The writer is professor of economics and finance at Columbia University and previously chaired the US Council of Economic Advisers.
Since the inception of the Biden administration, US Treasury Secretary Janet Yellen has championed a global minimum corporate tax. As the United States withdrew from a demand for a 21 percent rate (which was tied to a goal of increasing the current U.S. corporate tax by 21 percent between 25 and 28 percent) , they have reached rates of at least 15 per cent with ministers. Secretary Yellen praised the move: “This global minimum tax would end the race to the bottom in corporate taxation and ensure fairness for the middle class and working people in the United States and around the world.
It is difficult to argue that corporate income should not pay its “fair share”. But the global minimum tax raises both political and economic questions.
Politics first. Approval in the United States will likely be difficult. According to OECD estimates, the minimum tax would raise between $ 50 billion and $ 80 billion per year, much of it from successful American companies. US Treasury revenues would be part of that amount, but small compared to the substantial spending increase proposed by the Biden administration. Will other governments incur their own political costs to reach a deal that may be short-lived if it does not gain legislative approval from the United States? Even if the deal succeeds, could it give China a competitive victory? As a non-party to the G7 or OECD proposals, could it not use both tax rates and subsidies to attract more investment to China?
But it is on the economic level that the global minimum tax draws more sensitive questions in two areas. The first is the design of the tax base. The second addresses the fundamental question of the problem policymakers are trying to solve and whether the new minimum tax is the best way to do it.
A 15 percent rate is not particularly useful without an agreement on what the tax based is. Particularly for the United States, which is home to many very profitable tech companies, one should be concerned that countries will use special taxes and subsidies that effectively target certain industries. The United States has implemented a version of a minimum foreign income tax since the Tax Cuts and Jobs Act of 2017 enshrined the Global Intangible Low-Taxed Income (GILTI) provision into law. The Biden administration wants to use the new global minimum tax to increase the GILTI rate and broaden the tax base by eliminating a GILTI deduction for investments in factories and equipment abroad.
For a minimum rate of 15 percent to be meaningful, countries would need a uniform tax base. Presumably, the aim of the new minimum tax is to limit the benefits for companies to shift their profits to low-tax jurisdictions, not to distort where these companies invest. The combination of a global minimum tax with the broad base advocated by the Biden administration could reduce cross-border investment and reduce the profitability of large multinational companies.
An even deeper economic question is who bears the tax burden. I noted above that the projected income increases are small compared to the spending levels of the G7 government. It is not the corporations that would pay more, but the owners of capital in general and the workers, according to contemporary economic views, who bear the burden of the tax.
There is a better way to accomplish what Yellen and his fellow finance ministers are trying to accomplish. To begin with, countries could allow the investment to be fully expensed. This approach would shift the tax system from a corporate income tax to a cash flow tax, long favored by economists. In this revision, the minimum tax would not distort new investment decisions. It would also push the tax burden on economic rents – profits exceeding the normal return on capital – better meeting the G7’s apparent goal of generating more income from the larger, more profitable companies. And such a system would be simpler to administer, as multinationals would not need to set up different ways of tracking deductible investment costs over time in different countries.
In the debate that led to changes to U.S. tax laws in 2017, Congress envisioned a version of this idea in a destination-based cash flow tax. Like a value added tax, this would tax corporate profits based on the cash flow in a given country. The reform, which failed on the political desirability of border adjustments, limits tax bias against investment and strengthens tax fairness.
Getting back to the numbers: Countries with large government spending relative to gross domestic product, as the Biden administration proposes, fund it primarily with value-added taxes, not traditional corporate taxes. A better global tax system is possible, but it starts with a “no GILTI” verdict.