Category: Current Affairs

Here is FT coverage, I still feel I don’t know the whole story, but bitcoin will be legal tender and furthermore:

The government will set up a trust at the Development Bank of El Salvador to enable automatic conversion of bitcoin to dollars. The law will take effect 90 days after its publication in the official gazette.

“The entry of bitcoins will be equivalent to an increase in the country’s monetary supply, which will temporarily boost El Salvador’s economic activity, but will also pressure inflation higher and with that, interest rates will rise,” Gabriela Siller, head of economic analysis at Banco Base in Mexico, said in a note to clients.

Here are a few observations:

1. El Salvador already uses the U.S. dollar, so there is not much loss of monetary sovereignty here.

2. Maybe the easing into bitcoin is intended to lower the cost of sending remittances from the U.S., which are fundamental to the El Salvadoran economy?  According to the FT, remittances are about one-fifth of gdp, and transfer charges can be steep.

3. Is this all just?: “You don’t have to move to Puerto Rico to avoid capital gains tax, you can just invest in El Salvador!  We’re going to precommit to accepting your bitcoin so you will plan around that.”

3b. Isn’t it suspicious that their legislature approved the legal tender law by such an overwhelming margin?  Is it that they all have read and digested so many Medium crypto essays?  Or do they just see this as “a deal”?

4. I don’t see why this should increase price inflation in El Salvador.  Prices are denominated in dollars, and El Salvadorans, or for that matter visiting tourists, already had the option of converting their crypto into dollars before buying more pupusas.

5. Even in the United States the retail demand for bitcoin transactional use has been quite low.  Making merchants in El Salvador take bitcoin seems like a PR move to me.  What does it mean to make a low-tech merchant in the countryside “take bitcoin”?  How is he supposed to take it?  Do the abuelas in the market have to set up Coinbase accounts?

6. Could this be a transitional or bridge move to ease El Salvador away from the U.S. dollar and to replace it with a native currency?

7. Is the increasingly authoritarian government of El Salvador looking to PR moves to boost its international legitimacy?

8. Given all the surrounding publicity, it does seem that “they really mean it,” and the government will try to “get something” out of the initiative.

I will keep you posted as I learn more.  But as a general rule, if Central America is the laboratory for your ideas, beware before leaping to conclusions too quickly!  At the very least do go visit the country you are wondering about, and, in trying to understand the equilibrium, have the country more prominent in your mind than the innovation.

The G-7 nations have coordinated (NYT, FT here) to announce a minimum corporate tax rate of 15%.  Even if seen through, that doesn’t mean all rates must be at 15% or higher, rather if a rate is at 5% another country (the home base country?  the countries where the customers are?) gets to tack on another 10% to make the total take 15%.  That limits the incentive to post very low rates in the first place, by checking the gains from tax haven strategies.

One perennial question is whether the 15% rate is defined over gross or net income.  You don’t want to tax gross income, especially if the business under consideration actually is making a loss.  In any case, you basically end up taxing business income acquisition per se.

If it is net income you are taxing at minimum 15%, you haven’t done as much to limit tax arbitrage as you thought at first.  Especially if the multinational and its subsidiaries engage at arm’s length transactions with shadow pricing, etc.  Net income is a major object of the actual manipulations, and would become all the more so under this new plan, assuming it is applied to net income.  Won’t countries wanting to play the tax haven game end up with very lax definitions of “net income”?  (Or for that matter gross income?)  Or does that get regulated as well?

I don’t think this whole plan should make “the Left” happy.  David Fickling wrote for Bloomberg:

The more likely outcome of the current round of reform will be a continuation of the decline in corporate rates that we’ve seen for four decades. Even amid the push to prevent tax-base erosion in recent years, 24 of the 37 members of the Organization for Economic Cooperation and Development have cut their corporate tax rates since 2008, while just seven have raised them. Statutory corporate tax rates have trended downward by about 5% a decade since 1980 to the current situation, where the average sits at around 24%. Nations that want to compete with lower-taxed jurisdictions may find the pull of 15% irresistible.

And then:

The risk now is that 15% becomes not just a minimum, but an anchor for maximum tax rates as well.

In other words, the tax haven tax competition game is redone with a 15% floor, but the agreement also pinpoints a corporate tax rate that is “good enough” and would come to be seen as “best possible treatment.”  Neither of those are forcing moves which would require countries to drop their rates to 15% in the resulting equilibrium, but yes I agree with Fickling that there might be a good deal of clustering right at or near 15%, accelerated by this plan of course.

Note also that, under the plan, the 100 largest corporations would have to pay tax in proportion to where they sell their goods and services, even if they are not formally located in those countries (will there be a literal notch right at “company #100”?).  Ireland loses big on that provision, as in essence more corporate tax revenue would be routed to larger countries such as France and Germany.  In how serious a manner would companies have to keep track of their customers?  (What happened to privacy law here?  Or did they never really care much about privacy to begin with!?  What are crypto companies supposed to do about this?)

Biden wants to raise the U.S. corporate tax rate to 28 percent, and Ireland, one of the major supposed villains in this game, has a rate of 12.5%.  So fifteen percent just isn’t that outrageously high, even if companies do end up having the pay that actual rate (though see above about gross vs. net income, and what other “outs” will there be?).

The European digital taxes may be scrapped as well (with the details under negotiation and no one wanting to “move first”), which would ease a wee bit of the burden on the major tech companies from the broader change.

Here are various observations from Soumaya Keynes.

Is the underlying view that the U.S. Congress is supposed to approve this without further renegotiations?  How about the other countries?