Economic theories are not written in stone. They tend to change to acknowledge social and economic realities at a particular point in time. When a global crisis erupts, the chances are that long-held economic theories are challenged, and new ways of thinking and planning are embraced. We are in an economic watershed moment.
US President Biden is undoubtedly the catalyst that is accelerating change in current economic thinking. For more than three decades, many economists argued that governments should withdraw from being active in economic life and let private enterprise fill the gaps to promote healthier growth and jobs.
More recently, former president Trump egged on by a conservative Republican congress rewrote the tax code. In 2017, US corporate tax rate was reduced from 35 per cent to 21 per cent. There is little doubt that this strategy created jobs, but these were mainly low-paying jobs with little social security, especially for women and young people.
The socio-economic situation in Europe may be slightly better. Despite a more depressing employment situation, Europeans generally have better social safety nets as most countries have free public health systems. One common debilitating weakness in both the US and the EU is the lack of infrastructure investment.
This is about to change, and it is likely that, as usual, the US will beat the slow-moving EU to reach its economic objectives faster. As promised in his electoral campaign, Biden is proposing a €2 trillion public investment plan meant to lift the US economy out of the COVID pandemic and upgrade the often dilapidated physical and social infrastructure.
The spending will cover programmes ranging from fixing 10,000 bridges to tearing lead pipes out of millions of homes in the US. It will also include improvements in public transport. Finally, the US will be a part of the solution to the ever-growing threat of global warming. Biden’s commitment to the green economy is today at least as profound as that of the EU leadership.
The tough challenge of this paradigm shift in economic thinking is identifying the financing sources for this ambitious programme based on public investment. Biden wants corporate America to pay a good part of the expenditure bill.
Tax reforms in the US and the EU may take some years to become a reality. But social and economic weaknesses cannot be ignored forever
Biden’s initial proposal is to increase corporate tax again from 21 per cent to 28 per cent. What is more relevant for some EU countries is that the US tax reform would include taxing global income on US corporate profits at a minimum of 21 per cent, calculated on a country-by-country basis to reduce any benefits of channelling money through tax havens. In a bitterly divided Congress, it is still too early to say whether this drastic reform will indeed be approved in its present draft form.
Countries like Ireland that have built their business model on attracting direct foreign investment, especially from the US, by means of their benign 12.5 per cent corporate tax rate, are already thinking of recalibrating their investment strategy.
The Irish Business and Employers Confederation (IBEC) chief economist, Gerard Brady, argues: “The 12.5 per cent rate might not be what we sell the country on in future. Access to skilled staff, which can reflect quality of life, quality of infrastructure, educational standards and openness to inward migration may become relatively more important consideration and tax less important in a decision to base jobs in Ireland or the Netherlands.”
But not everyone in Ireland is prepared to consider a Plan B should the US tax changes slow down direct US investment. Irish Minister for Public Expenditure Michael McGrath repeated the often-used comment by a minority of EU politicians who want no change in taxation sovereignty: “If we are, to be honest, Ireland is viewed with a degree of envy across the EU because of the remarkable success we continue to have in foreign direct investment. The 12.5 per cent corporate tax rate is here to stay; it is the bedrock of our foreign direct investment strategy.”
Tax reforms in the US and the EU may take some years to become a reality. But social and economic weaknesses cannot be ignored forever. Biden’s plan includes programmes for affordable homes or community-based care for older people and people with disabilities, besides investment to support US manufacturing, bolster the electric grid and nationwide high-speed broadband.
This is not so much an extreme socialist way of thinking, as a realisation that politicians need to put all sectors of society’s well-being on the top of their agenda.