Is a Global Minimum Tax Rate On The Cards?

Economic policy discussions have long been preoccupied with the reality of tax avoidance by large multinational companies. In the wake of the COVID-19 pandemic, political momentum has only continued to grow behind efforts to address this specific issue. It is within this context that US Treasury Secretary Janet Yellen proposed the introduction of a global minimum corporate tax rate. Through a non-binding international agreement, Yellen’s proposal would ensure that corporations are required to pay the same tax rate, regardless of the country in which that corporation is physically located [1]. Whilst such a proposal would face obvious challenges, a global minimum corporate tax rate would represent a positive shift in updating international tax rules.

At face value, it is clear that a global minimum corporate tax rate would advance the interests of the current Biden administration. The President recently introduced a 2 trillion infrastructure package as part of his economic agenda to ‘Build Back Better”, and proposed an increase in the corporate tax rate from 21% to 28% in order to ensure its funding [2]. Without any global minimum rate, a unilateral increase in the US corporate tax rate would be at the cost of international competitiveness for US firms, and likely result in profit-shifting to low-tax jurisdictions [3]. In this way, Yellen’s advocacy for a global minimum rate would ensure funding for Biden’s infrastructure package without the downsides associated with raising the corporate tax rate.

The case for a global minimum rate extends far beyond the immediate interests of the current Biden administration. According to research from the World Economic Forum, approximately 40% of multinational profits are shifted to tax havens each year with 10% of the world’s largest firms responsible for this activity [4]. The result is a staggering $200 billion lost annually in global tax revenue [5]. With increased strain on public finances during the COVID-19 pandemic, it is clear how a global minimum tax rate would deal with this issue of tax avoidance. By establishing a uniform corporate tax rate across most major countries, multinationals would be unable to exploit the advantages of tax havens, such as Bermuda or the Cayman Islands. In this way, national governments would be able to temper corporate power and ensure that they pay their fair share of taxes.

In a recent speech to the Chicago Council on Global Affairs, Yellen warned of a “30-year race to the bottom on corporate tax rates” [6]. National governments have routinely competed with one another in slashing tax rates in recent years in order to attract foreign investment. According to the Tax Foundation, a Washington DC-based think tank, the average worldwide statutory corporate tax rate has declined nearly 41% since 1980 [7]. This has subsequently resulted in falling revenues and necessitated the implementation of austerity policies. Such policies, which typically involve spending cuts, have been widely established to have severe economic as well as societal implications, such as increases in poverty and homelessness [8]. As such, a global minimum tax rate would surely bring an end to this “race to the bottom” and ensure that governments are able to raise sufficient revenues to fund spending, particularly on social services.

Whilst Yellen’s global minimum corporate tax rate offers clear benefits, it would likely face significant challenges prior to implementation. In the US, such a proposal would likely face stiff opposition from the Republican Party, which has frequently objected to tax hikes in the past. Indeed, the modern Republican Party has become increasingly skeptical of efforts to secure international cooperation on major issues, perhaps most notably with the Paris Climate Agreement [9]. Already, many notable Republican figures, such as Senate Minority Leader Mitch McConnell, have expressed their opposition to Yellen’s proposal, leaving any chance of bipartisan action on this issue slim [10].

The Republican Party is not alone. A number of significant players in the international community are wary of a global minimum corporate tax rate and for good reason. Smaller developed economies, such as Ireland and Singapore, use lower corporate tax rates as a way of attracting foreign investment. A global minimum corporate tax rate set at Yellen’s estimate of 21% would threaten Ireland’s standing as a hub for international trade and commerce, particularly given that their corporate rate is currently set at 12.5% [11]. An increase to 21% might not see firms withdraw from Ireland, but would almost certainly see them re-evaluate investment decisions.

Despite some domestic and international opposition, Yellen’s global minimum corporate tax rate has already received considerable support from other quarters. Along with the United Nations, France and Germany have both signalled their support for the Biden administration’s push to reform the international tax system through the implementation of a global minimum rate [12]. Many economists perceive the proposal as an effective way of reducing, if not outright eliminating tax avoidance. Gabriel Zucman, an associate professor at the University of California, Berkeley, recently stated that “a high global minimum tax can change the face of globalisation — by making its main winners multinational companies pay more in taxes, instead of them paying less and less” [13].

At this point in time, no concrete progress has been made on the introduction of a global minimum corporate tax rate through an international framework. The current Biden administration, still very much in its infancy, has been bold in throwing its support behind such a proposal. A global minimum corporate tax rate would ensure that multinationals pay their fair share of taxes and no longer be able to take advantage of the tax differentials between nations. Perhaps more importantly, implementation of this proposal would represent key action on a fundamental issue of our time, and a tempering of corporate power.

References

[1] Dean, L. (2021, April 9). Global minimum tax rate: What that means for Australia. Yahoo Finance.
https://au.finance.yahoo.com/news/global-minimum-tax-rate-australia-024107664.html

[2] Pramuk, J. (2021, March 31). President Biden unveils his $2 trillion infrastructure plan – here are the details. CNBC. https://www.cnbc.com/2021/03/31/biden-infrastructure-plan-includes-corporate-tax-hike- transportation-spending.html

[3] Dean, L. (2021, April 9). Global minimum tax rate: What that means for Australia. Yahoo Finance.
https://au.finance.yahoo.com/news/global-minimum-tax-rate-australia-024107664.html

[4] Wier, L. (2020, February 27). Tax havens cost governments $200 billion a year. It’s time to change the way global tax works. World Economic Forum. https://www.weforum.org/agenda/2020/02/how-do-corporate-tax-havens-work/

[5] Wier, L. (2020, February 27). Tax havens cost governments $200 billion a year. It’s time to change the way global tax works. World Economic Forum. https://www.weforum.org/agenda/2020/02/how-do-corporate-tax-havens-work/

[6] Johnson, J. (2021, April 6). To end “30-year race to the bottom,” Janet Yellen calls for global minimum tax on corporations. Salon. https://www.salon.com/2021/04/06/to-end-30-year-race-to-the-bottom-janet-yellen-calls-for- global-minimum-tax-on-corporations_partner/

[7] Asen, E. (2020, December 9). Corporate Tax Rates around the World, 2020. Tax Foundation. https://taxfoundation.org/publications/corporate-tax-rates-around-the-world/

[8] Irving, Z. (2020, December 17). The Legacy of Austerity. Cambridge University Press, 20(1), 97-110. https://www.cambridge.org/core/journals/social-policy-and-society/article/legacy-of-austerity/ B176E1BE170AE629ECCD46B495D6A26F

[9] Lehmann, E. (2016, July 19). Republican Platform Rejects Paris Climate Agreement. Scientific American. https://www.scientificamerican.com/article/republican-platform-rejects-paris-climate-agreement/

[10] Franck, T. (2021, March 31). Biden targets global corporations to fund landmark infrastructure plan. CNBC. https://www.cnbc.com/2021/03/31/biden-infrastructure-plan-to-raise-taxes-on-global- corporations.html

[11] Quinn, E. (2021, April 6). Threat to Ireland’s prosperity looms large as US tax plan ‘to hit its 51st state’. Irish Examiner.
https://www.irishexaminer.com/business/economy/arid-40259750.html

[12] Partington, R. (2021, April 8). G20 takes step towards global minimum corporate tax rate. The Guardian. https://www.theguardian.com/business/2021/apr/07/g20-global-minimum-corporate-tax-rate- finance-ministers-us-avoidance

[13] Johnson, J. (2021, April 5). To Halt ’30-Year Race to the Bottom,’ Yellen Calls for Global Minimum Tax on Corporations. Common Dreams. https://www.commondreams.org/news/2021/04/05/halt-30-year-race-bottom-yellen-calls-global- minimum-tax-corporations