Insights

Policy preview: Washington’s weapons in tax treaty fight
“If the U.S. came down on tax havens in the same way they come down on countries that trade with Iran and Cuba, we’d have no tax havens in the world.” Professor Ha-Joon Chang, University of Cambridge.

US Treasury Secretary Janet Yellen is looking to work with finance ministers from around the world to agree on a global minimum tax rate for multinational corporations. This quiet effort has only just begun, but if successful it could prove among the most significant foreign policy and regulatory moves since the end of the Cold War.

This move is not without its challenges, and comes on the back of a round of recent competition by states to lower their corporate tax rates, which surprisingly saw France cut such levies under President Emmanuel Macron. Yet Britain has announced plans to buck this trend. The European Union has sought to restrict its own internal tax havens, and ensuring that technological multinationals pay their ‘fair share’ is a policy popular with all flavours of government from Canberra to Ottawa.

Perhaps the most underappreciated feature of the discussion thus far, however, is the carrots that the US can offer to other countries for their support for such an effort. The potential sticks – sanctions, tariffs and regulatory restrictions – are far better known, though at least until recently Washington has been hesitant to use these tools to target those it accuses of violating international business norms. It is unlikely that the Biden Administration will use such threats at this stage, though the precedent set by Trump’s actions on China means it cannot be ruled out that Washington will eventually use these tools for such purposes.

The key carrot also results from the US’ central role in international trade and financial markets. More significantly, Washington has already made ample, but quiet, use of the carrot over the last year. Specifically, the US Federal Reserve has offered ‘swap lines’ to key allies since last April, initially an effort to mitigate against the risk that the COVID-19 pandemic would cause a global debt crisis.

Historically, only very few countries – such as the UK – had access to such swap lines and they were only used to respond to the 2008 financial crisis. Today South Korea, Mexico, Singapore, and Brazil are among the biggest beneficiaries. If the US were to withdraw these lines, which would essentially mean that the Fed would treat local currency state debts as fungible with US debts, it would risk prompting a debt crisis. As a former Fed chair herself, Yellen is keenly aware of this.

Expect the US to offer making such swap lines permanent, in exchange for a global tax treaty.

Dollars and sense: Tobin tax’s latest turn
“This idea (of a financial transaction tax) has been around for a long time…I think frankly the experiences are mixed”. Former US Treasury Secretary Timothy Geithner, 2009

Discussions of so-called Tobin taxes once dominated considerations of how states should respond to the Global Financial Crisis and Eurozone Crisis. A few years later, they again turned heads in response to the rise of high-frequency traders, which entered the mainstream with Michael Lewis’ 2014 book Flash Boys. The Tobin tax is also known as a financial transactions tax (FTT) and is essentially a levy charged on a securities trade, either a fixed charge or as a percent of the value of the security. The debate appears to be returning again.

Although France did enact such a tax in 2012 – charging 0.3% of the value of certain stock trades, and some high-frequency trades at the lower 0.01% rate – Europe has not followed suit, with only Finland instituting a similar tax. The United States continued to oppose such a policy as well, under both the Obama and Trump Administrations.

However, the Tobin tax has recently received some attention once again, due to the high-profile Game Stop market madness. This saw a small US video games’ retailer’s stock become among the most volatile financial assets in recent months, driven by day-trading users on increasingly popular share trading applications and platforms. These in turn are dependent on selling their order flow to high-frequency traders, who some blamed for causing massive losses for small retail investors when trading in Game Stop shares was first suspended in late January.

In February, the Chair of the Financial Services Committee, Maxine Waters (D-CA), said she was willing to consider such a move. The Congressional Budget Office’s prediction that a 0.1% securities transactions tax could raise as much as $777 billion over 10 years has helped it garner further support. House Democrats are now expected to propose exactly such a tax.

However, such a proposal has little-to-no-chance of advancing in the Senate. The Biden Administration is unlikely to spend political capital on such proposals. Coverage of the tax will only grow through the rest of this year as budget debates and structural economic reforms dominate in Washington. But as with previous proposals, this game too will soon peter out and stop.

Power play: Madrid’s Diaz Ayuso

“It bothers me enormously to lose, I can’t stand it. And I’ve spent many years, with some friends, devoting almost all of our political activity to thinking about how we can win”

Pablo Iglesias, Head of Podemos

Isabel Diaz Ayuso was little heralded when she assumed the presidency of the community of Madrid, the governorship of the greater capital region, in August 2019. She had to hobble together a coalition between her centre-right Popular Party (PP), and the then-rising centrist Ciudadanos faction, as well as the nationalist Vox party. In the election held that May, she led PP to win just 30 of 132 seats in the Chamber, finishing behind the Socialist Party (PSOE), and with Ciudadanos securing 26 seats. The result was the PP’s worst performance in Madrid’s regional elections since the fall of the Franco dictatorship.

A little over 18 months later, Diaz Ayuso has called snap elections that will now be held on 4 May. Nearly 35% of voters plan on backing her PP in the vote, up from 22.23% in 2019. She said she called the vote to prevent Ciudadanos from switching to an alliance with the PSOE. Meanwhile Ciudadanos, which won 19.46% last time around, is polling on the verge of falling below the 5% electoral threshold.

Diaz Ayuso’s likely success tells the story not just of her masterful management of Madrid’s politics, but also of her prominent public opposition to the national minority government of PSOE leader Prime Minister Pedro Sanchez. Sanchez ousted the PP government in 2018 in a series of parliamentary no-confidence votes and won the most votes in the two general elections held in 2019. However, the PP has never been able to form a majority coalition and remains dependent on left-leaning Catalan independence parties for support.

With pro-independence parties winning a majority of votes in Catalonia’s 11 February elections this year, but chafing at the PSOE’s first-place finish, it is more-likely-than-not that that another election will have to be called before December 2023. Pablo Casado, PP’s national leader, has failed to capitalise on Sanchez’s troubles, particularly his regular spats with his leftist coalition ally, Deputy Prime Minister Pablo Iglesias of the Podemos party.

Iglesias announced this week he will step down to lead Podemos in the Madrid elections, vowing to challenge Diaz Ayuso. He may be able to lift Podemos above the 5% threshold it appears at risk of falling below, but it will be Diaz Ayuso who uses the election as a platform to raise her national profile. She may well lead the PP ticket by the time the next general election is called.