Yellen’s New Alliance Against the Elves – 08/06/2021 – Paul Krugman

Over the weekend, largely spurred on by U.S. Treasury Secretary Janet Yellen, finance ministers from the Group of 7 (G7) – the major advanced economies – reached agreement on a rate of 15% minimum tax on the profits of foreign affiliates of multinational companies. . You may not be sure what this means or why you should be interested in the topic.

So I’m going to tell you the story of Apple and the elves.

Apple has a wide international reach. Their products are sold almost everywhere; it operates subsidiaries in several countries. And it is of course very profitable.

But where are these profits made? Apple does not have significant industrial activities and mainly subcontracts its production to other companies, most of which are in China. Much of its profit comes from licensing rights, which reflect the company’s intangible assets – patents, trademarks, trade secrets and other marks. And where are these intangible assets located? From an economic point of view, this question is irrelevant.

For tax purposes, however, Apple has to report its profits somewhere. For now, this means that it is the company that chooses to declare where it makes its money – and what it does, of course, is to declare that the profits are made by subsidiaries located in countries which apply low taxes on these profits, in particular Ireland.

In fact, until 2014, it was even more than that. Much of the company’s global profits have been attributed to Apple Sales International, registered in Ireland but, for tax purposes, located nowhere. In 2015, however, a combination of pressure from the European Commission and changes in Irish tax laws prompted Apple to allocate a large chunk of its profits to its usual Irish subsidiary.

How important was that? On paper, Ireland’s GDP (Gross Domestic Product) suddenly increased by 25%, when nothing had changed in reality – a phenomenon I have dubbed “the pixie economy”, a nickname that has caught on (the Irish, luckily, have a sense of humor).

The truth is, Apple is far from the only company to exploit its multinational status to avoid taxes, and Ireland is far from being the most infamous tax haven, even in Europe.

According to figures from the International Monetary Fund (IMF), Luxembourg – whose population is similar to the state of Vermont [600 mil habitantes] – attracted more than $ 3 trillion in investment from foreign companies, a total comparable to that of the United States as a whole. What does it mean? The real investment involved is almost nonexistent. Instead, the little duchy offers many companies deals that allow them to file their taxes there, paying next to nothing.

So what do we learn from these stories? First of all, that the current international tax system offers immense possibilities for tax evasion by large companies.

Second, we’ve learned that when countries try to compete to lower corporate tax rates — what is known as the “race to the bottom” —they don’t really have a hard time figuring out who gets the jobs. and investments that will increase their productivity. There is little evidence that profit tax cuts incent companies to build factories efficiently and expand employment.

The real issue is where the profits will be reported, and therefore taxed. And with the continued decline in tax rates and the rise in tax evasion, the result is that tax revenues continue to decline.

In the 1960s, federal corporate taxes were equivalent to 3.5% of US GDP; now they are on average 1%. That’s a loss of over $ 500 billion a year in revenue, enough to pay for a lot of infrastructure, children’s services, and more.

Which brings us to this G7 agreement. How would the minimum rate of 15% work? Here’s how Gabriel Zucman – who has probably done more than any other economist to highlight the importance of multinational tax evasion – sums it up: “Imagine a German multinational that represents income in Ireland, taxed at an effective rate of $ 5. %. Germany will now collect 10% more taxes, rising to 15% – and the same goes for profits declared by German multinationals in Bermuda, Singapore, etc.

This would of course immediately reduce the amount of taxes that multinationals could avoid by transferring declared profits to tax havens. It would also significantly reduce the incentive for countries to serve as tax havens in the first place. And if you think companies could avoid the problem by moving their headquarters to, say, Bermuda, the big economies have the ability to make those moves more difficult.

To put the situation in a larger context, what we see here is the beginning of an attempt to fix a system that harms workers and benefits capital. Workers have little means to escape income tax, payroll taxes, and sales taxes unless they move to another country. Multinational corporations, which are ultimately controlled by a small, wealthy elite, can sue low-tax jurisdictions without doing anything real except hiring talented accountants. The G7 plan would contain this practice.

So far, it’s true, we only have an agreement between the finance ministers, and some important details are still unresolved. Large corporations can hire lobbyists, not just accountants.

But the deal remains a victory – an important step towards a more just world.

Translation of Paulo Migliacci

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