Surprisingly, “raising taxes” has become a very fashionable political idea in 2021. That’s right. After decades of being seen (at best) as a necessary evil, higher corporate taxes are now being treated as the Great Good Thing that will revive the US economy, re-distribute wealth productively, help to build neglected and decaying public infrastructure, fund public health, address social inequality, restore a sense of community and generally make everyone feel better about the society in which they live. In the immortal words of US President Joseph R. Biden: “You have 51 or 52 corporations of the Fortune 500 haven’t paid a single penny in taxes for three years. Come on, man. Let’s get real.”
To US Treasury Secretary Janet Yellen, one possible way of getting real with multinational corporations would be to impose a global minimum tax rate that all of them would have to pay, regardless of where they are nominally located. Here‘s how Yellen outlined the logic for such a tax in a speech she gave on April 5th to the Chicago Council of Global Affairs:
….Another global challenge we face is how to adapt to technological change, which has brought significant benefits but contributed to greater inequality… Another consequence of an interconnected world has been a thirty-year race to the bottom on corporate tax rates. Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids. It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.
This view will be heresy of course to the free market ideologues (“taxation is theft”) who have set the boundaries of what’s been deemed to be acceptable economic policy in New Zealand for the past 35 years. Yellen went on:
President Biden’s proposals announced last week call for bold domestic action, including to raise the U.S. minimum tax rate, and renewed international engagement, recognizing that it is important to work with other countries to end the pressures of tax competition and corporate tax base erosion. We are working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom. Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth, and prosperity.
Biden’s $2.5 trillion stimulus plan marks a watershed moment in the global economy. Its main impacts will be felt in the US, but the ideological shift it heralds will resound in all parts of the globe. We can all recognise the reasoning behind the conclusions that Biden has come to :
Large companies like Apple and Bristol Myers Squibb have long employed complicated manoeuvres to reduce or eliminate their tax bills by shifting income on paper between countries. The strategy has enriched accountants and shareholders, while driving down corporate tax receipts for the federal government. President Biden sees ending that practice as central to his $2 trillion infrastructure package, pushing changes to the tax code that his administration says will ensure American companies are contributing tax dollars to help invest in the country’s roads, bridges, water pipes and in other parts of his economic agenda.
Essentially, Biden is scrapping the bulk of the tax cuts lavished on corporate America by the Trump administration – which, once again, have delivered no boost to economic growth beyond what you’d expect from the normal business cycle. Biden will increase the corporate tax rate from 21% to 28%, and as Yellen intimated, will impose that new minimum tax on global profits, and crack down on companies that try to move profits offshore. And moreover:
The plan also aims to stop big companies that are profitable but have no federal income tax liability from paying no taxes to the Treasury Department by imposing a 15 percent tax on the profits they report to investors.
Will it work?
Europe of course, has tried going down this path before of imposing a global minimum tax rate on digital commerce. That bold effort fell apart largely thanks to the disinterest of the Trump administration. Apple and Google have also threatened to pass any such tax onto consumers. Yet recent history suggests their room to do so may be quite limited. After all, the relatively low price they charge for delivering digital services to consumers is the key defence they have against any anti-trust efforts aimed at ending their market dominance. With that in mind, Google, Facebook, Apple and Amazon could well decide that paying up is better than being broken up.
Similarly… In Australia, when Facebook was recently hit with a crude “pay for content” shakedown orchestrated by Rupert Murdoch and his cronies in Canberra, Facebook decided to pay off the Big Media enforcers, and thereby give them a vested interest in perpetuating Facebook’s market dominance. The same logic – pay for play – may become the initial response of the Big Tech giants if Biden can manage to get this global minimum tax rate proposal off the ground, even while the tax lawyers work overtime to minimise the liability that Google, Apple etc would finally face.
Taxing the neighbourhood millionaires
For now though, Wall Street is taking Biden seriously. It has also professed itself aghast at a New York state initiative – popularly known as the “millionaire’s tax”- that proposes to raise state and city taxes on high income earners located in the Big Apple itself. Yet for all the squawking threats to re-locate… Reportedly, the surcharge on income above $1million will only entail a rise from an effective rate of 12.7% to 15.73%. That hardly seems like a deal breaker for the millionaires in question, or a death blow to their ability to hire staff.
A proposal making its way through New York’s state legislature would have top New York City earners paying up to 15.73% in combined state and city taxes. New York state’s income tax rates currently range from 4% to 8.82% and New York City’s tax ranges from 3.08% to 3.88%, leaving the top earnings paying closer to 12.7%.
And back in New Zealand…
All of this political enthusiasm for raising taxes makes one realise just what an outlier New Zealand has become. In this country, raising taxes remains a taboo idea fraught with political peril. Look at the flak generated by the Greens’ proposal for a wealth tax, and at Labour’s headlong rush to distance itself from it. Similarly, the words “capital gains tax” are still wielded like a medieval curse. Back in the real world… The recent ratcheting up of the minimum wage seems to have had no discernible effect on growth or employment.
Regardless, the centre-right orthodoxy –i.e. National and Act – still clings quaintly to the notion that tax cuts will create economic growth, despite the lack of any supportive evidence over the past 40 years that this is indeed the case. On the evidence, all that tax cuts have been really good at creating is a widening inequality gap between the top 1 per cent and the rest of society. Here’s a brief overview of the recent track record of tax cuts/tax hikes in the US:
• In 1993, President Bill Clinton raised taxes on top earners from 31 percent to 39.6 percent. Conservatives predicted disaster;3 instead, the economy boomed. 23 million jobs were created and the economy grew for 32 straight quarters in what was then the longest expansion in history.
• By contrast, in 2001 and 2003, President George W. Bush cut income taxes substantially, lowering the top rate to 35 percent while also lowering top rates on capital gains and dividends. Conservatives maintained that the tax cuts would turbocharge economic growth; in fact, conservative think tank The Heritage Foundation predicted that growth would be so strong that the United States would entirely pay off its debt by 2010.5 Instead, the ensuing years saw weak growth, followed by the 2008 economic collapse. And as economist Danny Yagan has found, the steep cuts in dividend tax rates signed into law by President Bush in 2003 did not increase corporate investment or worker pay.
Then came the presidency of Barack Obama:
• The Bush-era tax rates stayed in place through 2012, but at the end of that year, President Barack Obama struck a deal to restore the 39.6 percent top tax rate and raise the tax rates on capital gains and dividends. Again, many conservatives predicted doomsday. However, the economy grew steadily…
What can we conclude from all this? Well, that tax rates may well be a far less important driver of economic growth/jobs/wages than interest rates, or government spending :
…Job growth has been much stronger following the two most recent increases in the top tax rate. Given that there are innumerable factors behind how the economy performs, this recent history certainly does not prove that raising taxes on the rich causes the economy to grow or that cutting taxes on the rich causes it to lag. It does, however, provide powerful evidence refuting the claims made by the proponents of trickle-down tax cuts.
Keep all this mind the next time you hear the Act Party or the Taxpayers Union claim that raising taxes will snuff out prosperity, or that the road to nirvana is paved with tax cuts. That was always quack medicine, even before the pandemic struck. In 2021, such views seem sadly out of step with where the rest of the world is headed.
Footnote One: The New Zealand experience has been much the same as in the US. Left unregulated and untaxed, the free market will not deliver what the 21st century demands. We saw that in the 1990s when the private sector was given free rein in the New Zealand economy and (as even former PM Jim Bolger recently conceded) all but wrecked it. It was an era marked by government bailouts and buybacks, punctuated by private quasi-monopolies that hiked prices for services, blocked competition and stifled innovation. Remember how Telecom in the 1990s was able to prevent New Zealanders from taking their phone number with them when they shifted from one phone company to the next? It took years of expensive court action and (ultimately, government intervention) to make “ number portability” a reality for the ordinary Kiwi phone user.
Footnote Two : Thankfully, our Commerce Commission has been taking a few baby steps to bring New Zealand back out of the free market Dark Ages. A couple of years ago, the Commission blocked the attempts to create (via a merger) what would have been an all-powerful media company, and it did so largely on the grounds that this erosion of competition would be bad for the public, and bad for the quality of New Zealand’s social discourse. In similarly welcome vein…from yesterday onwards, the price fixing actions of commercial cartels will be a criminal offence, subject to imprisonment. Hitherto, such behaviour had been subject only to civil actions and penalties. C’mon man, let’s get real.
These distinctions matter a lot in a country like New Zealand which – for all its zeal about market solutions during the Rogernomics era – has always been too small to sustain properly functioning markets. As a result, quasi-monopolies and cartel-like behaviour (by the like sof real estate firms and supermarket chains) have always been a clear and present danger here.
Keeping Dance Alive
The pandemic may have killed much of the club activity that provided the natural environment for electronic dance music. (Dua Lipa’s Future Nostalgia album was last year’s perfect evocation of the parties that never happened in 2020.) But the Peruvian born, Berlin based artist Sofia Kourtesis creates music that stands up in its own right, regardless of context. Her “By Your Side” track name-checks the Flamingos classic “ I Only Have Eyes For You” but only in passing… Many of the cuts on her Fresia Magdalena EP make similarly inventive use of ambient sounds (including the voice of her late father on the cut “ Nicolas” ) and field recordings. According to Pitchfork, all three of her three EPs also carry the image of Sarita Colina a devout domestic worker adopted by the transgender community in Lima as a kind of patron saint, after her death at the age of 26.