In one of the great feats of global political engineering, Joe Biden and Janet Yellen, working through the Organization for Economic Cooperation and Development (OECD) seem to be on the cusp of a near-universal agreement to set a minimum corporate tax rate of 15 percent. The intent is benign, even laudable: governments need to enrich their treasuries and big corporations are an easy target. But no one wants to set off a new round of tax arbitrage that will funnel global capital to countries with the lowest tax rate. Voila, the new global corporate minimum tax of 15 percent! There’s no place to hide! What could go wrong?
This global tax nirvana hasn’t reached the finish line yet, but it’s close. Ireland is still holding out, but China and India have both given a thumbs-up, albeit with certain caveats, which we’ll get to in a moment.
It’s ironic that even as this rough beast of a tax plan, its hour come around at last (apologies to Yeats), is slouching toward corporate balance sheets everywhere, Amazon has offered up a compelling alternative. Yes, that Amazon — the monopolistic hydra, scooping up everything in its path so Jeff Bezos has enough money to buy a yacht that his girlfriend can dock her helicopter on while she hops on a bigger yacht nearby as he flies to space. That Amazon.
As it turns out, Amazon doesn’t run on pure avarice after all. A new study by the Progressive Policy Institute found that over the last 12 months, Amazon invested more in the U.S. than any other American company. In 2020 alone, Amazon invested $34 billion in American infrastructure and created more than 400,000 jobs, putting it on PPI’s list of “Investment Heroes,” which it publicizes annually.
(Bloomberg and Forbes both covered this, and naturally Amazon promoted it through a press release and some advertising on Politico. When I tried to click on the list at the PPI website I got a “404 – Not Found” message. Did the PPI blink after taking too much heat for touting Amazon? We shall see).
How exactly did Amazon invest this $34 billion? Among other things, according to Forbes, it:
- Opened 150 delivery stations
- Built 20 new solar and wind farms
- Opened 45 Amazon Fresh, Amazon Go, Amazon 4-star, and Amazon Books locations via pop-up or within Whole Foods Markets
- Built Tech Hubs in Boston, Dallas, and Phoenix while expanding its second headquarters in Arlington, Virginia
- Amazon labs built for testing Amazon employees for Covid-19
- Opened 17 neighborhood health centers in 5 cities
- Invested in Robotics Innovation Hubs in Massachusetts and Washington in hopes to produce low earth orbit satellites for supplying high-speed broadband internet to hard to reach places throughout the world
Not bad for a year’s work.
Point No. 1: As governments around the world are trying to reach deeper into the top lines of corporations (the “T” in EBITDA) it raises a fundamental question: who allocates capital more efficiently — markets or governments? Amazon’s capital investments alone created 400,000 jobs; that doesn’t account for investments from capital-intensive sectors like aerospace or oil & gas. Also keep in mind that was direct job creation on the part of Amazon. Governments can only create jobs indirectly by adopting policies that promote corporate investment. Ironically, one of the best ways governments can do that is by lowering tax rates, but let’s not spoil the party.
OK, I concede that this is a philosophical argument here. I have much respect for Janet Yellen from her days at the San Francisco Fed, and I’m sure she makes a cogent argument on the government vs. markets debate. I’m all for free markets, but I respect a good counter argument. I understand the “fair share” argument, but I think the answer is tax reform, not tax increases. Also, the “fair share” debate doesn’t take into account the many other ways that corporate profits are repurposed for the public good, such as Amazon’s prodigious capital investments.
The second point is more granular, but more relevant. It’s the “Too Many Cooks Syndrome.” When someone says there are too many cooks in the kitchen it means there are too many people working together on something, which may unintentionally result in a bad outcome, e.g. “There were too many cooks in the kitchen, so the science project was never finished.”
We’ve lost count of how many cooks are over there in the OECD kitchen working on this project, but it’s a lot. China and India just put on their aprons and commandeered some pots, so let’s see what happens.
As the Wall Street Journal pointed out here, the carve-outs have started. The OECD proposal, for instance, said its first round of taxes would be levied only on companies with annual revenue above $20 billion and profit margins above 10 percent. Already, UK Chancellor Rishi Sunak had demanded exemptions for mining and financial services companies.
In addition, the OECD already wants to jump out of that swim lane to levy a special tax on Amazon, since it falls out of the new parameters because its profit margin is only 6.3 percent (it must be all that investment in infrastructure). You don’t think this “fair share” tax scheme is a teeny bit discriminatory, do you?
So you can start to see the contours here. The complexity of this new global tax scheme is such that unintended consequences will sprout like clover in a spring meadow. A few years from now, we may find the OECD wrestling with the “parity crisis” in the global corporate minimum tax.
One final irony: At a time when Western governments are almost universally condemning businesses for being too big (Big Tech, Big Oil, Big Media), they are embarking on the creation of the largest tax scheme in the history of the world. So, I’ll repeat the earlier question, what could go wrong?
Look, this isn’t exactly the kind of world government that people from Dante to Marx have been advocating. It’s just a new tax regime. But never underestimate the Law of Unintended Consequences. Janet and Joe are certainly trying to boost government income by preventing a “race to the bottom” while preserving a level playing field for American companies. But we may get to the end of the process realizing we’ve thrown the rules of competition out the window, along with our animal spirits.
Again, if a plurality of governments want to go in this direction, I accept that. Let’s just be aware of exactly where it is we’re going.