Biden, Yellen and the war against the goblins

Joe Biden, during a speech on how to stimulate employment on April 7 at the White House.KEVIN LAMARQUE / Reuters

In the summer of 2016, Ireland's Central Statistical Office released an astonishing report: the small country's GDP had risen 26% in one year (a figure that would later be revised upward).

It would have been an impressive achievement if the growth had actually happened.

But this was not the case, as government authorities recognized from the beginning.

Rather, it was a mirage created by the corporation tax games.

At the time, I called it "goblin economy";

luckily the Irish take things with a sense of humor.

What really happened?

Ireland is a tax haven, with a very low corporate tax.

This gives the big multinationals incentives to create Irish affiliates, and then use creative accounting to ensure that much of the profits made around the world accrue to those affiliates.

It appears that in 2015, several large companies became even bolder in their profit shifting, leading to an increase in the value of production that they claimed to have achieved in Ireland, an increase that was not consistent with any reality.

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To understand the great corporate tax reform proposed by the Biden Administration, what you need to know is that it revolves around goblins.

One way to interpret the huge corporate tax cut passed by Republicans in 2017 is that it was based on the hidden premise that goblins were real.

In other words, the architects of the tax cut insisted that large companies had been moving their operations abroad to avoid US taxes, and that reducing those taxes would recover millions of jobs.

It was not so.

In fact, the tax cut had no visible effect on business investment, probably because it addressed a false problem.

American multinationals had not moved jobs abroad to evade taxes;

they had simply evaded taxes.

The true impact - or indeed the lack of impact - of corporation tax on business decisions becomes apparent when we look at foreign countries where multinationals report large profits.

If they were truly responding to taxes by making large investments abroad that eliminated jobs in the United States, it would be expected that much of their profits would come from large production centers like Germany or China.

However, more than half of the profits that large US companies claim to have obtained from investments abroad come from tiny tax havens, such as Bermuda or the Cayman Islands, where they do not have any real activity.

This, by the way, is not just an American problem.

The IMF estimates that roughly 40% of foreign direct investment - basically cross-border business investment - is “ghost” investment, that is, accounting fictions created to evade taxes.

That is why on paper Luxembourg, with only 600,000 inhabitants, receives more foreign investment than the United States.

Therefore, the real problem with US corporate tax policy is not the loss of jobs, but the loss of income.

For the most part, the "

Made in America

Fiscal Plan

" presented by the Biden administration is an initiative to get them back.

As the name of the plan suggests, Administration experts do believe that there are aspects of the US tax code that have created an incentive to move jobs abroad.

But they consider that the problem is a consequence of the details of the tax code, and not of the total tax burden.

And while they believe that the tax reform can improve incentives to invest in the United States, the main objective of the plan - even things like the proposal to establish a minimum tax rate of 21% on profits made abroad, in which it has emphasized Janet Yellen, the Secretary of the Treasury, is not so much in these incentives as in increasing the income derived from the corporate tax, which falls mainly on the rich and foreigners, and which is currently at an all-time low.

And what about the warnings issued by business groups that raising taxes on multinationals would have dire economic consequences?

Well, it's normal for them to say it, right?

And if raising taxes would have such a negative effect, why does lowering them produce no visible positive result?

So the corporate tax plan seems like a really good idea.

Partly because President Biden, unlike his predecessor, has hired people who know what they're talking about.

And it's also a welcome break with the ideology that the only way to help American workers is indirect action: cutting taxes on multinationals and the wealthy in the hope that somehow a full pot will turn up. of gold at the other end of the rainbow.

The conclusion Biden's team seems to have come to is instead that the way to create jobs is to create jobs, primarily through public investment, and not by chasing unicorns and goblins.

To the extent (partial) that the direct creation of jobs must be paid for with new taxes, these should be imposed on those who can afford to pay them.

Encouraging isn't it?

Paul Krugman

is a Nobel Laureate in Economics.

© The New York Times, 2021. News Clips translation.