The writer is a professor of economics and finance at Columbia University and previously chaired the U.S. Council of Economic Advisers.
Since the inception of the Biden administration, U.S. Treasury Secretary Janet Yellen has advocated a global minimum tax for corporations. While the U.S. moved away from a 21 percent demand (which was linked to a goal of raising the current corporate tax rate of 21 percent between 25 and 28 percent), it closed with G7 finance ministers charge at least 15 per cent. Secretary Yellen praised the move: “That global minimum tax would end the race to the bottom in corporate taxation, and ensure equity for the middle class and workers in the United States and around the world.”
It’s hard to argue that corporate income shouldn’t pay its “fair share”. But the global minimum tax raises political and economic questions.
Politics first. Approval in the United States is likely to be tough. The minimum tax is estimated by the OECD to raise as much as $ 50bn- $ 80bn a year, largely from successful American companies. Revenues from the U.S. Treasury will be part of that amount, but little related to the substantial expansion of spending proposed by the Biden administration. Will other governments incur their political costs to reach an agreement that can be ephemeral if it fails to get U.S. legislative approval? Even if the deal succeeds, could it give a competitive victory to China? As a non-party to the G7 or OECD proposals, could it not use both tax rates and subsidies to attract more investment in China?
But it is on the economy that the global minimum tax poses more sensitive demands in two areas. The first is the conception of the tax base. The second deals with the fundamental question of the problem that policy makers seek to solve and whether the new minimum tax is the best way to do it.
15 percent tassu it is not particularly useful without an agreement on which to tax base it is. Particularly for the United States, home to many highly profitable technology companies, concern should arise that countries use special taxes and subsidies that effectively target certain industries. The United States has had a version of a minimum tax on foreign earnings since the Cuts and Taxes Act of 2017 embodied the GILTI (Global Intangible Low-Taxed Income) Act. The Biden administration wants to use the new global minimum tax to raise the GILTI rate and widen the tax base by eliminating a GILTI deduction for investments in overseas plants and equipment.
For a minimum tax rate of 15 percent to make sense, countries needed a uniform tax base. Presumably, the goal of the new minimum tax is to limit the benefits to companies by shifting profits into low-rate jurisdictions, not to distort where those companies invest. The combination of a global minimum tax with the broad base advocated by the Biden administration could reduce cross-border investments and reduce the profitability of large multinational corporations.
An ever-deepening economic problem is one that bears the fiscal burden. I noted above that the increase in projected revenues is small compared to the G7 government’s spending levels. It is not corporations that pay more, but capital owners in general and workers, according to the contemporary economic views of those who bear the brunt of the tax burden.
There is a better way to get what Yellen and his fellow finance ministers are trying to accomplish. To begin with, countries will be able to afford the full cost of the investments. That approach would move the tax system from a corporate income tax to a cash flow tax, much favored by economists. In this review, the minimum tax will not disturb investment decisions. It would also push the tax burden on economic incomes – profits in addition to the normal return on capital – better satisfying the G7’s apparent goal of collecting more revenue from the most profitable big business. And such a system would be simpler to manage, since multinationals do not need to implement different ways to track deductible investment costs over time in different countries.
In the debate that led to changes in U.S. tax law in 2017, Congress considered a version of this idea in the cash flow tax based on destination. As a value-added tax, this would tax business profits based on cash flows in a given country. The reform, which was based on the political will of border adjustments, limits tax bias against investments and promotes fiscal equity.
Returning to the numbers: countries with high levels of public spending in relation to gross national product, as proposed by the Biden administration, finance mainly with value-added taxes, not traditional income taxes. ‘company. A better global tax system is possible, but it starts with a “no GILTI” verdict.