Joe Biden’s tax plan will hurt Irish economy
The magnitude of what is planned is extraordinary. Whether everything is necessary, since the US economy is already on the road to recovery, is another question.
The United States created nearly a million jobs last month. Unemployment has fallen to six percent. The growth rate this year is expected to be at least five percent.
And that’s all before the Biden madness starts with his extra trillions. The danger of fueling inflation and wasting huge sums of money is real.
But it’s not just the immense scale of Biden’s overall plan that gets attention here. There is a sting in the tail for Ireland, one that worries officials here.
This has to do with how Biden’s plan will be paid for. The nearly $ 2 trillion of the first half of the plan, which concerns relief from Covid and was passed by Congress last month, is being borrowed.
The $ 2 trillion in the second half of the Biden plan, for infrastructure, job creation, etc., is to be funded largely through increased taxation. There will be higher income tax increases, as well as other measures that will affect individuals.
The most significant change, however, is Biden’s proposal to increase corporate taxes. Under Trump, that had been reduced from 35% job destruction to 21%. Biden’s plan would bring it down to 28%.
While that may not be making the headlines in the United States, Biden’s proposal to go after U.S. multinational corporations that avoid taxes on profits they make in other countries by keeping them abroad is related to this. Since he intends to hit home businesses with higher taxes, he can hardly let these multinationals get away with it.
For example, the tax component of Biden’s plan includes a minimum overall corporate tax rate of 21% on U.S. corporations abroad. As you know, we have a lot of them here in Ireland providing tens of thousands of jobs.
The main reason they’re here is our 12.5% corporate tax rate. (It’s not that a lot of the big guys pay the overall rate – we’re helping them lower it to an effective rate of just a few percent.) They’ll almost certainly get credit for any tax they pay here, but they will then have to repay the balance up to 21% in the United States
The question is, if they are to be hit with an overall tax rate of 21 percent anyway, will they still want to come here? Will those who are well established here already want to expand their operations in the future?
In the good old days – until recently, in fact – American companies with operations in other countries paid no tax on their income abroad until they brought it home. This caused them to hold and reinvest their profits overseas. And many of them settled in countries with low corporate taxes, including Ireland.
This means that our tax system has been a sore point for American leaders for some time. We of course deny that we are a tax haven. But our behavior over the past few decades tells a different story, allowing large American corporations to pay very low taxes on their operations here and also helping some of them avoid tax on a large portion of their global profits by channeling them to or through Ireland.
The first serious attempt to reduce this tax evasion by American multinationals came from the Trump administration which introduced the GILTI (global intangible low-taxed) tax of 10.5% for American multinational companies which keep their profits at l ‘foreigner. You will recall Trump making uncomfortable jokes about Ireland’s fiscal setup and in particular complaining about the amount of drugs made in Ireland by US pharmaceutical companies for the US market.
So what President Biden is proposing is not new. The impact of the 10.5% GILTI tax on US business investment here is not yet clear.
It doesn’t appear to have been too negative so far, due to a few shortcomings. But Biden now wants to double it to 21%, and it’s widely believed that that level is doomed to be detrimental for us.
It’s not just the rate that’s a problem. As part of Biden’s plan, the GILTI tax would be levied on all profits made, eliminating the allowance that allows the top 10 percent to avoid the tax.
In addition, the tax would be imposed individually in each country in which the US company operates, rendering inefficient the transfer of profits from subsidiaries in different countries. Both of these have implications for Ireland.
As we said, there is a lot of concern here about all of this right now. No one is panicking so far, as we have yet to see how many Congress will pass and what the final form will be.
The detail will be important to us. But it is admitted here that a substantial change is on the way.
Biden’s determination to effectively tax U.S. multinational corporations, underscored in speeches before and during the campaign, made it clear. The same is true of the level of support on the issue across Congress. All of this would mean that our corporate tax rate of 12.5% - and the special tax deals we’ve been prepared to make to attract the biggest players here – will no longer be the powerful pull for American businesses that it is. once was.
If the doubling of the GILTI tax were to occur, then we would have an intriguing decision to make. We could increase our corporate tax rate to retain more of the additional tax that US multinationals would have to pay. But it would reverse our entire approach to attracting foreign investment so far and also be complicated and could have unintended consequences.
Any faint hope we may have that Biden’s love for the old country somehow protects Ireland from this change will likely be in vain. We are well known for our very low tax rate and for facilitating profit shifting by multinationals, and this is no longer acceptable, neither to Biden nor to other senior politicians in the United States.
Biden has said explicitly during the campaign that he wants to target profits in tax havens, and whether or not we like the definition, that includes us.
Like Trump before him, Biden is particularly focused on repatriating the overseas operations of U.S. drug companies. Ireland is one of the biggest overseas locations for these pharmaceutical giants. The effect here over time could be devastating both in the loss of jobs and huge amounts of tax revenue on the corporations that fund state spending here.
Hopefully we don’t embarrass ourselves by playing the Irish card and begging for special treatment. This is unlikely to work. Just think of the vaccine shenanigans.
Following Taoiseach Micheal Martin’s St.Patrick’s Day virtual tour with Biden, some opposition politicians here have questioned why Martin hadn’t begged him for US vaccines, especially when they learned that Spare vaccines from the United States had been supplied to Mexico. and Canadian.
This made sense from a US perspective since they are the closest neighbors and therefore have to go first due to the danger of spreading across borders. Giving these vaccines to Ireland would not have been justifiable, although that did not prevent the moans here of a missed opportunity.
Trying to exclude Ireland from Biden’s corporate tax plans for US multinationals overseas would also not be justifiable. And no matter how Irish Biden feels, he won’t.
Whether we like it or not, change is coming. The campaign to get multinationals to pay their fair share of taxes has been underway at the Organization for Economic Co-operation and Development for some time.
The aim was to get all countries, including low-tax countries, to agree on a minimum level of corporate taxation. The numbers mentioned so far have been well below the 21% of the Biden plan, but this preemptive move by the United States could be a game-changer.
This issue is of vital importance to Ireland. Multinational corporations are a huge part of our economy and most of them are American.
All the major IT players like Google, Facebook, Amazon, Apple, Microsoft, PayPal, etc. are here. All the pharma giants, like Pfizer, Johnson & Johnson, etc. are also there. Both sectors continued to thrive during the pandemic. On their own, they account for about 80% of our global exports and about three-quarters of the corporate tax revenues collected here, as well as thousands and thousands of jobs.
We like to pretend that our low tax rate isn’t the most important reason they’re here. We like to say that it is just as important to speak English, to provide access to the EU market, to have a young, well-trained workforce, a stable democracy and a reliable legal system. We may soon find out how true this is.