The Econmist - USA (2021-10-30)

The Economist October 30th 2021 Finance&economics 83

TaxinAmerica

A taleoftwo

profits

O

nthefaceofthings,it seemsbothab­

surd andunfair thatlarge American

companies regularly whittle down their

taxbills,takingadvantageofeveryloop­

holeonoffer.Onestudyfoundthatatleast

55 bigcompaniesincurrednofederaltaxes

atallontheirprofitsin2020.Aproposal

beingdiscussedasTheEconomistwentto

press,andastheDemocraticPartyscram­

bledtofunditssocial­spendingpackage,

seemstooffera popularsolution:a mini­

mumtaxoncorporateearningsasreported

toshareholders,ratherthanasmassaged

downwhenreportedtotaxcollectors.

Thestructureoftheminimumtaxlooks

simple enough. Companies that report

morethan$1bninprofitstoshareholders

wouldpaya taxofatleast15%onthosepro­

fits.Thelevywouldbeexplicitlyaimedat

firmssuchasAmazon,whichhadaneffec­

tivefederalincome­taxrateofjust4.3%

from 2018 to2020,farbelowthestatutory

rateof21%,accordingtotheInstituteon

TaxationandEconomicPolicy,a left­lean­

ingthink­tank.Alltold,thenewtaxwould

applytosome 200 bigcompanies.

Politically,theminimumcorporatetax

hasmuchgoingforit.AngusKing,aninde­

pendentsenatorwhoisanarchitectofthe

proposal,believesitcouldraise$400bn

overtenyears.Thatwouldhelpfundthe

billthatisthecornerstoneofPresidentJoe

Biden’s“BuildBackBetter”agenda,featur­

ingabout$2trninspendingoverthenext

decade(equivalenttolessthan1%ofpro­

jectedgdpduringthattime).Thecorporate

minimumisalsolesscontroversialthan

anothernewlevytheDemocratswererow­

ingover,a taxonunrealisedcapitalgains

thatwouldtarget 700 billionaires.

Democratshadhopedatfirsttorelyona

generalincreaseinthecorporate­taxrate

toraiserevenues.ButKyrstenSinema,a

DemocraticsenatorfromArizonawhose

supportisneededforthebilltopass,op­

posedthewiderincreaseandhasinstead

backed the minimum tax as “common­

sense”.TheideaalsohastheapprovalofJoe

Manchin,a DemocraticsenatorfromWest

Virginia,whosevotecouldprovedecisive.

The economic rationale is, however,

moredubious.Despiteitsapparentlysim­

ple structure, it would introduce more

complexity into an already bloated tax

code.Companieswouldfacetwoparallel

systems,calculatingtheir liabilitiesfirst

underregulartaxrulesandthenunderthe

minimum­taxregime.Anearlierversion

WASHINGTON,DC

Aminimumtaxoncompaniesseems

alluring,butislikelytodisappoint

Theenergycrunch

Perverse but

persistent

“T

hisreformwillincreaseourenergy

security...and  it  will  help  us  combat

the threat posed by climate change.” Those

hopeful words were uttered by Barack Oba­

ma, then America’s president, at the end of

a meeting of the g20 group of countries in

Pittsburgh  in  2009.  The  gathered  leaders

had agreed to phase out subsidies for fossil

fuels,  which,  by  encouraging  the  use  of

polluting  fuels,  tilt  the  playing  field

against  cleaner  alternatives.  Twelve  years

later,  however,  fossil­fuel  subsidies  are

still  hanging  on.  And  as  a  severe  energy­

supply  crunch  leads  to  soaring  prices

around  the  world,  they  are  making  some­

thing of a comeback.

Ministers  from  the  European  Union

held  an  emergency  meeting  this  week  to

discuss how to respond to the price spikes,

but failed to agree on a plan. National poli­

ticians,  however,  are  turning  to  subsidies

and price caps. Italy is considering spend­

ing  more  than  €5bn  ($5.8bn,  or  0.3%  of

gdp) this year and next to reduce the price

of  natural  gas  and  power  for  consumers.

France  will  extend  its  cap  on  household­

gas prices until the end of next year. 

Most  people  would  agree  that  fossil­

fuel  subsidies  should,  in  principle,  be

ditched. But no politician wants to expose

voters  to  pain  at  home  or  at  the  petrol

pump.  Even  before  the  energy  crisis,  the

politics of subsidies were veering off track.

Bloombergnef,  a  research  outfit,  and

Bloomberg  Philanthropies,  a  charity,  cal­

culate  that  g20  countries  offered  direct

subsidies  on  coal,  oil,  gas  and  fossil­fuel­

fired  power  worth  more  than  $3.3trn  be­

tween 2015 and 2019. Tim Gould of the In­

ternational  Energy  Agency,  an  official  bo­

dy, notes that periods of lower energy pric­

es  offer  governments  a  chance  to  reduce

subsidies. The fact that they did not use the

pandemic­induced drop in energy demand

and prices last year to roll back subsidies,

he says, was “a missed opportunity”. In July

g20  ministers  could  not  even  agree  on  a

date  by  which  fossil­fuel  subsidies  would

be phased out. 

A  new  study  from  the  imfpowerfully

sets out both the scale of the subsidies and

their impact. It estimates the effects of two

types of support. Explicit subsidies, which

include  production­tax  breaks  for  oil

firms,  create  a  wedge  between  the  cost  of

supplying  fuel  and  the  price  consumers

pay at the pump. Yet governments are un­

derpricing energy not only relative to sup­

plycosts,but alsocomparedwithsocial

costs(suchasthedamagetohealthandthe

environmentcausedbyfossilfuels).The

researcherscallthisanimplicitsubsidy.

They estimatethat explicit subsidies

willamounttojustunder$600bnthisyear

(or0.6%ofglobalgdp) butthatimplicit

subsidiescouldbetentimesthat(seechart

1).Evenifthevalueofexplicitsupportre­

mainsconstantasa shareofglobaloutput,

theboffinsreckonthatthedamagefrom

fossilfuels,especiallycoal,willworsen,

andthatthevalueofimplicitsubsidieswill

continuetorise(seechart2).

Ifgovernmentsweretoeliminateboth

explicitandimplicitsubsidiesby2025—

admittedly,ahugeif—then globalemis­

sionsofcarbondioxidewouldfallby36%,

andglobaltaxrevenueswouldbehigherby

3.8%ofworldgdp, comparedwitha sce­

nariowithnosubsidyreform.Ratherthan

a miserableworldinwhichwarmingis3°C

abovepre­industriallevels,thetempera­

turerisewouldbekept“wellbelow”2°C

andperhapsevenontracktowards1.5°C,as

theun’sParisclimateaccordsintend.As

theworld’sleaderspreparetoassemblein

Glasgowfora climatesummit,thehopeis

thatthesefindingsre­energisetheirefforts

totacklesubsidyreform. n

N EW YORK

As fuel prices spike, governments

reach for the dirtiest tool in the box

Primingthepump

Globalfossil-fuelsubsidiesbytypeoffuel

%ofglobalGDP

Source:IMF

*Governmentsupporttoproducersorconsumersoffossilfuels

†Dierencebetweenfinalpricesandsocialcosts ‡Forecast

2

Coal Petroleum Naturalgas Electricity

0.8

0.6

0.4

0.2

0

25‡202017

Explicit*

8

6

4

2

0

25‡202017

Implicit†

Cash to burn

Global fossil-fuel subsidies*

Source:IMF

*Basedonprojectionsforfuelusefrom2019. 2021 prices

†Differencebetweenfinalpricesandsocialcosts

‡Governmentsupporttoproducersorconsumersof fossil fuels

1

Implicit†

Explicit‡

8

6

4

2

0

25202015

$trn

8

6

4

2

0

25202015

% of global GDP