Originally posted on Business Post 4 April 2021.
A democratic left-leaning president can always be expected to favour big spending programmes, but has anyone ever been as big a spender as US president Joe Biden?
After committing $1.9 trillion to pandemic responses, he now proposes to commit a further $2 trillion to infrastructure spend. This marks a radical shift in economic approach between Biden and his predecessor.
Donald Trump seemed to view economic growth as being primarily private sector-driven. Biden, on the other hand, is betting on a public expenditure programme.
A trillion here, a trillion there, and suddenly you're talking real money. Even for an economy as vast as that of the US, expenditure in the trillions of dollars cannot be sustained by standard taxation or borrowing. Additional tax has to be found somewhere. In line with his election promises, Biden is looking to raise it from the corporate sector, with a shake-up of the tax code and a headline-grabbing hike in corporation tax from 21 per cent to 28 per cent.
Any mention of changes to US corporation tax policy tends to cause a flurry among the commentariat here, many of whom seem to regard Ireland's attraction as a destination for US investment as being purely tax-driven. However, Biden‘s proposed reforms are all about how much money is collected by Uncle Sam.
The US already has many counterbalancing measures in its tax code to reduce the attractiveness of offshore tax planning by American-headquartered companies. Since 2017, there have been restrictions on tax breaks for foreign expenditure. Intangible assets like patents, held overseas by US corporations, are deemed to generate taxable income in the US.
The key to assessing how Ireland will fare as a destination for US foreign direct investment following these reforms is the extent to which Irish corporation tax paid by a US subsidiary reduces the overall tax bill of its US headquarters. At the moment, most (if not all) corporation tax paid in Ireland by a US subsidiary is available to offset against the ultimate US tax bill. There is insufficient detail available yet on the proposals to know if that will continue.
Another factor is whether or not these US changes will prejudice how Irish tax rules operate when compared with the tax regimes of competitor countries in Europe, in the Far East and in Latin America. That didn’t happen with the 2017 changes, and hopefully it won’t happen this time either.
More broadly, the proposals could well reinforce the position of the US as the ultimate arbiter of cross-border tax policy. There is ongoing OECD work towards reforming the tax landscape for multinationals in the digital sector like Google, Amazon and Facebook. This will involve shifting the taxability of digital services away from the countries where the services are provided, and into the countries where the market exists for those services. As the homeland for most of the tech giants, the US has the most to lose from such a policy shift, and needs to have compensating measures.
A minimum effective rate of corporation tax worldwide is also on the OECD agenda. This is a concept the US is far more comfortable with. The Biden administration may be stealing a march by enhancing its own existing models of restricting foreign deductions and claiming the earnings of overseas subsidiaries for additional tax in the US.
Will any of this come to pass? US tax reform has traditionally moved at a glacial pace. There were no significant developments in US tax policy between 1985 and Trump’s Tax Cuts and Jobs Act of 2017. Yet the current proposals may be landing at a good time.
First of all, if only because of the pandemic response and the obvious need for infrastructure investment in the US, it's hard to argue with a move to increase taxes on companies. After all, companies don’t vote.
Secondly, the Democrats currently have a (tenuous) grip on both houses of Congress, which is essential for any fiscal legislation to pass. The main proposal requiring House of Representatives and Senate approval would be hiking the tax rate up to 28 per cent.
Thirdly, it seems that many of the plans involve strengthening measures that are already in place to tighten the offshore regime. It’s always easier to work with what’s already there, rather than try to invent new taxes.
Ireland has used tax policy to good effect in promoting industrial policy for more than half a century, but tax is not the only driver of foreign direct investment. Speaking at a US-Ireland Economic Roundtable virtual event last week, Congressman Richard Neal pointed towards the Irish education system and the stability of the political system as components for a successful foreign investment regime. That observation has particular significance because all US tax law has to be passed by the House Ways and Means Committee, which Neal chairs.
Irish corporation tax policy on its own may no longer be the investment attraction it once was, but as long as it does not become a handicap we can still compete very well. In the years ahead, the Irish policy imperative should be to secure the corporation tax yields that we already have. Joe Biden's America is not the only country that needs to be able to spend on pandemic responses and infrastructure.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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