BOSTON, Massachusetts: US President Joe Biden’s spending plans grabbed the headlines, and rightly so.
The administration’s relief program and infrastructure plan could remake the US welfare state by strengthening the social safety net and increasing spending on transportation, broadband, and education.
But with U.S. government spending likely to remain high after the COVID-19 pandemic, tax revenues must rise, as additional borrowing can only fund so much.
Therefore, the Biden administration proposed the equally ambitious Made in America tax plan, which would increase corporations’ share of tax revenue.
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TIME TO INCREASE CORPORATE TAXES
Raising the corporate tax rate is the best option. In the first decade after World War II, taxes on individual income and social insurance receipts accounted for about 50 percent of federal tax revenue, while corporate taxes accounted for 30. additional percent.
But since then the first category has grown steadily, reaching about 85 percent of total federal tax revenue, while the corporate share has fallen below 10 percent.
In addition, corporate profits in the United States have never been higher, as the share of national income going to work has fallen from around 66 percent to 58 percent, indicating that workers are paying an ever-increasing share. large in total taxes even though they were. get a decreasing share of the economic pie.
My own research reveals equally high imbalances in the effective marginal tax rates on labor (over 25 percent) and on capital investments such as software and equipment (5 percent).
These marginal rates guide companies’ investment decisions. Under the current US tax structure, companies are much more motivated to pursue excessive automation than to employ, train, and pay workers properly.
But automation is not the only technological avenue open to American companies. With different incentives, they would instead invest in technologies designed to make workers more productive.
All in all, the deep imbalances in the current tax structure are costing the US economy not only in terms of jobs, but also in terms of reduced productive efficiency and growth.
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DECLINE IN CORPORATE TAX REVENUES
While the Trump administration’s 2017 tax bill reduced the corporate tax rate from 35% to 21%, the share of businesses in total tax revenue has been declining for half a century. Many companies have become private partnerships or S-Corporations, which are exempt from corporate income tax.
Depreciation allowances, which allow companies to deduct capital expenditures from their taxable income, have also contributed significantly to this trend.
Biden’s promise to raise the overall corporate tax rate from 21% to 28% is therefore an important step, but insufficient in itself.
This will not level the playing field between capital and labor, nor will it prevent US-based companies from engaging in “tax reversals” to flee to other jurisdictions or shift their profits to. foreign subsidiaries.
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Unpaid corporate profits have been a major factor in reducing long-term capital and corporate tax rates, and multinationals would still have a bag full of tricks to reduce their reported U.S. profits, such as internal financial transactions aimed at increasing their debt obligations. in the United States and using foreign affiliates to overcharge their US branches (transfer pricing).
A WORLDWIDE MINIMUM CORPORATE TAX
Fortunately, the Biden plan includes a second pillar to address precisely this problem: a minimum overall corporate tax.
In theory, the idea is simple. Ideally, tax rates would be significantly increased in Ireland, Luxembourg, Switzerland, Panama, British Virgin Islands and other jurisdictions that allow businesses to evade their tax obligations through a “arbitration”.
Otherwise, a company headquartered in the United States and subject to the minimum worldwide corporate tax rate of 21% which declares all of its profits in Ireland, where the corporate tax rate is 12%. , 5%, would face additional US taxes equivalent to 8.5%. cent of its profits.
Of course, politics would be more complicated in practice. Low tax jurisdictions have become so dependent on international tax evasion companies that they have rejected coordination.
Faced with the overall minimum tax rate in the United States, some might be tempted to relocate their headquarters to those countries (which is why Biden’s tax plan also includes provisions to prevent evasive business flight). If some of the most notorious tax havens refused to cooperate, any new international framework would fail.
NECESSARY AMERICAN LEADERSHIP
This is where American leadership comes in. The United States has incredible fiscal power, not only as the world’s largest economy, but also as the regulatory seat of the global financial industry.
If US policymakers lead with enough conviction, other countries will be forced to follow. Biden’s tax plan already contains provisions to prevent tax reversals and includes proposals to limit tax deductions for multinationals engaged in tax arbitration.
The United States can also take legal action against foreign financial institutions involved in tax evasion and systematic innovation, and can work multilaterally to bring about greater harmonization of international corporate income taxation.
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If fully implemented, a global minimum corporate tax rate would revolutionize the international taxation of capital. But even that wouldn’t solve America’s fiscal problems.
To reverse the unfair and inefficient reduction in the corporate tax burden, the Biden administration must also end overly generous depreciation and broaden the tax base, so businesses cannot avoid taxes simply by changing their legal status. .
MEASURES TO ENCOURAGE NECESSARY INNOVATION AND INVESTMENT
Greater corporate taxation should be accompanied by other measures to encourage investment and innovation.
In addition to subsidizing research and development, the state can do more to help increase the supply of well-trained engineers, scientists and skilled workers and to facilitate the diffusion of technological know-how.
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With a more level playing field between capital and labor, companies can be incentivized to develop and adopt new technologies that increase worker productivity, rather than continuing the trend of excessive automation that has shaped the US economy over the past two decades.
An integral part of this effort will be taking steps to end the dominance of just a few companies in the tech sector.
A fairer tax system alone would not solve all of America’s economic problems. But it would be an important step in the right direction, helping workers and the economy while curbing the alarming rise in the federal debt.
Daron Acemoglu, Professor of Economics at MIT, is co-author (with James A. Robinson) of Why Nations Fail: The Origins of Power, Prosperity and Poverty and The Narrow Corridor: States, Societies, and the Fate of Liberty.