The US used to act as the global policeman; now it wants to become the global taxman. On the eve of the IMF and World Bank spring meetings this week, Janet Yellen called on countries around the world to join Washington in setting a global minimum tax rate for companies.
You can see why that might look like a good idea from the US Treasury secretary’s perspective. Last month, Joe Biden signed his $1.9 trillion (£1.4 trillion) Covid relief bill into law, paving the way for a host of measures, including direct payments of $1,400 to a broad swathe of Americans.
That was just the warm up act. Last week, the president unveiled a hugely ambitious economic plan focused on upgrading the country’s infrastructure, from roads and bridges to high-speed internet and clean energy networks. Price tag: $2.3 trillion.
How to pay for all this stimulus? Part of the Biden administration’s answer is to hike corporate tax from 21pc to 28pc, which will go some way to reversing Donald Trump’s decision to slash the top rate for companies from 35pc to 21pc in 2017.
There’s little doubt that US companies can, in aggregate, afford this. Last year, the corporate income tax take in the country represented just 1pc of GDP, the lowest level since the Great Depression.
But will they pay it? There are a huge number of complicated reasons why the US government is collecting so little revenue from companies. But at least part of the answer was that the global economy has become far more fluid.
The biggest tech companies mostly sell intangible products and are able to book their sales in more of less whichever low tax jurisdiction they choose. In recent years there has also been a wave of inversions, whereby US companies merged with foreign companies and moved their headquarters overseas to avoid taxes back home.
The Biden administration is clearly worried that a unilateral tax hike won’t work and is therefore keen to get the buy-in of the rest of the world.
But will other countries go along with this? Similar attempts to coordinate tax policy in the past have floundered. The EU, for example, attempted to introduce its own digital services tax but couldn’t get member states to agree.
In frustration, France introduced its own version based on the revenue tech companies generated from French customers. And guess what? The US government claimed the tax discriminated against American companies and slapped $1.3bn of duties on French goods in retaliation. What’s the French for “irony”?
This time round the US is leading the charge rather than acting as the main obstacle. Will it work? Maybe. The US certainly has a big enough stick with which to coerce other countries.
The US dollar is used in 88pc of all international foreign-exchange trades, according to the Bank for International Settlements. The US demands banks give it access to these cross-border currency movements. Fail to comply and they can be shut out of the dollar-clearing system, which effectively means being shut out of world trade.
This has allowed the US to develop a variety of financial techniques against terrorist groups, organised criminals and enemy states such as Syria, North Korea and Iran. So far, so fair enough.
But in recent years, “dollar weaponisation” has been used to more prosaic ends. In 2010, the US started demanding that global banks reveal which of their clients were American citizens with more than $50,000 in investments. In effect this law (called the Foreign Account Tax Compliance Act) forced foreign banks to act as the long arm of the IRS.
It was ultimately the reason why Switzerland had to abandon its famous bank secrecy laws in 2013. Again, few tears were shed. But there’s a nagging question about whether Swiss banking laws should be decided by, you know, the Swiss.
A digital services tax? Fine. A crackdown on tax avoidance and tax shelters? OK. These are important issues that require global solutions – hopefully after a healthy debate. But there’s a hint of mission creep about the latest proposals; the setting of corporate tax rates must surely be a national prerogative.
To take one example, Ireland has long used a corporation tax rate of 12.5pc to persuade the likes of Facebook, Google and Apple to set up subsidiaries in the country. If the OECD proposals were adopted, the tech companies would pay more tax, but not in Ireland. It would blow a $1bn hole in the nation’s budget, according to Ibec, the Irish business lobby group.
Does Yellen have a view on which taxes the Irish government should hike or services it might cut to fill this hole?
Don’t the American proposals skirt dangerously close to economic imperialism? And is the world prepared to accept a country that elected Donald Trump as president, and could do so again, should decide who pays what? What happens if a minimum global level is agreed, only for the orange guy to get back into the White House and undercut it?
The G20 is quite a disparate collection of countries. Many will want to play nice. Those that don’t like the sound of Yellen’s proposals may think about accelerating their plans for whittling down that big stick.
China, for example, has already made huge strides in developing a central bank digital currency. The digital yuan is primarily designed to allow Beijing to better monitor its population and economy. But, as a handy by-product, it would allow the development of an alternative international payments system beyond the prying eyes of the US.
And China is far from alone. Of the 60 central banks surveyed by the Bank for International Settlements last year, nearly two thirds said they were looking at creating their own CBDCs. The more cross-border transactions that are conducted with these new digital currencies, the weaker the US hold over the global financial system and the less effective its sanctions.
The dollar has seen off plenty of challengers in the past. But if Biden’s plans accelerate the development of alternative financial systems and undermine the greenback’s hegemony even slightly, it would have to go down as one of the most spectacular economic own goals of all time.
