Friday, June 25, 2021

United States and European Union Agree to End Tariff War Over Subsidies to Boeing and Airbus

On June 15th, the United States and the European Union announced an agreement to finally solve their decades-long dispute over subsidies given to Boeing and Airbus. This was followed by a parallel agreement with the United Kingdom on June 17th, since the UK is part of the Airbus consortium, but has exited the European Union.

The accord provides for a five-year truce on the WTO-approved tariff war between the two sides. In 2019, the World Trade Organization gave the United States permission to impose tariffs on $7.5 billion worth of EU exports per year due to its subsidies to Airbus. Then in 2020, the WTO approved countervailing EU tariffs on $4 billion of U.S. exports due to subsidies to Boeing.

The Biden administration and the European Union agreed to a four-month halt to these tariffs in March; they had cost EU exporters $2.2 billion and U.S. exporters $1.1 billion in 2019-20. The five-year cease-fire is the fruit of negotiations between the two parties since then, which concluded with two days of discussions in Brussels between U.S. Trade Representative Katherine Tai and European Commission Executive Vice-President Valdis Dombrovskis, the Commissioner for Trade.

The agreement establishes a working group, chaired by Tai and Dombrovskis, that will make concrete proposals to ensure that both sides provide financing to their large civil aircraft (LCA) manufacturer only on market terms and not provide subsidies via research and development programs. These principles will apply to all levels of government, including state and local.

I liked the last point of the main agreement: “8. The two sides will continue to confer on addressing outstanding support measures.” In other words, as I suggested in another blog, Boeing continues to enjoy “favorable tax treatment,” as Governor Jay Inslee put it, in Washington state, which may need to be adjusted going forward. In addition, while the Evergreen State’s subsidies for 787 production were ended early and 777X subsidies were canceled in advance, Boeing may well have subsidies in South Carolina, Missouri, or Kansas that might need to be addressed in this phase.

In addition, the European Union and United States will work together against non-market intervention in the LCA  market by other countries (read: China). This is consistent with President Biden’s actions to repair relationships with U.S. allies and rally as many of them as possible to a shared struggle against Beijing.

If this truce holds, it would finally bring an end to the longest-running dispute of the WTO era. The United States filed its first complaint against Airbus subsidies in 2004, while the European Union filed a complaint against U.S. subsidies to Boeing the following year. While 17 years is already a long time, in fact the original slate of WTO agreements in 1995 was supposed to have a Boeing-Airbus agreement within it. Indeed, my personal copy of the draft legislation for Congress to approve joining the WTO, which I received from the Office of the U.S. Trade Representative, has a page marked where that agreement was expected to be placed.

But it didn’t happen then. No agreement was reached moving into the new century, and then the WTO complaints were filed. Now, at last, the dispute has been stopped and may be on the verge of solution. Moreover, subsidies in Washington have been stopped (though not repaid), subsidies in other states will draw more scrutiny, and in the future Boeing will not be in a situation to shake down states for billions of dollars.

 

Cross-posted from Good Jobs First.

Thanks to my Good Jobs First colleague Greg LeRoy for suggesting this topic and making valuable editorial suggestions.

Saturday, June 12, 2021

Big week on the tax reform front

 Tax has been in the news a lot in the past week. With good reason, since "Taxes are what we pay for a civilized society," as U.S. Supreme Court Justice Oliver Wendell Holmes eloquently put it. There are three main elements to fixing taxes, and there have been big developments in all of them. In this post, I want to look at all three together to show the breadth of the problems with taxation in the United States.

The first two lie in the realm of what's "perfectly legal," as the title of David Cay Johnston's 2005 best-seller so aptly put it. The third, of course, is tax evasion.

The first, corporate tax avoidance, saw a huge development June 5th as the Group of Seven agreed to a U.S. proposal (thanks, Janet Yellen!) for a 15% minimum corporate income tax. This would make it irrelevant that so much corporate income is "earned," via transfer pricing, in tax havens. There are still some details to work out, and it has to pass Congress, but a bill on taxation should be subject to the Senate's reconciliation procedure, allowing it to pass with a simple majority. According to the Biden administration's budget, this should yield an average of $50 billion a year in new tax revenue over the next 10 years.

The second area needing reform is individual tax avoidance. On June 8, Pro Publica released what it called the first installment of "The Secret IRS Files," data on thousands of the country's richest individuals over more than 15 years that show how they legally get away with paying tiny amounts of tax even as their wealth increases by billions of dollars. Jeff Bezos of Amazon paid no federal income tax in either 2007 or 2011, and he even took a $4000 child tax credit in 2011 because he had no income.

Pro Publica calculated a "true tax rate" for each of the 25 wealthiest individuals in the United States. This metric equals tax paid divided by growth in wealth for the year. For the top 25 as a whole, over the five years 2014-2018, their wealth increased by $401 billion. However, they only paid $13.6 billion in income taxes for those five years, for a true tax rate of just 3.4%. The two worst offenders both had rates less than 1%: Warren Buffett at 0.10% and Jeff Bezos at 0.98%.

The biggest problem making tax avoidance so easy for the rich is that income tax can only be charged, thanks to the U.S. Supreme Court decision Eisner v. Macomber (1920), when assets are sold, not when they increase in value. This is a problem because, as Thomas Piketty discusses in Capital in the Twenty-first Century, unrealized capital gains are income in an economic sense, and not taxing them makes it impossible to carry out a truly progressive income tax. This leads to the need for a tax on capital. As he puts it, "...only a direct tax on capital can correctly gauge the contributive capacity of the wealthy" (p. 525).

But wait, there's more! What happens if a rich person doesn't sell the stock they own? When they die, the heirs get to have a new cost basis for the stock, equal to the price on the decedent's death, so no tax gets paid on the increase in value at all. This is called the "step-up basis of capital gains on death," and all by itself it is estimated to cost the federal government $40.26 billion in FY 2022, not to mention the smaller additional amount for states with state income taxes. Since state individual income tax revenues came to $390 billion in 2018 versus $1.718 trillion of federal individual income tax revenues, $9 billion would be a good ballpark estimate for the loss to state governments.

The third area is tax evasion, both corporate and personal, the illegal stuff: Non-reporting, non-payment, underreporting, underpayment, hiding assets in tax havens and not declaring the income based on them, and much more. The IRS estimated the tax gap, the difference between tax owed and tax paid, to be $450 billion in 2006 and $458 billion on average for 2008-2010. The Treasury Department, extrapolating from the most recent IRS estimate covering 2011-2013, estimated the 2019 gross tax gap (before late payments and enforcement actions) of $584 billion, which comes to 2.7% of 2019 gross domestic product.

In the June 9th New York Times, five Treasury Secretaries (four Democrats and one Republican) point out that the Internal Revenue Service today has the lowest number of auditors in the postwar era. That shows just how much the agency has been crippled, by design, in its ability to fight tax evasion. The authors all endorse President Biden's proposal to spend $80 billion over the next decade to step up enforcement and improve the general quality of service at the IRS. It's worth noting that we don't know whether something is "perfectly legal" unless a tax return is audited. Plenty of corporations and individuals push the envelope and chalk up losses as a cost of doing business. And with audit rates falling in recent years, that cost is similarly falling.

You will notice that tax evasion is the biggest piece of the pie. Although no one thinks $8 billion a year will wipe out the tax gap, putting money into enforcement has a strong return on investment. I wonder if maybe even more money should go into it.

This was a great week on the tax front: A gigantic expose on the tax system the 1% enjoy, a potential landmark deal on corporate taxes, and a prominent bipartisan push for fighting tax evasion. We have to convert all three into concrete wins, but we've got to remember to celebrate the small successes along the way, too.