The Capital Letter

Taxes, Inevitably

President Joe Biden signs an executive order on ‘promoting competition in the American economy’ at the White House in Washington, D.C., July 9, 2021. (Evelyn Hockstein/Reuters)
The week of July 5, 2021: the Biden tax cartel (update), China, industrial policy, and much, much more.

A recent update from the Tax Foundation on the administration’s tax plans does not (spoiler ahead) make for cheery reading. Here’s how it begins:

President Biden’s tax proposals released as part of his fiscal year 2022 budget would collect about $2 trillion in new tax revenue from businesses over 10 years. This new revenue would bring income tax collections on businesses as a portion of GDP to its highest level on a sustained basis in over 40 years.


Under Biden’s tax plan, business income tax collections would increase to 3 percent of GDP in 2022 and rise to about 3.3 percent after 2025…averaging 3.2 percent from 2022 to 2031—a level that has only been reached one other time in the last 40 years, during the peak of the housing and financial bubble from 2005 to 2007. Furthermore, in the last 40 years there has not been a sustained period of 10 years or more in which federal business tax collections reached or exceeded 3 percent of GDP . . .

Since that time [the 1960s], most advanced countries reduced business taxes and specifically corporate taxes in recognition of competitive pressures and the economic costs of heavily taxing business. Biden’s plan amounts to a reversal of the trend and a return to heavy taxation of U.S. companies. It is not at all clear that foreign competitors will follow suit.

That last sentence is an example of exquisitely insulting understatement. And what it describes goes a long way to explaining why the president is pushing so hard for a global tax cartel (or, as the OECD puts it, a “bold new framework for international tax reform”). Despite the vast profits just waiting to be made in the U.S. — about to be transformed into even more of an economic powerhouse on the back of a green transformation and command-and-control regulation — the administration is clearly worried that being asked to pay their “fair share” might lead some firms to conclude that they would do better to take their business elsewhere (and that some countries might be only too glad to welcome them).

More than that, it also helps explain why Treasury secretary Yellen has reportedly suggested that the 15 percent minimum corporate-tax rate (very) preliminarily agreed by 130 countries last week should be increased.

Reuters (July 6) (my emphasis added):

U.S. Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week, but a rate decision is not expected until future phases of negotiations, U.S. Treasury officials said on Tuesday.

The specific rate, and potential exemptions, are among issues still to be determined after 130 countries reached an historic agreement at a Paris-based Organisation for Economic Co-operation and Development (OECD) meeting last week. The countries outlined a global minimum tax and the reallocation of taxing rights for large, highly profitable multinational firms.

From an earlier Tax Foundation report:

An increase in the federal corporate tax rate to 28 percent would raise the U.S. federal-state combined tax rate to 32.34 percent, higher than every country in the OECD, the G7, and all our major trade partners and competitors including China. This would harm U.S. economic competitiveness and diminish our role in the world.

When the U.S. last had the highest corporate tax rate in the OECD, prior to tax reform in 2017 with the Tax Cuts and Jobs Act (TCJA), the U.S. experienced several years of economic malaise, including chronically low levels of investment, productivity, and wage growth, as well as major distortions and avoidance schemes in the corporate sector. This included corporate inversions to lower-tax countries, migration out of the corporate sector and into the noncorporate sector, and a decline in business dynamism. This is why the U.S. lowered the corporate tax rate, to compete with other countries around the world that lowered theirs long ago.

Whether we use corporate tax collections as a portion of GDP, average effective tax rates, or marginal tax rates, each measure shows that the U.S. effective corporate tax burden is close to or above the average compared to its OECD peers. Raising corporate income taxes would put the U.S. at a competitive disadvantage, whether one looks at statutory tax rates or effective corporate tax rates.

Yellen’s fear, obviously, is that if the minimum rate is set at 15 percent, those wicked and disreputable countries that regard a lower tax rate as a source of competitive advantage might notice that fifteen percent is a long way below (checks notes) 32.34 percent.

So, what now? The G-20’s finance ministers are meeting today and tomorrow and it seems that they are backing what was agreed in Paris.

One issue that may be going away is the EU’s proposed digital tax. A key part of the horse trading that has gone into making a deal possible is that countries will be handed a slice of the profits of certain large companies doing business, whether physically or virtually, in their territory (I touched on this during the course of last week’s Capital Letter), in exchange for which they will drop the digital-services taxes (very roughly, a form of sales tax) that have been beginning to spring up in Europe. However, the EU plans to introduce a digital levy of its own across the entire union and will do everything it can to keep that, uh, dream alive. That’s because such a tax would, in EUspeak, be an “own resource.”

Writing for Bloomberg Tax, Jefferson VanderWolk, sets out what that means:

In case you are wondering, an “EU own resource” is a revenue-raising measure that is applied by all EU member states, on identical terms, for the purpose of funding the EU’s budget. Although the EU is not a sovereign government, it does spend money in various ways, and therefore it needs to have sources of funding. Up to now the EU’s own resources have consisted of customs duties, a share of VAT collected by member states, and a further contribution by member states based on their respective gross national incomes.

Politically, the question of own resources remains highly contentious within the EU. Taxation is a key part of sovereignty (there is a good reason that some critics have described the Biden tax cartel, of which membership will be encouraged by sticks as well as carrots, as an exercise in neo-imperialism), which is why the EU’s member states have tended to push back on the degree to which Brussels can lay claim to revenues of its own. The mirror image of that stance is that Brussels is always doing what it can to establish just such claims. While a good part of the thinking behind an EU digital levy has been traditional protectionism (spiced up by the fact that the protectionism would be directed against successful American companies), a more important reason is institutional, in that it would effectively increase Brussels’ fiscal autonomy.

Some supporting evidence for the EU’s priorities come from this Politico story:

Washington told the EU not to tax its tech giants. So Brussels is making plans to tax everyone instead.

The European Commission is eyeing a 0.3 percent tax on the goods and services sold online by companies operating in the EU with an annual turnover of €50 million or more, officials briefed on the plans told POLITICO. That makes the initiative more of a digital sales tax for all firms, rather than one that solely targets tech companies — a key concern for Washington.

The issue of how to tax big tech firms has been a major source of transatlantic tension in recent years, with each side threatening tough action to support its view. Europeans have complained that tech giants rack up big profits on their turf but pay little into government coffers. Washington has pushed back at efforts to target U.S. tech giants, arguing that amounts to unfair discrimination.

The details of the Commission’s plans emerged after U.S. President Joe Biden’s administration called on EU capitals to drop their tech taxes as part of a global deal that aims to overhaul corporate taxation, agreed among 130 countries last week.

G20 countries are set to rubber-stamp that deal this weekend — but Washington’s participation in the G20 accord is contingent on countries including France, Italy and Spain rolling back their national tech taxes or similar initiatives. As far as Washington is concerned, that should also include the EU digital levy . . .

If this issue can be ironed out (I imagine it will be) and, if most of the 130 countries stick with the course agreed in Paris (best guess, they will, although I would be surprised if the agreed minimum moves far above 15 percent, if at all), the question then becomes how the bold new framework will fare with legislators back home, including, of course, here.

The Financial Times:

US president Joe Biden celebrated last week after 130 countries agreed to make significant changes to the international tax system, reaching a consensus after fresh proposals from the US jolted talks that appeared to have hit an impasse.

But the momentum that had gathered pace since Biden took office threatens to be lost in Washington, where any tax agreement must secure support in the Senate, which the Democrats have control of by the tiniest of margins . . .

Any eventual OECD agreement will probably be addressed by lawmakers on Capitol Hill in two separate parts. The agreement on a global minimum tax of 15 per cent, known as Pillar 2, will require lawmakers to change domestic tax legislation.

Giving countries new rights to tax large companies based on where they generate revenue, the so-called Pillar 1, is likely to be dealt with as a separate bill, because it alters Washington’s agreements with other countries, meaning the US must alter existing treaties or create new ones.

Pillar 2, which changes US domestic legislation, could potentially be passed using the so-called reconciliation process. This can be used by US Congress once a fiscal year and bills passed by this route can clear the Senate with a simple majority. The upper chamber is split 50-50 between Democrats and Republicans, with US vice-president Kamala Harris casting the tiebreaking vote.

However, Pillar 1, which will probably require treaty changes, would need the support of at least two thirds of the Senate . . .

Any attempt to circumvent the Senate is likely to be the subject of technical and legalistic arguments on Capitol Hill.

Manal Corwin, a former senior Treasury official in Barack Obama’s administration who now works at KPMG, said there could be a way to override existing treaties by passing both Pillar 1 and Pillar 2 using the reconciliation process . . .


Interesting times ahead.

Meanwhile, in other tax news:


During a Wednesday press conference to promote his “Build Back Better” agenda, President Biden pledged to end tax breaks for energy companies in the fossil-fuel business, raising $90 billion dollars in revenue for the federal government.

The president justified the proposal as it would “make polluters pay to clean up the messes they’ve made,” seemingly nodding to oil spills, natural gas leaks, and other mishaps.

“We’re not asking them to do anything that is unfair. We’re just not going to subsidize them anymore, they’re doing well thank you,” Biden said in reference to the oil conglomerates . . .

And no, a tax “break” (not a term I like anyway) is not a subsidy.

Greg Sargent in the Washington Post:

In our big debates over President Biden’s infrastructure and jobs package, you often hear Democrats discuss corporate tax hikes as merely a means to “pay for” the big public expenditures they’re seeking. Raising corporate taxes is often something that Democrats back into defending almost apologetically.

What you hear less often is this: Democrats making an affirmative case for raising corporate taxes and reforming the tax code as a policy end unto itself, one that will accomplish a lot of good on its own, in addition to its utility as a “pay for.”

A large coalition of labor, progressive and activist groups is now trying to change this. And they have a good argument . . .

Or not.

The Capital Record
We released the latest of a series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the 25th episode Jerry Bowyer became the second repeat guest on Capital Record, this time unpacking with David what he believes is a massive untapped strategy for those who feel corporate America is not playing nice in the sandbox — shareholder activism!

And the Capital Matters week that was . . .

Health Care
Sally Pipes:

The Centers for Disease Control and Prevention (CDC) deserve much of the blame for plummeting vaccination rates. Public-health officials have botched their pandemic response and messaging nearly every step of the way — inadvertently stoking skepticism of the vaccines.

Take the CDC’s worst mistake: its decision, in partnership with the Food and Drug Administration, to pause the use of Johnson & Johnson’s COVID-19 vaccine for ten days because of a risk of blood clots. The risk ended up being less than one in a million.

That overreaction triggered an immediate drop in public trust in the vaccine. Immediately after the CDC advised halting the J&J shot, the number of daily first doses of all vaccines administered plummeted by some 40 percent compared with weeks earlier.

Recent data have confirmed just how damaging that choice was. According to recent polling, more than 40 percent of unvaccinated Americans say that their biggest concern is that the J&J shot causes blood clots. More than one-quarter believe that every vaccine causes blood clots.

This poor decision-making has been the norm for the CDC since the beginning of the pandemic. The agency’s guidance seems to have been motivated more by armchair psychology than by hard data . . .

Andreas Hellman:

World leaders from the G-7 recently announced their support for the Biden administration’s plan to implement a global minimum corporate tax of at least 15 percent. The plan would effectively eliminate tax competition and create a government taxation cartel — companies could no longer vote with their feet and move to more tax-advantageous countries to grow their businesses. The Biden administration led the charge, and European leaders from high-tax countries with hugely inflated welfare spending embraced the proposal. Whenever European leaders cheer for an American policy proposal, it’s usually safe to assume that this means bad news for everyday Americans.

Treasury secretary Janet Yellen and other world leaders successfully got buy-in from 130 countries — at least in principle. The enforcement of the new global tax regime will be complicated, with an abundance of loopholes available to governments that would like to be more competitive in international markets.

Secretary Yellen has previously pushed the corporate global minimum tax agreement, arguing it is needed to “end the race to the bottom” and “make all citizens fairly share the burden of financing government.” What’s another term for a “race to the bottom”? It’s competition — the very principle Democrats and Republicans agree is missing from Big Tech and other industries. For some (political) reason, when the Biden administration has to compete, all that talk of the benefits of vigorous competition for American consumers and workers falls by the wayside . . .

Daniel Pilla:

For years, Congress has assigned increased responsibilities to the Internal Revenue Service (IRS), well beyond the task of mere tax collection and administration. The federal government’s delegation of power to unelected bureaucrats has resulted in “mission creep,” with the IRS usurping authority from elected officials.

The problem has been especially pronounced since the Obama administration passed the Affordable Care Act. Beside the Obamacare credit, there are at least six so-called refundable tax credits in the tax code. A tax credit is a provision that reduces one’s final tax bill, dollar-for-dollar. A tax credit differs from tax deductions and exemptions, which reduce taxable income, rather than your final tax bill directly. Deductions and exemptions reduce one’s tax liability by the amount deducted multiplied by one’s marginal tax rate.

Refundable credits work to give people more money in refunds than they actually paid in taxes in the first place. The most notable refundable credit is the Earned Income Tax Credit. For all practical purposes, refundable credits are welfare programs administered by the IRS through the tax code, and driven by one’s tax return.

Dominic Pino:

Why have sales-tax rates been resistant to partisan impulses? One reason is historical. The sales tax was first introduced in its modern form in many states during the Great Depression, and it wasn’t on a partisan basis. All states were strapped for revenue, and the sales tax seemed like a good way to close the gap. The concern was primarily financial, not political. Once the tax existed, states became dependent on the revenue and kept it around after the Depression was over.

Another reason is that there is no federal sales tax, so the national political parties don’t spend much time talking about sales taxes. The debates are insulated within each state, and each state has different revenue needs. Tennessee has a high sales tax to compensate for not having a state income tax. A Tennessee Republican is likely to support a higher sales-tax rate than a Republican from a state with an income tax. Oregon has no sales tax but a very high income tax. An Oregon Democrat is unlikely to propose the creation of a sales tax even if other states’ Democrats want to raise theirs.

Sales-tax rates demonstrate how more political issues could look if they were left to the states to decide. In the absence of national partisan pressures, sales-tax rates are set based on each state’s unique needs. Each party within each state fights it out over rate changes, and they come to their own equilibria . . .

Stakeholder Capitalism
Jerry Bowyer:

I am part of a team that designs and manages investment funds. My colleagues and I have become increasingly concerned about the politicization of publicly traded companies. Rather than boycott or complain, however, we decided to talk to the managers of the companies we own. We’ve written to all of the companies we hold in our two domestic stock portfolios — or at least all of them, 313 in total, that care enough about shareholders to publish the email address of their respective investor-relations departments — asking them to discuss with us the following . . .

Sean-Michael Pigeon:

Regulatory action often ends up hurting ordinary businesses unintentionally. In this case, though, the FTC’s message is clear: American companies will not be given deference. If Khan decides to expand and use the FTC’s newfound powers, consumers, employees, and employers will all be worse off because of it.

William J Holstein and Clyde Prestowitz:

Even though the Biden administration has designated China as its No. 1 geopolitical rival, American business does not want to see governmental action that would hurt its ability to make money in China. Critics say some American CEOs have become hostages of the Chinese Communist Party, which may be overly harsh. But the fact remains that they are caught in the middle of an emerging geopolitical confrontation and are being used as policy tools by Beijing. Xi’s government is openly appealing to American CEOs to lobby the Biden administration to go softly on the China policy his administration is developing.

Unless the administration can narrow the gap between America’s public and private sectors, any response to the global and technological ambitions of President Xi Jinping is likely to be piecemeal and therefore ineffective. In effect, Xi is taking advantage of the pluralistic American system in which CEOs believe they have a responsibility to make money and increase their share prices while leaving national-security concerns to the government.

Sean-Michael Pigeon:

The Chinese Communist Party has tightened its grip over its political and economic system in a number of high-profile moves. From silencing those who mention Taiwan’s independence to quashing Hong Kong’s independence, the CCP is aggressively targeting people and institutions that it deems a threat. A new Bloomberg report finds that the Communist Party will be closing a legal loophole that benefitted Chinese tech companies. This change has worried U.S. investors and politicians who are rightly concerned about whether China is stable enough to invest in . . .

Daniel Tenreiro:

With little in the way of antitrust regulation or intellectual-property protection, China’s tech market over the past two decades has, in a certain sense, been “freer” than that in the U.S. In Lee’s triumphant telling, this intensely competitive ecosystem paved the way for companies such as Didi to create an “alternate internet universe,” moving virtually all transactions online. “Compared with China’s startup scene, the valley’s companies look lethargic and its engineers lazy,” Lee claimed in his 2018 book AI Superpowers.

But if the recent tech crackdown is any indication, the optimists may have spoken too soon: The Party giveth and the Party taketh away. Chinese president Xi Jinping is not content to cede the spoils of the country’s tech giants to shareholders. The crackdown is in part a flexing of the government’s muscle toward increasingly powerful entrepreneurs, but it is also a land grab: Chinese officials want access to the troves of data held by the country’s tech firms.

Dominic Pino:

Our highways are marvelous things. Insofar as there are specific places that need new highways, state governments should point them out. If the people of those states want to spend money to build them, they should do so. But there isn’t a case that we need a national plan to build more highways. The economic benefits would be small at best, and we already have the largest highway network in the world.

You can’t build the Interstate Highway System twice. Promising another “generational investment” like the one that funded the Interstate System, as President Biden has often done, would not have the same results as it did the first time around. The most likely result is that a lot of people will be scratching their heads in about ten years wondering where all the money went as we drive on the same highways we did before.

Industrial Policy
Scott Lincicome:

As President Biden picks up the “industrial policy” baton from Donald Trump, it has become accepted wisdom that “Operation Warp Speed” (OWS) shows how such policy can surmount “market failures” to achieve major national objectives. The Biden administration’s new report on “critical supply chains,” for example, uses OWS to justify its industrial-policy proposals, and in doing so links to work calling OWS “a triumph and validation of industrial policy.” And Senator Marco Rubio echoed this conclusion a few weeks earlier, when he claimed on Twitter that “the free market would have eventually developed a vaccine, but we would all still be wearing masks without Operation Warp Speed.”

This potted, bipartisan history, however, omits crucial facts that turn OWS from a clear “industrial-policy success” to, at best, a useful complement to incredible private-sector efforts and, at worst, a cautionary tale of how industrial policy can impede such efforts.

To be clear, OWS undoubtedly subsidized the production of several successful COVID-19 vaccines in a remarkably short period of time. But those claiming OWS drove that success must contend with several uncomfortable facts . . .

Big Tech
Ingrid Chung:

Former president Donald Trump announced yesterday in a press conference that he would file a class-action lawsuit against Big Tech companies, including Twitter, Google, and Facebook, claiming their decision to ban his and other plaintiffs’ accounts on various social-media platforms has infringed the plaintiffs’ right to free speech guaranteed by the First Amendment. He demands damages and the reinstatement of his accounts on these social- media platforms as legal remedies.

Big Tech censorship is alarming. Conservative accounts are disproportionately targeted and banned. But Trump’s lawsuit is unlikely to succeed . . .

Kevin Williamson:

If you  happened to be sailing on the Gulf of Mexico earlier this week, you could have witnessed a dramatic example of genuine socialism in action — and it looked a bit like Sauron.

The “eye of fire” — a conflagration on the surface of the water of the Gulf of Mexico — was the work of Pemex, the state-owned oil company operated by the Mexican government. It was caused by a massive gas leak that apparently was set afire by lightning.

The Gulf of Mexico hasn’t seen that much socialism in action since the Mariel boatlift.

When our progressive friends talk about “socialism,” they inevitably point to some rich capitalist European country with a larger welfare state and higher taxes than ours, but actual socialism — central planning, government control of the commanding heights of the economy, state-run enterprises — looks a lot more like Pemex . . .

Paul Gessing:

On June 15, 2021 U.S. District Court Judge Terry Doughty issued a preliminary injunction halting the Biden administration’s moratorium on new oil and gas permits on federal lands and in federally controlled offshore areas in the Gulf of Mexico. The lawsuit was filed by 14 states that were set to lose out on significant oil and gas development if the moratorium remained in place indefinitely.

Ironically, of all the states impacted by Biden’s moratorium, increasingly deep-blue New Mexico had the most to lose. According to an analysis from the American Petroleum Institute, New Mexico would be expected to lose over 62,000 jobs and $1.1 billion in revenue from the moratorium by 2022. Ranking third among all states in oil production and a leader in natural-gas production as well, New Mexico would have lost nearly half of total production in both had the moratorium stuck.

Wyoming, the next-most-affected state, would have lost just a bit over half as much revenue ($641 million) as New Mexico. And, with an annual general fund budget of $7.4 billion, that is a lot of revenue for New Mexico to make up. Unfortunately, in this world of “red” and “blue” states, self-interest was not enough to get New Mexico attorney general Hector Balderas to join the lawsuit.

So, no thanks to any of our own elected officials (or former New Mexico congresswoman, now Interior secretary, Deb Haaland), New Mexico likely just dodged a dagger aimed straight at the heart of the state’s economy . . .

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