July 12, 2021 5:27 p.m. ET
US Treasury Secretary Janet Yellen during a press conference in London.
Justin Tallis / WPA Pool / Getty Images
A global minimum corporate tax rate agreement borders on price fixing (“US Wins Backing for Global Minimum Corporate Tax Rate,” page one, July 2). The Biden administration clearly believes it is in the best interests of the US to reduce competition for businesses based on tax rates. Do the other 129 countries agree because they believe that what is best for America is best for the world? Individuals and businesses continue to relocate within the United States for lower state and local tax rates. Should there be a minimum corporate tax rate for all 50 US states? Global tax agreements also suggest that multinational cartels like OPEC were ahead of their time in maximizing member states’ revenues through agreements on prices and production levels. The race to the top gives governments more revenue and power at the expense of the private sector.
Not so long ago it would have been an uncompetitive European welfare state that persuaded other countries to raise their corporate tax rates so that Europe could continue milking the private sector without fear of corporate cows departing. Now the US must end the downward tax race so Washington can grow without losing business to other countries. A higher corporate tax rate is passed on to customers like all other costs, but is buried in the prices of goods and services and thus constitutes a clandestine personal tax. The race to win the top of corporate tax is a loser for everyone but our politicians, that save money.
Why did so many countries with so many conflicting interests join the agreement? While the treaty sounds doable in theory, in practice the taxable income on which the tax rate is applied is determined independently by each country, so the tax definition of taxable income can be adjusted to offset an undesirable tax rate.
The agreement also relates to the statutory rate, which is different from the effective rate that companies actually pay. The US statutory corporate tax rate of 21% is illusory as it is manipulated by a phalanx of tax lawyers and accountants, resulting in an effective tax rate of around 8%. There are similar differences between legal and effective rates in other countries.
Even if agreement is reached on the adoption of a global tax law – an unlikely scenario – it is unlikely that parity of the effective tax rate will be reached. To ensure multinational corporations pay their fair share, easily manipulable income must be abandoned as the basis for corporate tax and replaced by the market value of the companies based on the price of their shares.
Prof Dan Palmon
Rutgers Business School
Newark, New Jersey
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Published in the printed edition on July 13, 2021.