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Regulatory Policy

Pushing Back Against Biden’s Tax Cartel

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)

From Deutsche Welle, yesterday:

Ireland is set to drop its 12.5% corporation tax rate later this year, Irish media reported on Wednesday.

While a formal decision is still to be confirmed, pressure is mounting over Ireland’s opposition to global corporate tax reform proposals. Several government sources have told the Irish Examiner that the country’s major tax incentive for large multi-national firms is set to be abandoned in October.

Earlier this month, some of the globe’s largest economies reached a broad agreement on key aspects of a worldwide tariff which will see a minimum taxation rate of 15%.

Irish Finance Minister Paschal Donohoe has so far only indicated he is willing to discuss the impact of a new global minimum rate, but behind the scenes there is a greater determination to comply, according to the daily.

“Ireland will continue to make the case for the rights of small countries to retain some competitive advantage, but we don’t want to be an outlier in terms of a global tax deal,” a senior coalition figure told the newspaper.

Ireland does not want to become an international pariah, according to the source, and therefore is prepared to move in line with the new proposals.

Then again, from the Irish Times today:

Minister for Finance Paschal Donohoe has said that Ireland cannot be part of an international agreement on a minimum global tax rate of 15 percent.

“What is on the table is an agreement that we cannot be part of,” he told RTÉ radio’s Morning Ireland.

However, Mr Donohoe said he was committed to seeing if an agreement could be reached at some stage, just not now.

“We are committed to the negotiation to see if we can enter the agreement at some point, but I’m making the case for our 12.5 per cent, it has been a key feature of our economic policy for decades and I’m so committed to it that I decided we couldn’t enter into the agreement.”

Earlier this month, the G7 and OECD countries reached agreement but not unanimous consensus on the key aspects of a global tax deal which seeks to introduce a minimum rate of 15 per cent. Ireland is among a handful of countries such as Hungary who are opposed to a 15 per cent rate . . .

Needless to say — the Irish Times is what it is — bad boy Hungary is given as an example of one of the holdouts, but it’s more instructive to look at Estonia.

Here’s the Estonian president, Kersti Kaljulaid, via CNBC:

“There are no companies in Estonia, currently, which will actually fall under this new proposed regulation,” Estonian President Kersti Kaljulaid told CNBC’s Rosanna Lockwood…on Tuesday.

“We are discussing theory. We are not stealing any dollar of tax money from any country globally,” she said. She added that Estonia is “extremely transparent” with its tax board. “We are no tax haven,” she said.

The president said Estonia needs to hear more before deciding what to do . . .

“Because we do not know the technicalities, we cannot yet sign,” said Kaljulaid.

The discussions cannot be rushed, and it’s not yet clear what the regulation will eventually look like, she added.

“But when the technicalities become known, and we can negotiate about these technicalities, I am quite sure that we will find a way to prove to the world that our tax system actually will work with this new system globally as well,” she said. “I’m very optimistic.”

Estonia’s “problem” is not its headline corporate-tax rate (which is 20 percent, compared with Ireland’s 12.5 percent, and Hungary’s 9 percent), but the nature of the corporate income that is taxed (essentially retained earnings are excluded). Eager as ever to feature clickbait, I wrote about the Estonian tax system in a recent Capital Letter, borrowing heavily from work by the Tax Foundation, which has explained that

for [2020] the seventh year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax system. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.

I added:

It should be noted that Estonia’s territorial tax system is only applicable where EU/EEA and Swiss income is concerned, although separate tax treaties with other countries may limit double taxation: For those who want to get into more detail on Estonian tax (you know you do), whether corporate or individual, you can find it here. Among the highlights, no death or gift taxes, VAT at 20 percent, and, if you were worried about the fact a company pays no tax on retained earnings (a measure designed to encourage corporate investment), it’s worth noting that, if a shareholder sells stock in a company, the implicit value of those retained earnings will (or ought to) be reflected in the share price and, to the extent that the shareholder makes a profit on that sale, capital gains would be taxable (at 20 percent).

I am going into this detail about Estonia’s tax regime because it is significant that a small country that, for obvious historical reasons does not want to stand out too far from the western consensus, does not want to join the Biden cartel. Having designed a rational, reasonable, competitive tax system (that the U.S. would do well to follow — yes, under certain conditions that should include a VAT, or something like it), it is understandable that it doesn’t want to mess with any aspect of it in order to make it easier for Joe Biden to pursue his domestic political agenda.

And (this may sound familiar to the Irish):

After centuries of foreign occupation, Estonia also has a keen awareness of the importance of preserving its sovereignty. And, as no Americans should need reminding, particularly this weekend, control over taxation is a central part of any nation’s sovereignty.

It seems clear that both Ireland and Estonia would like at least to give the appearance of falling into line with the Biden cartel’s demands while preserving the integrity of their own tax regimes. That may be easier for negotiators to achieve in the case of Estonia (thanks to its higher headline rate) than for Ireland or, for that matter, Hungary, another nation that suffered under lengthy foreign occupation. Its prime minister, Viktor Orbán, has had this to say:

I consider it absurd that any world organization [the OECD] should assert the right to say what taxes Hungary can levy and what taxes it cannot.

He’s not wrong.

Estonia, Ireland, and Hungary are all members of the EU, as is Cyprus (which also has a 12.5 percent rate, was not involved in the recent talks on the minimum tax, and is unenthusiastic about the idea). Any one of those four has the ability to stop the EU signing up for the cartel as a bloc, although individual member states still could enlist.

There was a time when the U.S. used to believe in the virtues of competition. Not anymore, it seems, at least if the administration’s approach to tax is any guide. In the meantime, I look forward to the moment when those in America who are normally so quick to attack the U.S. for anything that looks like imperialism join the opposition to the proposed tax cartel.


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