A Change in the (Economic) Weather?

6 June 2021

It’s not Bretton Woods, but it’s a start. The decision by the finance ministers of the G7 countries to create a global minimum tax rate on corporate profits is a step in the right direction, if only a baby step. The tide was due to turn about now, according to one theory, and maybe it’s finally happening.

What was actually agreed at the meeting in London on Saturday was both timid and provisional. The minimum tax rate for large international corporations was set at 15%, not far above the rate charged by low-tax venues like Ireland and Cyprus (12.5%).

That’s already down significantly from the 21% tax rate originally proposed by US President Joe Biden. Moreover, the G7 (the US, Germany, Japan, France, the UK, Canada and Italy) was just the first hurdle for this initiative.

The plan must also pass scrutiny by the Organisation for Economic Co-operation and Development (38 upper- and middle-income democracies), then by the G20 meeting in Italy next month (which includes Russia, China, India and Brazil), and finally by the US Congress (ratification in 2022?).

If it makes it through all that, then companies like Microsoft could no longer shield their profits from meddlesome taxation by the following routine:

a) earn $315 billion worldwide from license fees for the use of copyrighted Microsoft software;

b) remit all license income to Microsoft’s European subsidiary, conveniently located in Ireland, whose accounts state that it has “no employees other than the directors” and that it is ‘tax resident’ in Bermuda;

c) pay a few billion to the Irish government by other avenues to keep it happy;

d) send all $315 billion of worldwide profits to Microsoft’s Bermuda ‘office’ ( a brass plate on a wall), where it pays no tax at all because Bermuda does not have a corporation tax.

Ordinary people would go to jail for running a tax scam that brazen. What ordinary people need, obviously, is Bill Gates’s tax lawyers. But alas, ordinary people cannot afford Bill Gates’s tax lawyers.

So it is heartening that the gates may be closing on that particular form of tax avoidance. With governments desperate for more tax revenue after a year of spending vast amounts on various forms of pandemic support, the political mood has changed, and previously unthinkable breaches with neoliberal dogma are now quite thinkable.

The question is whether this is a flash in the pan or a lasting change of direction. The answer largely depends on whether or not you believe in the idea of a long (circa 40-year) cycle in the politics of the economy. If you take it seriously, then we are indeed due for a change.

Modern economists tend to doubt that economic cycles exist at all – not even the traditional boom-and-bust business cycle of 7-11 years. Technology-linked cycles like the ‘Kondratieff wave’ (45-60 years) get an even colder reception. But many see a plausible political cycle hiding in plain sight.

It has to do with the expansion and contraction of income differentials in developed countries over the past century and a bit. Between about 1890 and the late 1920s (the ‘Gilded Age’ to the ‘Roaring Twenties’), the gap between the rich and the rest widened fast: Rockefellers, Rothschilds and Vanderbilts.

After the Crash of 1929 and the Great Depression came not just Roosevelt’s ‘New Deal’ in the 1930s, but even more ambitious welfare states in every Western country after the Second World War. The great expansion lasted until the late 1970s, and the income gap between the rich and the rest stayed relatively narrow throughout.

The ‘neoliberal’ era began with the elections of Margaret Thatcher in the UK in 1979 and Ronald Reagan in the US in 1980. Over the next four decades middle- and working-class incomes stagnated or fell in most Western countries, while a new class of super-rich emerged with Bezos, Musk and Gates as their totems.

The last era when income differences stayed small and public spending soared (1935-1980) ended with runaway inflation. The previous get-rich-quick era ended with wild speculation and a spectacular economic crash (1929). If that precedent holds, the neoliberal era ought to end in a crash too, and 40 years would be just about now.

There was a crash almost as bad as that in 2008, and Western economies have not really recovered since, while income differentials have continued to widen. Maybe we have just been in a holding pattern because it came a bit too early, and now the emergency spending of the pandemic has finally pushed us over the edge.

Or maybe not: I’m just speculating here. But it does feel like the wind has changed. If governments start cooperating internationally to curb the excesses of the neoliberal era, we really are in a new game. Universal basic income next stop? (And runaway inflation by 2060?)
To shorten to 725 words, omit paragraphs 10 and 13. (“Ordinary…lawyers”; and “Modern…sight”)