The Economist - UK (2022-04-02)

The Economist April 2nd 2022 Finance&economics 69

approached  an  all­time  high  in  February,
according  to  an  index  maintained  by  the
un Food  and  Agriculture  Organisation.
They will have only gone up further since.
One  consequence  of  this  is  a  surge  in
poverty.  The  Centre  for  Global  Develop­
ment,  a  think­tank,  estimates  that  40m
people  worldwide  will  be  pushed  into  ex­
treme  poverty  as  a  result  of  Russia’s  inva­
sion of Ukraine. (By comparison, the World
Bank estimated in 2021 that roughly 100m
people  may  have  fallen  into  poverty  be­
cause  of  the  covid­19  pandemic.)  High
commodity  prices  will  also  add  to  macro­
economic strains in many places. 
Total  debt  across  emerging  and  devel­
oping  economies  stood  at  a  50­year  high
last year, relative togdp. The cost of servic­
ing  those  borrowings  is  rising,  as  central
banks  worldwide  begin  pushing  up  inter­
est  rates  in  order  to  check  inflation.  The
tough  economic  conditions  are  weighing
on  emerging­market  currencies,  raising
the cost of foreign­currency debt and forc­
ing  governments  to  drain  currency  re­
serves in order to shore up exchange rates.
Higher  commodity  prices  could  also  fur­
ther  complicate  the  fiscal  picture  for
emerging  economies,  given  that  many
governments  offer  generous  food  and  en­
ergy subsidies to households. 
Sri  Lanka’s  case  is  illustrative.  Its  for­
eign­exchange reserves shrank from more
than  $8bn  in  2019  to  around  $2bn  earlier
this  year.  Though  the  government  has
sought  aid  from  both  India  and  China,  it
will almost certainly require help from the
imf, with which it is expected to begin ne­
gotiations in April (and which may ask for
a reduction in subsidies as part of any res­
cue package). 
Egypt  has  also  struggled.  It  imports
nearly  two­thirds  of  the  wheat  it  con­
sumes,  the  vast  majority  of  which  comes
from  Russia  and  Ukraine.  At  a  pre­pan­
demic level of consumption, Egypt’s annu­
al  bill  for  food  and  energy  imports
amounts  to  about  40%  of  its  foreign­ex­
change  reserves  (see  chart).  Sensing  trou­
ble, foreign investors began pulling money
out of the country, which in turn forced the
government  to  devalue  the  currency  by
14%. On March 23rd it officially sought the
imf’s help.
According  to  estimates  by  the  World
Bank,  at  least  a  dozen  countries  may  find
themselves  unable  to  service  debts  over
the  next  12  months,  as  stores  of  hard  cur­
rency run low. Some south Asian and north
African economies are in danger; Pakistan
and  Tunisia  look  particularly  vulnerable.
Even  emerging  markets  with  healthier  fi­
nancial positions can expect to face slower
growth, higher inflation and grumpier citi­
zens as a result of Russia’s war. 
The  news  is  not  all  grim.  Economies
that  specialise  in  the  production  of  the
commodities  most  disrupted  by  the  war

standtoreapsomebenefitfromsoaring

prices.Oil­exportingGulfstateswillcol­

lecta windfall,whichhigherpricesforim­

portedfoodstuffswillonlypartly offset.

SomeLatinAmericancurrencieshaveap­

preciatedsincetheoutbreakofwar,inex­

pectationofhigherearningsfortheiroil

andgrainexports.In 2021 Brazilseemedto

beslippingintocrisis,weigheddownby

high inflationandfiscalprofligacy. The

warhasgiventhecountry,whichisa big

commodityexporter,a reprieve.Formuch

oftherestoftheworld,though,it hasbeen

anythingbut.n

Material maths

Imports as % of foreign-exchange reserves

Selected emerging markets, 2019*

*Foreign-exchange

reserves data for 2020

Sources:ObservatoryofEconomic

Complexity;WorldBank

0 5 10 15 20

Wheat and corn

Oil

80

60

40

20

0

Chile

China

Egypt

India

Pakistan

Sri Lanka

Tunisia

Vietnam

Tu r ke y

Taxingthewealthy

Before death

do us part

M

ost americans want the govern­

ment  to  impose  higher  taxes  on  the

ultra­rich.  Every  few  months  or  so  Demo­

cratic  lawmakers  unveil  plans  for  doing

just  that,  only  to  stumble  well  before  en­

acting them. It is not just that the wealthy

can  afford  powerful  lobbyists.  The  nature

of  their  fortunes  also  makes  them  an  elu­

sive  target  for  tax  authorities.  A  new  pro­

posal by the Biden administration may of­

fer a partial solution, provided it can over­

come political and legal hurdles.

The idea, contained in President Joe Bi­

den’s new budget proposal on March 28th,

is that Americans worth more than $100m

would  pay  a  minimum  tax  of  20%  on  all

their  income,  including,  controversially,

the appreciation of their investments. If an

ultra­rich American makes a paper gain of,

say,  $10m  on  his  stock  portfolio  in  a  year,

he would face a liability of $2m.

The  goal  is  to  close  a  gaping  loophole.

Wealthy Americans must pay capital­gains

taxes of at least 20% when they sell assets.

But when assets are inherited, the price at

the time of the transfer forms the new ba­

sis for calculating capital gains. In this way

the  ultra­rich  can  shrink  their  tax  bills:

they  owe  nothing  on  unsold  assets  while

alive and their heirs then benefit from the

“stepped­up basis” for capital gains. Econ­

omists  in  the  Biden  administration  have

calculated  that  the  400  wealthiest  Ameri­

can  families  pay  an  average  federal  in­

come­tax  rate  of  just  8%,  far  below  the

rates paid by most in the middle class.

A  simple  way  to  close  this  loophole

would  be  to  recognise  all  capital  gains

upon  inheritance.  Indeed  that  was  Mr  Bi­

den’s  preference  in  legislation  last  year.

But opponents tarred it as a “death tax” that

would  bankrupt  family  farms.  Although

that  charge  was  unfair—almost  all  farms

would have been below the tax threshold—

the Democrats dropped the idea.

The Biden administration dubs the new

proposal  a  “billionaire  minimum  income

tax”. Steve Rosenthal of the Tax Policy Cen­

tre, a think­tank, calls this an ingenious re­

branding  of  the  stepped­up  basis  idea.  “It

would  operate  like  a  pre­payment,”  he

says.  Taxes  owed  at  death  would  be  re­

duced by those paid previously.

The  White  House  reckons  the  new  tax

would  bring  in  $360bn  over  the  next  de­

cade,  impressive  for  a  levy  that  hits  the

wealthiest  0.01%  of  households.  That,

however,  reflects  a  windfall  for  the  state

when it collects on decades of gains for the

likes  of  Jeff  Bezos  and  Elon  Musk.  To  pay

the tax, they may need to sell down stakes

in  their  firms,  potentially  remaking  their

ownership  structures.  The  government

would  cushion  the  blow  by  breaking  pay­

ments  into  instalments  (spread  over  nine

years at first and, later, five years). Once es­

tablished, the revenues would be slimmer.

“The $360bn estimate makes it look more

promising than it really is in the long run,”

says  Kyle  Pomerleau  of  the  American  En­

terprise Institute, a think­tank.

There  are  two  immediate  obstacles.  As

with  every  idea  from  the  Biden  White

House,  the  political  question  is  whether

Joe  Manchin  and  Kyrsten  Sinema,  two

moderate Democratic senators, support it.

They  have,  for  different  reasons,  opposed

previous tax increases. Then there are the

courts. The constitution limits the federal

government to taxing incomes, not wealth.

The White House would argue that accrued

capital gains are a form of income, but its

proposal would face legal challenges.

Even  if  Mr  Biden  were  to  succeed  in

shepherding the tax into law, another con­

cern  would  emerge.  The  levy  would  be

complex,  especially  for  assets  that  do  not

trade in public markets. Lawyers would de­

vise  new  structures  to  shelter  wealth.

“Their pencils are being sharpenedeven as

we speak,” says Joel Slemrod,aneconomist

at the University of Michigan.n

WASHINGTON, DC

The White House wants to close a tax

loophole used by the ultra-rich