politicians outside the United States are especially eager to collect more from U.S. technology firms that seem so skilled at minimizing their tax bills.
- The current U.S. administration is ready to demonstrate that multilateral diplomacy can deliver results.
- Multinationals generally want to avoid chaos, including the current world in which Europe taxes digital revenues and America threatens retaliation.
- Finally, developing countries see a chance to extract more revenues for treasuries laid bare by the pandemic.
“The current international tax system has eroded national sovereignty in ways that have had measurable effects on the middle and working classes around the world,” Yellen wrote in the Washington Post with her counterparts from countries as diverse as Germany, Mexico, Indonesia, and South Africa. “Together, we can ensure that global capitalism is compatible with fair tax systems and that governments are able to tax multinational corporations.”
If the politics of the moment make a deal possible, there are still years of legal work ahead to translate policy into law and law into tax rules. The Biden administration already faces its own opposition in Congress. Then there are the lawyers and accountants who will find ways to work around the rules in order to minimize their own corporate obligations.
Only then will even the most sophisticated analyst be able to meaningfully adjust price targets on these profit forecasts. Chances are good that many of the corporate tax payments will certainly be larger. Indeed, the White House has already signaled it views the 15% minimum rate as a floor.
In the meantime, in a world where geopolitical tensions are rising and technological change is accelerating, corporations will stand a better chance of planning for the future and making sensible capital investments. Governments, now besieged by demands to redress inequality, face more favorable odds of collecting revenues they need for an increasingly demanding voter base.
An agreed tax framework won’t deliver robust growth alone, but the alternative will almost surely result in a weaker and gloomier recovery.