Higher corporate taxes are a key part of paying for President Joe Biden’s $ 2 trillion infrastructure package. To prevent American multinationals from being at a competitive disadvantage, the government is lobbying other countries to commit to a tax floor.
In a speech at the Chicago Global Affairs Council on Monday, Treasury Secretary Janet Yellen announced a return to multilateralism after four years of diplomatic and economic isolationism. “America in the first place should never mean America alone,” said Yellen.
“This is an area in which the United States is now trying to exercise some leadership,” said Eric Toder, a member of the Urban-Brookings Tax Policy Center institute.
Yellen asked other nations to support the initiative, saying the United States is working with other G20 nations to develop and implement a global minimum tax, which she said would “stop the race to the bottom” and promote economic growth more equitable between countries and regions.
“Together, we can use a global minimum tax to ensure that the global economy thrives on the basis of a more equitable playing field in the taxation of multinational corporations and stimulates innovation, growth and prosperity,” she said.
Biden’s plan calls for a corporate tax rate of 28 percent – effectively dividing the difference between the 21 percent rate signed in 2017 and the 35 percent it had before the Republican Party tax cuts – and to double the current one. 10.5 percent offshore tax rate.
The president rejected the idea that rising corporate tax rates would hamper the United States’ economic recovery, telling reporters at the White House on Monday: “There is no evidence of that.”
Policy observers say a global minimum tax would be a boon to Biden’s domestic corporate tax ambitions: if all companies – not just US-based multinationals – were assessed at the same tax rate, no matter where in the world if they accounted for their profits, corporate America would have little reason to establish leading offices in places with little commercial activity but low tax rates.
“The discussion of this now also suggests that they are concerned about capital flight if they raise corporate taxes for the infrastructure account,” said Michael O. Moore, professor of economics and international affairs at George Washington University.
“Business is multinational nowadays, and the idea of corporate residency has little economic significance,” said Toder. While it is a thorny issue now for companies ranging from social media platforms to drug makers, the question of locating or relocating a company for tax evasion purposes has only recently emerged.
“The problem has gotten much worse in the last 20 to 25 years. The nature of business has changed and it has become more global, and much more added value is in intellectual property, as opposed to factories, ”said Toder. Computer code, chemical formulas and the like are portable assets in a way that cars or jet engines are not.
Secretary Yellen has the advantage of being well-known and highly regarded by her colleagues on the global economic scene, and her words carry weight, noted Tom Martin, senior portfolio manager at Globalt Investments. “In general, Janet Yellen has an excellent reputation as an attentive and sophisticated global market participant. It is difficult to take the gravity that it brings ”, he said.
But even it will have a weight to persuade a multinational consortium to agree in principle, let alone negotiate details like a real global tax rate, which was not addressed on Monday. Achieving compliance can be a significant challenge, some said. “The incentives for a government to renege on such a promise of a minimum corporate tax will be overwhelming,” said Moore.
“Countries that decide to attract ‘desirable’ companies or activities will find a way to get around the global minimum with tax credits [or] special deductions, ”said Gary Hufbauer, a senior non-resident member of the Peterson Institute for International Economics. “China will not pay attention to the OECD global minimum. Neither does Russia and many other countries. “
The government must also face internal resistance to any plans to generate revenue by raising corporate taxes, with Republican lawmakers already speaking out against Biden’s proposal to fund his infrastructure plan.
In theory, an international tax with agnostic frontier application would be an equalizer between companies – but it is an open question whether executive directors will want to exchange the certainty of a fixed tax rate for the opportunity to extract more profits. “As it affects all of them uniformly, then it is not an event from a competitive point of view,” said Martin.
“If you only tax American companies on their worldwide revenue, that really puts them at a disadvantage,” said Toder. “If Biden tries to impose a tax on companies in the US and other countries that don’t follow through, that’s a recipe for failure.”