Some economists argue that a tax hike for multinational corporations might just be the cure. Columbia University’s Joseph Stiglitz and other economists recently penned an open letter to President Biden saying the United States should support “a global minimum tax on multinational corporations” that would set a floor on how low countries would rate their corporate tax rates could set. This would “put an end to harmful tax competition between countries” and “reduce the incentive for multinational corporations to shift profits to tax havens,” they argued. These economists have found support from Treasury Secretary Janet Yellen, who said nations that lower their corporate tax rates are starting a destructive “race to the bottom”.
However, introducing a global minimum tax on the world’s businesses would severely limit countries’ autonomy in using tax policies to stimulate investment, while also imposing a cap on global productivity and the speed at which we recover from today’s pandemic-induced downturn can.
As discussions continue between policymakers and the governments of the Organization for Economic Co-operation and Development (OECD), where over 130 countries negotiate changes to international tax rules, leaders must wonder whether this is an adequate response to a world is trying to restart its engine.
The answer? Yellen and Stiglitz have it backwards. Most countries do not race down, but in the middle. Research by the Tax Foundation shows that the global average corporate tax rate has risen in the mid-20% over the past decade. In addition, the OECD has found that corporate income tax is the most damaging tax on economic growth. If tax rates remain competitive, economies can be rebuilt faster and stronger. After 30 years of one of the highest corporate tax rates in developed countries, the United States cut the federal corporate tax rate from 35% in 2017 to 21%. The law on tax cuts and jobs didn’t bring the race to zero, however ;; It simply brought our corporate income tax closer to that of our competitors, making the US more attractive to businesses.
Proponents of a new global minimum tax suggest that this is a way of leveling the playing field, but it is an excuse for OECD countries to decide who wins and who loses new business as the world rebuilds. Imagine if the big tech companies decided to level the playing field with “minimum prices” that freeze competition with lower prices. Consumers would be the losers because companies would no longer be able to produce good products cheaply, just as taxpayers would be the losers if governments set a global minimum tax. Competition is good in the economy and in tax policy.
A new global minimum tax and the revision of other international tax rules would not affect every country equally. High-tax countries like France, where the corporate rate is currently 28.4%, would benefit from this policy, while places like Ireland and the United States that have lower, more competitive rates and are home to larger multinational corporations, especially those that are high Making profits would face major tax hikes that could motivate companies to exit.
If one of the goals of the ongoing OECD negotiations and Secretary Yellen is to generate new revenue to fight the global pandemic, a policy that redistributes revenue from one country to another and relies on increasing the tax burden on investments does not seem like it to fit in with this task.
Not to mention the United States already has its own version of a minimum tax. The Global Low Intangible Tax Income (GILTI) enacted as part of the 2017 tax cuts is considered the minimum tax on profits of U.S. multinational corporations. Expanding this policy on a global scale will only hurt those companies that can help the United States and the rest of the world rebuild.
One reason for a new global minimum tax is to stop tax avoidance – or what is known as “anti-base erosion”. The United States worked in the 2017 tax cuts to address this issue by lowering the corporate tax rate and adopting rules like GILTI. While the approach was not perfect, it was a step forward in containing base erosion. Corporations brought the revenues parked overseas back to the US, but the reform failed to simplify tax laws.
These tax enforcement guidelines are troublesome and complex, and throw sand in the gears of cross-border investment by making it more expensive for companies to expand and do global business as they face higher taxes. As talks continue in the OECD, leaders must wonder whether this is an appropriate response to a world trying to restart its engine.
Last year it tested the world’s performance and demonstrated its resilience. But there were also fragility in our economies. If countries want to promote competitiveness, we should do everything we can to encourage it so that we can all rebuild faster. The desire of executives like Yellen and others around the world to set a new global minimum tax risks starting another and much more damaging “race to the bottom” – slower economic growth.