After the Emergency: Balancing the Budget

Calls for the wealthy to pay more taxes are nothing new. Left wing parties have been campaigning for more progressive taxation since the advent of socialism and social democracy over a century ago. Opposing them has been an alliance of conservatives and classical liberals advocating free market economics and supply-side solutions. As a consequence, both income tax rates and corporation tax rates have fallen substantially since the 1980s and wealth taxes have become politically toxic.  Driving this consensus have been the IMF and the World Bank, a pair of Washington based global financial institutions providing credit and development funds to low and middle income countries.

For the past 30 years, the IMF, in particular, has become a bête noire for left wing activists opposing the Washington Consensus of privatisation, liberalisation and economic deregulation. IMF stability funds have often been tied to a reform package intended to stimulate growth through free market orthodoxy. Thus, a recent IMF proposal for a temporary solidarity tax in advanced economies came as a surprise to parties across the political spectrum. It shouldn't have done.

Austerity?

IMF thinking has been trending towards a more centrist approach for some time. Following the 2009 Financial crisis, they were among the first major institutions to raise concerns about the impact of austerity measures on economic growth. This hasn't necessarily been reflected in IMF policy on the ground, but it did impact thinking in the west. European governments have abandoned austerity measures in recent years, and there is no serious suggestion that they're about to return.

There has been rumour of treasury imposed budget cuts in the UK government following Rishi Sunak's budget last month. However, these will be balanced with corporation tax rises that would have unthinkable a few years ago. The UK will still have the lowest corporation tax rate in the G7, but the George Osborne era plan to cut it to tax haven levels has been firmly abandoned. For individual taxpayers, it's been strongly hinted that Income Tax thresholds and National Insurance rates will also rise to further pay for the pandemic support.

Other governments have been less clear on their post-pandemic fiscal policies, but they're unlikely to be as open to austerity politics as the UK government. There are upcoming elections in both France and Germany that will put the brake on unpopular economic policies. Meanwhile, across the pond, President Biden never supported austerity to begin with. That's not to say we'll see spending increases in the US as some Democratic Senators push back against the scale of the proposed infrastructure bill. Any accord that is reached will likely include increases in tax rates for corporations and high-earners.

International Co-operation

The Biden administration is instead focusing on multinational tax reform. Treasury Secretary, Janet Yellen, is openly campaigning for a minimum global corporate tax rate. She floated a target rate of 21%, which would require significant rises among some of the most famous low taxation regimes such as Ireland. The extent of any agreement is unclear, but the OECD are already working on tax harmonisation as part of an ongoing initiative to reduce tax avoidance by multinationals corporations. An accord could likely be reached within the G20, but the smaller jurisdictions may be less willing to co-operate. A global agreement setting a minimum tax rate of 12.5% might be possible, though, as this wouldn't require any major economy to increase tax rates.

Also under discussion at a global level is cross-border taxation on technology firms. The Biden administration's willingness to reach an agreement on this issue is in sharp contrast with the Trump administration, which threatened France with sanctions after it levied a digital services tax on Google and Facebook. Many multinationals shift their profits to low tax regimes such as Ireland or the Netherlands, meaning that they pay nothing to the US treasury. This is a situation that the new President is keen to fix as part of his plan to increase corporate taxes. Meanwhile, these firms' local offices also pay little or no tax on sales in their countries. The Yellen proposal would fix both of these issues by linking corporation tax to sales but allowing a firm's home country to levy a top-up tax on sales in low tax jurisdictions. It will be a long time before this is adopted, but tech companies want a global agreement before they are hammered by unilateral taxes such as the one in France.

What price solidarity?

In this environment, the IMF proposal for a solidarity tax is hardly new or surprising. Windfall taxes are not a new idea either. The UK levied one on utility firms in 1997, and it has been regularly discussed during periods of high oil prices ever since. Governments have been forced to bail out millions of businesses and workers in the hospitality and service sectors impacted by the pandemic. On the flip side, tech firms have benefited substantially from the accelerated digital transformation brought on by lockdowns and remote working. The idea is that the winners should help pay for the losses experienced by the losers.

That sounds fine in principle, but governments need to be careful to target companies who actually made excess profits during the pandemic rather than those merely perceived as doing well. Google saw a revenue drop in Q2 last year due to cuts in ad spend, but has otherwise prospered. Furthermore, a shift to more progressive taxation would foster confidence in the fairness of the current economic order. The IMF justified solidarity taxes as a mechanism to avoid the kind of voter polarisation already seen in the US. Even right-wing voters believe the tax system to be rigged in favour of the wealthy. Any moves to correct this imbalance would be well received among the populist voters that now form an important part of conservative coalitions in the west, as well as among left-wing voters. In doing so, it would help increase trust in governments among those left behind by globalisation. That doesn't mean it will actually happen, but the mere concept would have been unthinkable a decade ago.